The European small-cap fund increased in May, outperforming the benchmark. The best performing companies were Simcorp, Sweco and Ion Beam. Greggs, Dia and Dunelm were the worst performers.

The European small-cap index climbed 1.8% in May, continuing the positive momentum from April. Political uncertainty remained to the fore, nowhere more so than in Italy where toing and froing over new government formation caused Europe-wide volatility in markets late in the month. Looking into June, Spain will likely join Italy in dominating headlines from political instability, where relevant developments will continue to influence markets. In this context we note that our Italian and Spanish holdings have limited operational or revenue exposure to their domestic economies so their intrinsic value ought not to be materially affected. More broadly in Europe economic data weakened during May. PMIs in particular disappointed relative to expectations. In this context of higher economic and political uncertainty we saw ‘Quality’ style outperform ‘Value’, to the benefit of our strategy. The softer data gives the ECB a difficult job in deciding when to further tighten monetary policy, especially when combined with the significant increase in inflation seen during May – driven largely by rising energy costs from oil’s continuing recovery towards $80 per barrel. This job is easier for the Fed where recent data reflects a strengthening US economy, their own political volatility notwithstanding. The US remains an important end-market for many of our portfolio companies. Looking through the noise we remain focused on the long-term prospects of our investments, ensuring that portfolio weighting reflects valuation opportunity.

Denmark, Switzerland and Norway were the best performing countries during the quarter while Italy, Spain and France were the worst. Energy, information technology and healthcare were the strongest outperforming sectors with utilities, financials and telecoms lagging.

There were no new complete purchases or sales during May.

As the voting season starts to quieten, we can review the AGM results to see which items passed and failed relative to our votes. As we have discussed previously remuneration policies were at the forefront of our dialogue with companies surrounding AGMs. Another interesting topic raised was an item seeking to introduce anti-takeover measures – a so-called ‘poison pill’. Our view is that shareholders ought to be have the opportunity to decide on the relative merit of any given takeover offer without the company holding a veto right, so we opposed the item. Preparation for voting on each AGM and EGM takes time and research, but the importance of this analysis is not to be underestimated. Engagement with companies before and after voting on these items can help strengthen company governance and protect shareholders’ interests.

Looking forward, European growth should remain robust and we expect further moderate monetary policy tightening from Central Banks. Given the greater domestic focus of European Small-caps we believe the asset class is well placed to benefit from the macroeconomic improvement. Politics will remain an important influence on market sentiment - particularly the continuing evolution of Brexit negotiations. This combination of modest uncertainty in a favourable economic landscape provides good opportunity in seeking out our favoured combination of quality companies at attractive valuations.