The European small-cap fund decreased in March, outperforming the benchmark. The best performing companies were IMA, FDM and Simcorp. Ion Beam Applications, Durr and Ascom were the worst performers.

The European small-cap index fell by 1.7% in March, continuing a downwards slide from February. More muted economic data from the region combined with growing concerns of a trade war led by the US and China were the main drivers of the sell-off. In Europe most economic indicators remained positive in absolute terms, though many fell short of expectations during March. PMIs rebased to a less extreme level, while still comfortably in ‘expansionary’ territory. Industrial Production and Business Confidence similarly retraced from recent highs. The labour market and consumer data held firm, with the exception of the UK where Brexit uncertainty remains a drag on the consumer. The protectionist trade tariffs enacted by the Trump Administration, and subsequent Chinese retaliation, weighed heavily on sentiment for global equities as a potential trade war looms. While we view this outcome as unlikely, volatility should remain high as this situation develops.

Ireland, Austria and the United Kingdom were the best performing countries during the month while Belgium, Switzerland Portugal were the worst. Real estate, utilities and health care were the strongest outperforming sectors with telecoms, information technology and industrials lagging.

There were no new complete purchases during March.

We completed the sale of our position in Dignity during the month. Following an acceleration in price competition in the burials division (69% of group sales) the company announced a repositioning of group strategy on 19th January. The price of a simple funeral was cut by 25% (7% of the burials business). A price freeze was placed on traditional funerals (60% of the burials business). Previously this segment had increased prices by 5-7% annually. Following the strategic update we had calls with the CEO and CFO and had a separate call with the Chairman of the Board. After a Price Target Review we took the decision to sell following thorough discussion and scenario analysis. We are skeptical of the new strategy and are concerned that further cuts to pricing will be required.

A growing number of our investee companies are identifying and selecting the Sustainable Development Goals (SDGs) with which their business most closely aligns, and where they can positively influence the Goal’s objective. While only five of our current holdings are publicly reporting these alignments to date, we are encouraged by the response from the management teams we have spoken to about the SDGs. The next phase of engagement concerns the companies setting targets with relation to the Goals. We have recently added this topic to our proprietary ESG questionnaire, allowing us to track through time the performance of our investments with regard to the SDGs.

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.