Dual interview Ivo Kuiper & Luuk Jagtenberg Small-caps are the choicest cuts

Why did Kempen start up the Kempen (Lux) Global Small-cap Fund three years ago?

Jagtenberg: ‘It was the logical next step. We have invested in Dutch small caps via the Kempen Orange Fund since the early nineties and added the European small-cap strategy in the late nineties. We had also been investing worldwide via the Kempen (Lux) Global High Dividend Fund for many years. The combination of all this experience led to the creation of the global small-cap fund.
Small caps form a niche market. A small-cap fund can never become very big, because then your share in companies becomes too large to be able to trade freely. That’s why this asset class is of little interest to large fund houses and larger institutional investors. Yet the fact that small caps can add a great deal of value makes them particularly interesting to a fund house such as Kempen. Worldwide there are about 6,000 small caps in which we can invest. Yet there are relatively few analysts and fund houses who focus on small caps. The poor cover means that as a dedicated small-cap investor you can profit from opportunities that other investors ignore.’

Can you give an example of the added value?

Jagtenberg: ‘Kronos Worldwide is such a typical small-cap. It makes titanium dioxide, white pigment, which is used in all kinds of coatings and paints. There are only a handful of players in its market. Our analysis showed that the real value of Kronos was significantly higher than was reflected by its equity price. Both Kronos and its competitors announced various price rises from December 2015. Our analysis pointed to an improved end market, but Kronos’ equity price initially responded slowly to the news. This is the type of opportunity we mean.’

How do you view the outlook for investment in these companies?

Kuiper: ‘Historically, small caps earn a better return than large caps [1]. The outlook is also positive, because smaller companies generally profit more when the economy picks up. Based on our internal valuation model, European equities are currently attractive in general, and that includes small caps. US equities are less attractive than their European counterparts, but small caps are more attractive than large caps. In the US, multinationals are being affected by the local trend. This was the case even before President Trump took up residence in the White House. If he cuts taxes, small caps will benefit more from this than large caps because the latter already pay relatively low amounts of tax. Moreover, in contrast to large multinationals, small caps in the US will be less affected by any import duties. The amount may occasionally be slightly higher or lower, but we expect small caps to outperform large caps by 1 percent a year in the long term. That may not seem much, but it does make them an interesting investment in this climate of low returns. We do not include the added value of fund managers in this amount.’ 

“Kempen differs from its peers in its central approach: there is a single global team that operates out of Amsterdam.”

Luuk Jagtenberg

How do you conduct the global selection process?

Jagtenberg: ‘We do this bottom-up. Active management and our own analysis add extra value in the case of small caps, as relatively few analysts bother to examine them in detail. First, we need to reduce the total investment universe of about 6,000 companies to a manageable set. We therefore start by screening the companies with respect to liquidity, quality and valuation. The best remaining companies are then subjected to in-depth analysis. Kempen differs from its peers in its central approach: there is a single global team that operates out of Amsterdam.’

A single location for a global fund?

Jagtenberg: ‘It may seem counter-intuitive, but it was one of the most important decisions when the fund was set up. Our experience with the high dividend fund tells us that this approach has many benefits. For instance, a single team applies the same investment process and assesses all the companies in the same consistent manner. As our desks are next to each other, we can constantly update each other on the latest developments in the portfolio, allowing us to take decisions quickly. Furthermore, we always challenge each other on our decisions and arguments. This keeps us alert. This modus operandi is also more likely to lead to a balanced fund that contains only top companies: if you have three different regional teams, they will each come up with the best semi-conductor equity from their own region. We continue our selection process until we have just one: the best in the world.’ 


How do a Portfolio Manager and an Investment Strategist interact?

Kuiper: ‘Although the outlook for small caps is compiled independently, there is certainly cooperation between the investment strategy team and the small-cap portfolio managers. How small companies are performing often tells us a great deal about the direction in which the economy is heading. When the management of that type of company decides to increase investment or take on more staff, this is a good sign for the economic cycle. As an investment strategist you use the ‘bottom-up observations’ of the portfolio managers to challenge the economic outlook.’ 

[1] Source: Kenneth French data series, 1926 - 2016 for US large and small caps.  Kenneth French data series, 1990 - 2016 for international large and small caps, http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

The value of your investments may fluctuate. Past performances provide no guarantee for the future. 


This article has been compiled by the fund managers of the Kempen (Lux) Global Small-cap Fund (‘the Fund’), managed by Kempen Capital Management N.V. (‘KCM’). The Fund currently holds equities issued by the company named in this document. As the management company of investment funds (‘asset manager’), KCM may accrue holdings in financial instruments issued by the company named in this document and may execute buy and sell transactions at any time it sees fit. This article is meant for information purposes only. It should not be regarded as a recommendation to invest or as an offer or invitation to buy or sell any of the named securities. The outlook contained in this document is our outlook as of the date of the document and may be subject to change without prior notice.
KCM is under no obligation to update the content of this document. This document is based on information we deem to be reliable but KCM can neither guarantee nor be held liable for the accuracy of the data given. This document was compiled independently of the company named in it.