Focus on diversification

Focus on diversification

Mandarine Gestion has been present in Germany since its foundation in 2008, initially known among German investors for its flagship Mandarine Unique fund focussing on small-and midcaps. However, with the recently rebranded Mandarine Microcap fund range, the manager aims to offer a fundamentally different approach to the asset class.

The Mandarine Europe Microcap and the Mandarine Global Microcap funds are based on a strategy initially developed by Sebastien Lagarde, who joined the boutique from insurance giant AXA.

In contrast to the Unique strategy, the Microcap focus is on a broadly diversified portfolio selected through a quantitative-based approach to stock picking. This applies an equal weighting to each individual stock in the portfolio.

The global fund is invested in about 300 positions, while the European fund invests in approximately 160 positions, a significantly more diverse portfolio than that of the Mandarine Unique fund, which invests in up to 60 companies.

The theme of investing in smaller businesses is likely to be well received in Germany, argues Andreas Krebs, managing director and partner in charge of distribution in the German speaking markets at the boutique.

“The resilience of the German Mittelstand has been a key factor in explaining Germany’s recovery following the 2008 crisis, and traditionally, the perception of small- and mid sized companies in Germany is very good,” he says.

The idea for the microcap strategy occurred to Lagarde when he was still working at AXA, but the group was unwilling to launch a new product. Consequently, he entered
into negotiations with Mandarine Gestion, which decided to rebrand its existing Mandarine PME fund in order to implement the new strategy, switching the benchmark of the fund from the DJ Stoxx Small 200 to the MSCI Microcap Index.

“Our definition of microcap currently includes all companies with a market capitalisation of less than €450m, but we reassess this twice a year, alongside the bi-annual rebalancing of the MSCI Microcap Index, with the company with the biggest market capitalisation in the index constituting the upper threshold of our definition,” explains Lagarde.

The current definition still offers him a universe of more than 4,000 stocks for the European fund and more than 20,000 on a global level of which to select from. For the sake of simplicity and transparency, each individual holding has an equal weighting in the portfolio.

By focusing on a broad number of stocks, Lagarde also hopes to counteract some of the liquidity risk which is inherent in the sector. “I don’t pretend to be right 100% of the time. Problems can occur, most of these companies are very young, accidents can happen, but the investment process ensures that it is not dramatic for the overall portfolio,” he argues.

With the Mandarine Unique and the Microcap funds both targeting a similar sector, is there a danger that they might be competing with each other for similar investors? According to Krebs, that is not the case: “The investment universe of small- to mid-caps and microcaps are still very different. In the end it is a question of which universe is suitable for which selector.

“When we talk to institutional investors or funds of funds, they tend to select the small cap fund for its asset allocation aspect, while the microcap fund offers a broader exposure to the asset class.”

Despite the focus on established markets, Lagarde argues that he is able to capitalise on some of the key advantages of microcaps. “Very small companies are promising because on average they tend to be a lot more innovative and deliver higher growth levels than multinational and large cap companies. In our universe European and global microcap universe there have been four takeovers throughout October, which demonstrates that there are still market inefficiencies.”