Mandarine Gestion: Investing in moats


Mandarine Gestion aims to venture the German market with a small cap fund picking stocks based on their uniqueness in the market.

The German market has become increasingly popular for French asset managers. Following Carmignac’s successful venture into Germany, boutiques including Financière de l’Echiquier and Rothschild & Cie Gestion are now increasing their presence.

For French boutique Mandarine Gestion, this ambition comes quite naturally, as when founded in 2008, it took over several members of Commerzbank’s distribution team. Consequently, Mandarine established a German presence from inception. This Franco-German outlook fits with its investment strategy.

As a relatively small company, currently managing €2bn in assets and employing 27, among which are nine fund managers, Mandarine Gestion’s investments are focused on European equities, including value, SRI and mid cap growth funds.

Since European small and mid caps are still a rather large universe, the Mandarine Unique fund introduces an additional selection criterion, focusing on the level of exclusivity of a company, as its fund manager Diane Bruno (pictured) explains.

“We initially conduct a quantitative screening process among 3,500 European stocks, taking into account factors such as uniqueness of the business model, global market share, technological advantages and the originality of their approach.”

“If you apply these filters, the universe is reduced dramatically to around 350 stocks which form the investment universe of Mandarine Unique.” These approximately 350 stocks identified as unique are then registered in a database, which is updated on a regular basis.

“Deciding whether a stock is truly unique is still based on a qualitative selection process, and we don’t have any specific databases for that,” she explains. As a small team, this final stage of the process, the interaction between investors and businesses becomes quite direct.

“We don’t have any buy side analysts in the classical sense, instead, we just approach the companies directly and ask them if they would like to help us,” Bruno explains. Examples of the Mandarine Unique’s current holdings
include German optician Fielman which, according to Bruno, is set to benefit from a growth in purchasing power among German consumers due to a combination of economic recovery and the introduction of the minimum wage.

It also holds an 80% market share and has no other listed competitor, thereby complying with Mandarine’s uniqueness criterion.

Given the focus on uniqueness, the obvious question becomes at which point does a company no longer comply with this criterion. According to Bruno, while there are no set rules, events such a competitor listing or regulatory
changes can contribute to a decision to sell.

Nevertheless, with an average holding period of five years, the fund remains very much focused on long term growth.

So far, this strategy has gained traction. Since inception in 2008, Mandarine’s assets have grown from just over €100m to more than €2bn. The Mandarine Unique fund outperformed its benchmark, the Stoxx Small 200 DR over the past four years.

Because of the growth of the fund’s assets and the growing concentration in the small and mid cap sectors, the fund tends to be increasingly weighted towards the mid cap segment. “With the market capitalisation of most of our holdings being in the €3bn-5bn range, we are now much more of a mid rather than a small cap fund, and we even have to consider to what extent some of our holdings are now within the large cap segment. Overall, given that the
volatility of the fund is still very low, I think this is a good worry to have,” Bruno concludes.