Why our engagement can have a big effect within small cap investing

From our office in Stockholm, Joel Backesten manages our Swedish small cap strategy with his colleague Max Frydén. He considers it a privilege to have the job of analysing, meeting and investing in a selected range of smaller companies in Sweden.

“Smaller companies on the Swedish market are often run by innovative and entrepreneurial people who definitely do not lack creativity or the will to succeed,” says Joel Backesten.

Having said that, when it comes to sustainability perspectives, he often sees that many of the companies are a bit constrained or stuck in their way of thinking.

“While we are also seeing rapid changes in this area, we surprisingly often get the opportunity to help them with the fundamentals, such as presenting the business from a more optimal perspective with sustainability fully integrated,” says Joel Backesten.

He has been part of the Swedish small cap team since it was established in 2018, and over the past four years he has met with many companies. He mentions the companies Balco and Nobina as two examples where engagement activities resulted in new sustainability-related company disclosures.

We are convinced this will help the company present itself in a more attractive way to the market, something that should ultimately be reflected in the valuation ...  Joel Backesten, portfolio manager at Danske Bank Asset Management.

Engagement with small cap conglomerate
Another example, with a slightly different twist, is Ratos, an investment company consisting of 11 smaller companies. A small cap conglomerate if you like, in itself a bit of a paradox, but also part of the solution according to Joel Backesten:

“We invested in Ratos in March 2021. Much can be said about the company’s history over the past many years and I could maybe sum it up in one word: turmoil. The short story is that the clear majority of the 11 companies constituting Ratos are growing nicely with attractive return levels. However, if you combine them into one unit and call it Ratos, that entity has been largely shunned by the market in recent years."

The key to the turnaround case that Joel Backesten and Max Frydén identified is as follows: Ratos in its current form does not present itself as a classic small cap case with the attractive focused investment exposure that the market usually looks for. Ratos reported on the 11 companies individually, so the market would always find something to be negative about.

“We focused instead on Ratos’ stable balance sheet and strong returns, something we thought constituted a growth case,” says Joel Backesten.

Present the company in a more attractive way
Ratos’ way of reporting at the individual company level differed from Swedish peers, and after investing into the company last year the investment team initiated a dialogue with Ratos about alternative ways of reporting. Joel Backesten and Max Frydén urged Ratos to move away from individual company reporting and instead report according to the different business areas Ratos represents.

“How a company presents itself can obviously have tremendous implications for the market as a whole, and to us this was an important governance-related dialogue to take. We were therefore very pleased to see that Ratos changed its approach to reporting in Q1 2022 and now presents itself as we suggested in our discussions last year. We are convinced this will help the company present itself in a more attractive way to the market, something that should ultimately be reflected in the valuation of Ratos,” concludes Joel Backesten.

This publication has been prepared as marketing communication and does not constitute investment advice. Note that historical return and forecasts on future developments are not a reliable indicator of future return, which may be negative. Always consult with professional advisors on legal, tax, financial and other matters that may be relevant to assessing the suitability and appropriateness of an investment.