Banque de Luxembourg Investments S.A.: Third anniversary of BL-American Smaller Companies: Investing in the “Sweet Spot” of the US market

21 dec 2018

BL-American Smaller Companies, a fund of BLI - Banque de Luxembourg Investments, is celebrating its three-year anniversary. The fund, managed by Henrik Blohm, invests mainly in mid-cap companies, which historically outperformed small and large caps over the long term.

BL-American Smaller Companies, a fund of BLI - Banque de Luxembourg Investments S.A., is celebrating his three years of existence. The fund was launched in November 2015 with the goal to profit of the “sweet spot” of the US market, i.e., investing in fast growing, high quality, and predominantly mid cap companies that compound value over time. Henrik Blohm currently holds about 80 percent of his fund in mid-caps and 15 percent in small caps. “I have been managing the fund since it was launched three years ago”, said Blohm. “My job consists mainly of identifying high quality companies with a sustainable competitive advantage. My fund’s attractive risk adjusted return profile since its inception shows that a rigorous selection of high quality companies at reasonable prices creates value over time.”

Mid-caps outperform small and large caps over the long term

Investors often tend to focus on large cap companies and younger small caps. While small-cap stocks have a reputation for delivering some of the best returns in the stock market, in fact mid-cap stocks have outperformed both small- and large-caps over the long term. And, mid-caps have produced this superior return with less risk than that of small-cap stocks. The balance between the risk and reward offered by an investment vehicle is encapsulated in a statistical measure called the Sharpe ratio. Historically, mid-cap stocks produced the highest Sharpe ratio.

Companies in the most attractive stage of their life cycle

Once through the difficult start-up phase, small and mid-cap companies enter the phase where they can deploy all their growth potential: “With respect to large caps, the key reason for higher growth is mathematics – it is simple easier to grow from a smaller base than a larger one. Mid-caps have an advantage over small caps, as they are typically more mature, therefore offer better cash flows, more stable balance sheets, more experienced management teams, better established brands, market positions, products and relationships. Mid-caps find themselves in the business life cycle where they can generate stable profitable growth and therefore strong shareholder returns”, Blohm argues.  

A high quality and growth approach has led to strong historical performance in mid-caps.

The quality premium is well documented among large cap stocks and is also applicable to mid-cap companies, with high-quality mid-caps enjoying long-term performance advantages versus their low-quality peers. High-quality mid-caps have been consistent outperformers versus low-quality mid-caps across most time periods and market conditions. Growth is another large determinant of long term returns. Generating above average growth in the mid-cap space has led to strong performance advantages compared to slower growing companies.

Take advantage of the “sweet spot” of the US market

“I am convinced that the BL-American Smaller Companies fund is perfectly positioned to benefit from the ‘sweet spot’ of the US market. Our focus on investing in reasonable priced high quality companies with a sustainable competitive advantage will continue to create strong risk-adjusted returns for investors over the long term. If a fast-growing company can reinvest its cash flow at high rate of returns, it creates a lot of shareholder value over time”, Blohm concludes.