After a difficult year, Marc Possa, from the Saraselect fund, explains how to select Swiss stocks and what their strengths are in a protectionist context.
Swiss industry dominates innovation rankings. But on the stock market, Swiss small & mid caps are suffering. The Saraselect fund, specializing in this segment, with 1.2 billion francs of assets under management, fell by 13.8% last year while the benchmark index rose by 1%. Should the manager modify his portfolio? Are small and mid-caps attractive as we approach 2025? Marc Possa, manager of the Saraselect fund, answers questions from Allnews:
After a difficult year for your Swiss small & mid cap fund, have you changed your choices and what should you keep?
The vast majority of our way of thinking, our way of acting and investing must be maintained. However, we can adapt our preferences and sector exposures. For example, we increased the defensive side of the portfolio during the year. These modifications sometimes encounter feasibility problems. Several positions are illiquid. Our fund of 1.2 billion francs suffered in 2024 from our exposure to Lem (-63%), with 43,000 shares in the portfolio. I must be convinced by Lem’s management and strategy to continue to support him over time. Given the low volume traded on the stock market, it is difficult to reduce the position even if I foresee a more complicated quarter or year.
“For example, we increased the defensive side of the portfolio during the year.”
The idea of our fund is to make a good selection of securities at the start and to understand the reasons for the headwinds that a company may face – which leads us to be close to management and to support it.
Is it cheaper to keep Lem for 12 months than to go back and forth depending on temporary factors?
Lem encountered a management problem in Asia, with China being a key market (around half of costs and turnover). The company has also been penalized by the recent emergence of Chinese competitors. His reaction was late but the discussions with his clients show that Lem is on the right track.
In reality, we have no choice. We are convinced by the long-term strategy and appreciate the alignment of interests with this company for the benefit of a reference shareholder and managed by a responsible family of entrepreneurs. The downside of low free float and modest liquidity is undeniable. This is why we select the right ships knowing that it will not be easy to leave them at our convenience.
This case is valid for other companies, such as Bachem, Dottikon, Forbo and others, which may temporarily suffer from the situation in Europe, which penalizes the operating result and the perception of investors temporarily.
Your December comment concerns the value of using Shiller’s P/E, which takes into account cyclically adjusted earnings when analyzing a stock. Isn’t it daring to try to distinguish between cyclical and structural factors? Don’t temporary problems tend to persist?
We can add value by being able to distinguish and understand the impact of mega trends, such as urbanization, digitalization, communication, electrification or automation. The analysis of the European automobile industry is a good example.
The slowdown is partly the result of the end of subsidies for electric cars at a time when China is increasing support for the electrification of its automobile manufacturers so that the adoption rate exceeds 50%. The difference in trend can largely be explained by a very different political will.
“Swiss groups have a future because they will best meet needs and not because they are from a specific country.”
To distinguish cyclical and structural elements, it is important to refer to the evolution of market shares and the degree of innovation. Our discussions with management focus on these aspects. Lem’s has just gone to China to visit his customers and returned with a positive opinion. By reducing its prices a little, Lem regained market share. But the company will have to control its costs and reduce its “footprint” in an automobile market which is definitely not growing. Lem has five segments, including automobiles, but the group is well diversified in the railway sector, automation, renewable energies, electric chargers.
Changes will continue and we will have to respond to them, but man is a creature of crisis. It needs a crisis to develop.
As an investor, shouldn’t you be exposed to artificial intelligence rather than European automobiles?
Okay, but I remain convinced by Swiss industry and in particular by mechatronics, the real-time combination of electronics, mechanics, automation, electrification and digital data. Swiss manufacturers are excellent at the physical translation of digital data. Switzerland is the world champion in this area. Since 2011, Switzerland remains the most innovative country.
Are you adapting your portfolio to the arrival of Donald Trump and the resurgence of protectionism?
Almost not. It is very difficult to anticipate what will really be decided. Many companies that experienced Trump’s decision-making style in 2016 have tried to prepare for it. In fact, the arrival of Donald Trump expresses the emergence of a bipolar or multipolar world, and no longer unipolar. Companies have diversified and reduced the risks of political mismatch. They have been adjusting for several years to developments in both China and the United States. All have developed an emergency plan to better react to possible decisions.
-Should we invest in the Swiss companies with the largest presence in the United States?
No, because Swiss companies go below the radar and are barely visible to consumers. They are less affected by tariff risk. They provide part of the components of a product, like the Intel Inside of a computer, but without being visible. They are less vulnerable to customs duties that would seek to protect an American industry that does not have access to these components. Swiss groups have a future because they will best meet needs and not because they are from a specific country.
Would Swiss groups be penalized if Switzerland does not sign the new bilateral agreement between the EU and Switzerland?
The risk exists, but companies tell us that they can add value regardless of possible additional administrative obstacles. The degree of bureaucracy and one of the reasons for Europe’s weakness.
Pharma is targeted by the new American Minister of Health. What do you conclude from this for Swiss companies in this sector?
I am particularly interested in the megatrend in the healthcare sector of favoring injectable rather than oral drug delivery. The trend is accelerating. According to studies by the Skan company, in 2005 none of the ten largest pharmaceutical products were injectable. In 2023, the rate increased to 70%. The injection has the advantage of avoiding potential risks with the digestive system. It also allows very precise administration depending on the characteristics of the patient. Side effects are also minimized, as well as prices.
“Swiss manufacturers are excellent at the physical translation of digital data.”
Skan is a global leader and cannot be replaced by an American company. Robert Kennedy, the new US Secretary of Health, will try to promote a healthier America, but his policies will have to take into account the cost/income ratio.
Which Swiss companies are best placed in this sector?
Ypsomed is very well placed with a global leadership position in terms of innovation and costs in injection systems. It will also invest in the United States and has already inaugurated a factory in China after only 11 months of work. Skan, in the sterilization of ampoule filling, is also a world leader. Bachem and Polypeptide, which produce peptides that meet the challenges of targeted and personalized medicine, Lonza and Dottikon are also among the beneficiaries.
The situation is more complicated in biotech, a sector which is the subject of fewer transactions. Sellers’ price hopes are rarely met.
Your portfolio includes a large capitalization, Sika, which penalizes your performance. What do you think?
Timing is complicated on the stock market. We remain convinced by the company culture, which consists of responding to customer needs on a daily basis. This philosophy will remain effective. She was immediately integrated into the companies that were acquired, from MBCC to Parex.
Swiss manufacturers are often subcontractors to the European automobile industry. As an investor, how do you separate the wheat from the chaff?
We avoid companies that face major headwinds, like Feintool. In 2011, I inherited a 9% position in Adval Tech, which I keep, because the valuation is very low. The company had the exclusivity of capsules for one of the two major Swiss retailers. The contract is coming to an end, but its offer could attract new customers. We don’t want to sell at the wrong time.
Ems, Daetwyler, Sika are also exposed to automobiles, but they are more or less diversified groups. We don’t like a company to be focused on a single niche.
What are your market beliefs for 2025?
A rebound should occur after a difficult 2024. We remain convinced by stocks like Lem, Daetwyler, Forbo, SIG Combibloc, through their products and their strategy.
