Interview with Jean Luc Ménard, fund manager at Crédit Mutuel Asset Management.

This fund has just obtained the SRI France label, could you remind us of its DNA?

CM-AM Small & MidCap Euro aims to support the long term development of quality growth companies that create value and therefore generate performance for unitholders of the fund.

The investment universe is made up of small and medium sized stocks in the euro zone that are companies with a market capitalisation of between 200 million and 10 billion euros at the date of purchase. The fund has the option of holding a company with a market capitalisation above 10 billion euros in order to continue to support it if we believe it retains upside potential in the coming years.

Its benchmark is the Eurostoxx ® Small Net Return. The fund is eligible for the PEA. Over five and ten years, his performance¹ allows him to rank in the first quartile of his category.

What is your investment process? How is the extra financial approach integrated?

CM-AM Small & MidCap Euro recently obtained the SRI France label. The approach is called selectivity when constructing the portfolio, namely the exclusion of 20% of the lowest rated companies from the reference universe, according to the ratings of the Responsible and Sustainable Finance division of Crédit Mutuel Asset Management. In addition, two KPIs (Key Performance Indicators, one of which is for example carbon intensity) of performance and two of monitoring are also monitored. The performance KPIs of the fund must be better said than those of the reference universe.

The fund responds to a conviction based management, which has been in place for ten years within the management team, by investing in companies with attractive medium term development prospects. Idea generation is mainly based on internal scoring (ranking of companies in a universe according to financial criteria) carried out at a monthly rate that highlights the most interesting companies. We understand their business model and industrial strategy to identify their growth drivers. We then model the medium term value creation potential using our internal valuation model based on the ratio of enterprise value to operating income. We integrate the company's rating by the Responsible and Sustainable Finance division into this stage of valuation of companies, by applying in our internal model a specific bonus/malus system at the level of the WACC (Weighted Average Cost of Capital).

In the event of a change of paradigm or society that does not deliver the expected results over time, we do not hesitate to reduce or even exit positions to avoid the destruction of value. Internal scoring with the possible decline in the ranking of the company in question helps us in this decision making.

What is the main interest of small and medium sized stocks?

Their capacity for development. The creation of medium term shareholder value when these companies engage in a virtuous circle of growth is very important. Small and medium sized companies have high growth rates and often demonstrate a strong ability to accelerate their development thanks to the dynamism and responsiveness of their managers, whether through acquisitions or deployments in new geographies.

This is why the fund has the opportunity to maintain positions whose capitalization has become higher as a result of an acceleration in the pace of growth with the success of the management's strategy.

That's why we can find Sartorius Stedim in the portfolio, on which we have been positioned for several years. The company is thus in a good position in our main investments.

Small or medium sized stocks at the moment?

The median market capitalisation of our investments is around €4.5Bn recently. Structurally, we favour mid caps, especially for their greater liquidity and their greater involvement, as a rule, in the extra financial dimension.

Does the fund have sector and geographic biases?

Around 80% of the fund is invested in four countries: France, Italy, the Netherlands and Germany.

Sector allocation is the result of the stock selection work we do and the major investment themes we have identified: Innovation (digitalisation and increased automation of the economy), the quest for well being (better quality of life, particularly through sport and a healthier and more natural diet), the sustainable economy (energy transition, circular economy) and longer life expectancy (health and medical progress with research, prevention and screening).

Examples of companies linked to the energy transition on which the fund is positioned?

Within this trend towards a more sustainable economy, we can mention the Dutch company Alfen, which is at the heart of the energy transition. The group designs, develops and manufactures smart grids, energy storage systems and charging stations for electric vehicles.

Alfen's advantage lies in combining these activities into integrated solutions to meet the needs of its customers. Alfen's strong growth prospects for the coming years are also supported by the plan put in place by the European Union.

We can also mention the Italian company ERG, which is active in the production of electricity mainly from wind and solar sources. It is the leading wind operator in Italy and one of the European leaders.

Changes in the composition of the fund in recent months?

This year saw rates rise with central banks, particularly the Fed, tightening financial conditions to cope with inflation. It is also marked by the invasion of Ukraine and the resulting commodity shock as well as the various lockdowns in China.

In this context, we strengthened our positions in energy transition stocks, such as ERG mentioned above, as the European Union will further accelerate the development of renewable energies following the invasion of Ukraine.

We also strengthened our positions in strong and well managed financial stocks, such as the Spanish bank Bankinter, whose results should benefit from the upward movement on rates. On the other hand, we reduced our positions in more cyclical industrial stocks, which should be impacted by both the economic slowdown and the rise in raw materials.