Montanaro European Smaller Companies (MTE ) fund managers George Cooke and Stefan Fischerfeier exited three positions in the year to the end of March as they battled to hang on to their gains in the sell-off of growth stocks.

Investment returns soared 34.7% in the first nine months, before crashing to leave net asset value up 7.9% for the financial year. The £229m trust still beat its MSCI Europe ex-UK SmallCap index, which rose 5.7%.

They sold out of Swedish radiation equipment manufacturer Elekta in June last year, according to Morningstar data, after growing concerned about intense competition from rival company Varrian.

They also dropped Italian pharma group Recordati in February because it was not as ‘compelling’ an investment as other companies. They also sold Swedish telecoms company Sinch in March, one of the largest detractors to performance, recording shares falls of 51% in the year to the end of February.

The managers said the company struggled to pass on rising costs to consumers and made several large acquisitions which ‘appear to be more difficult to integrate than they expected’.

‘As a result, the company’s level of debt increased significantly. Sensing a deterioration in the core quality of the business, we therefore exited our position.’

The team bought German electric vehicle gearbox developer hGears in May last year, which now holds a weighting of 1%, and Swedish medical imaging provider Sectra in August, which makes up 1.3% of the portfolio.

Both newcomers experienced torrid years, recording share price falls of more than 30% each in the year to date.

The top contributors to outperformance include current largest holding Swedish printed circuit board supplier NCAB, whose shares rocketed 92% over the period, but have since dropped back to 18.4%.

‘In 2021, the company delivered high organic revenue growth; made some attractive bolt-on acquisitions; saw its order intake (in dollars) almost double; and significantly expanded its operating margins. The stock also began being covered by a second sell-side institution during the period,’ the pair wrote.

Swedish cloud-based account system provider Fortnox was the largest contributor to gains in the previous year and is the second largest position in the portfolio at 4.6%.

This year, the company returned 33.8% as it continued to grow revenues and earnings at double-digit rates, as well as increasing prices for their subscription-based products in March. Since then, the shares have fallen 10.4%.

Swedish helmet safety company MIPS similarly was a top contributor a year ago, with shares going up 40.9% this year. Cooke and Fischerfeier credit this with the expansion of their model range and a strong start on the commercial market, doubling 2021’s operating profit. The shares also fell victim to the sell off, falling 36.5% since the end of March.

The portfolio now appears quite concentrated, with IT, industrials and healthcare the largest sector exposures, accounting for 72% of assets. 

Chairman Richard Curling, manager of Jupiter’s Fund of Investment Trusts and Monthly Alternative Income fund, and a former small cap investor, struck a bullish tone in his outlook for the coming year.

‘Previous periods of significant underperformance from such quality growth companies have presented good buying opportunities for those with a long-term investment horizon.’

So far this year the growth trust’s asset value has plunged 35.7% and the shares 45%, compared to the benchmark’s 19.8% decline, leaving the fund on a 12% discount.

Curling reminded investors worried about performance that despite the setback in the last quarter, the trust hac delivered over three and five years to 31 March an underlying investment return of 20.1% and 17.0% a year. This beat the benchmark by 7.6% and 8.3% a year, making it ‘the best performing European investment trust over these time periods.’

‘We continue to believe that companies capable of generating high returns on capital employed - and that can continue to grow while maintaining or expanding those returns - will be the ones that fundamentally increase most in value over the long term,’ he said.