After a challenging 2024, SKAGEN Focus is having a much more positive 2025. Against a volatile equity market backdrop, our global small and mid-cap fund entered June down 1.6% in EUR year-to-date, 5.5% ahead of the MSCI All Country World Index[1].
Strong performance from European companies have helped lift the fund from the shadows. One of our best contributors this year is Italian-based cement producer Cementir which recently left the portfolio after hitting our price target following a very lucrative journey since 2022. Other strong performers are Ayvens, a French car leasing company whose shares are nearly 40% higher in 2025, and K+S, the German fertilizer producer which has benefitted from increasing demand and higher prices. We currently hold a substantial portion of the fund in primarily industrial European small-caps (~40%) which trade at a deep discount to our price targets based on normalized earnings power.
In addition, our South Korean positions have re-rated sharply this year as favourable election results have reaffirmed the focus on better corporate governance and improved minority shareholder treatment. Defence conglomerate Hanwha and construction company DL E&C have both contributed solidly to the year’s result.
Conversely, Methanex has been the largest drag on fund performance with the Canadian company weighed down by falling methanol prices and a temporary production outage, followed by Vale Indonesia which has declined as the government considers higher mining taxes, while and nickel prices remain depressed.
Three positive market forces
We believe there are three overall market dynamics that can potentially be very positive for the fund going forward. We wrote recently about the Great Rotation away from US equities as investors shift their exposure towards undervalued and under-owned areas of the global stock market outside of the US equity markets. Since Trump’s Liberation Day tariff announcement, this has gained increasing momentum with investors requiring a higher risk premium to hold US assets and a falling US dollar. At the same time, inflation expectations have risen, and Moody’s recently downgraded the country’s credit rating, both of which put upward pressure on US interest rates relative to the rest of the world. The standstill in investment activity has the potential to create negative earnings surprises for US-exposed companies and accelerate the signing of trade deals, which should benefit our portfolio given its US underweight relative to the benchmark, particularly if Trump’s erratic behaviour continues.
The second positive driver is a partial closing of the Magnificent Gap in valuations between US companies and the rest of the world, with small and mid-cap stocks in particular still trading at historically large discounts relative to large and mega cap stocks. Although tariff concerns have unjustifiably pressured valuations for small-caps more than for larger companies, we believe that US big tech stocks will face challenges as non-US customers switch to domestic providers for geopolitical reasons, while increased M&A activity among small and mid-cap companies will also help to close the gap.
The third driver is the Tariff Shadow, a temporary market dislocation created by the broad-brush market reaction to Liberation Day which has disproportionately impacted smaller companies and their valuations. Exporters into the US have been particularly hard hit with industries like autos and auto-parts, construction and machinery appearing overly discounted, as well as companies in countries like Canada and Mexico.
Recently added positions
A good example of one stock currently stuck in the tariff shadow is Traxion, a recent small-cap addition to our portfolio. The Mexican logistics company operates across different segments domestically and is primed to capitalise on the trend for near-shoring and expand into the US. Although this has been temporarily impacted by Trump’s policies, the heavily discounted stock valuation indicates an unreasonable dark scenario. We believe the long-term investment case remains attractive given its dominant market position in Mexico and the US’s dependency on the region. The stock trades at roughly half the multiple of similar companies listed in the US.
Another recently added position is South Korean banking holding company BNK Financial. We have historically had several very lucrative journeys in Korean financials, for instance KB Financial which we closed at price target last year. The undiscovered and ignored BNK Financial is now one of the most discounted regional banks in Korea, trading at just 0,3x book value and 4x earnings while yielding around 5% annually. The company has a clear roadmap to use funds to support increased shareholder returns with a higher pay-out ratio with higher profitability and simultaneously reduce loan growth.
Portfolio priced for lucrative future returns
The portfolio has 46 holdings with weighted upside of 88% based on our current price targets and 87% of assets invested in small and mid-cap names. Korea (21% of NAV) is its largest country exposure terms, followed by Japan (11%) and the US (10%). Analysis from Copley Fund Research shows that relative to global equity peers, our fund’s largest overweight is in Korea (+18%), while the US (-47%) is its standout underweight exposure.
This positioning reflects our price-driven strategy with Korea (8x forward P/E) among the cheapest global equity markets, whereas US equities (22x P/E) remain expensive relative to both other regions and their own historic average. The portfolio currently trades at 10x earnings and 0.7x book value, which represent discounts of 40% and 80%, respectively, to the MSCI All Country World Index[2]. According to Copley, SKAGEN Focus currently sits among the very cheapest global equity funds in terms of earnings and book value multiples, whilst also placing among the highest for dividend yield which reflects the portfolio’s cash generation and balance sheet strength.
Following the negative market response to Trump’s tariffs, many of the most severe reciprocal ones have been reversed or de-escalated via several trade deals and we expect investors to start differentiating between perceived and real-world impact as certainty returns. We also expect this to lift the current tariff shadow over valuations, something which will have a disproportionately positive effect on smaller, non-US companies which will be highly beneficial for a large part of our portfolio.
A recording of the SKAGEN Focus webinar is available here: Market update with SKAGEN Focus - YouTube
[1] Net of fees.
[2] Source: Bloomberg. Data as at 15/05/2025.