DNCA Invest Explorer Smid Euro

Summary of Economic Conditions Influencing Investment Decisions

The MSCI EMU Small Cap Index closed September down 3.7%, in an environment marked by the return of inflationary pressures and a broad-based rise in sovereign bond yields. In the United States, the Federal Reserve raised its benchmark interest rate by 25 basis points, adopting a resolutely hawkish stance in response to a still-strong economy, persistent inflation, and oil prices remaining at high levels amid the conflict in the Middle East. In Europe, the ECB also continued its monetary tightening, while the rise in long-term rates was accompanied by a marked widening of the spread between France and Germany. Despite continued favorable earnings growth and ongoing investments in artificial intelligence, European equity markets were weighed down by higher discount rates and concerns about future growth.

Within the index, Utilities (-0.7%), Industrials (-1.1%), and Information Technology (-1.2%) showed the strongest resilience. Conversely, Health Care (-10.7%) and Energy (-7.5%) posted the sharpest declines, followed by Consumer Staples (-5.7%) and Real Estate (-4.8%). Materials (-2.7%), Communication Services (-2.6%), and Financials (-3.1%) also declined amid rising risk aversion and a more uncertain outlook for demand.

Decisions Made During the Period

During the month, we initiated positions in KBC Ancora (a financial holding company), whose discount relative to the value of its stake in KBC offers an attractive entry point; Fagron (pharmaceuticals), which continues to deliver sustained organic growth and improved profitability; and Aixtron (semiconductor equipment), whose valuation already reflects subdued activity in its end markets. We also invested in Heijmans (construction), CTP (logistics real estate), Construcciones y Auxiliar de Ferrocarriles (railway equipment), Nemetschek (construction software), Metso (mining equipment), and Intercos (cosmetics), to benefit from their leading positions in structurally buoyant markets.

We continued to build our positions in Uniphar (pharmaceutical services), Hera (municipal services), Alpha Bank, and Piraeus Bank (Greek banks), whose results continue to benefit from improved profitability and capital distribution. We also increased our holdings in ESI Group (simulation software), Ayvens (fleet management), Merlin Properties (real estate), Amplifon (audiology), and Technip Energies (energy engineering), as their valuations have become more favorable again.

Conversely, we reduced our holdings in Technip Energies, Arcadis (engineering), Planisware (project management software), Hensoldt (defense), Vienna Insurance Group (insurance), Lottomatica (gaming), and Krones (beverage industry equipment), following their strong stock market performance. Regarding Krones, growing uncertainties in its end markets and the risk surrounding the achievement of its annual targets also motivated this reduction.

Finally, we closed out our positions in Webuild (construction), Fugro (geotechnical services), Covivio (real estate), Rémy Cointreau (spirits), Equasens (healthcare software), Exail Technologies (defense and navigation), and SBM Offshore (offshore engineering), in order to reallocate capital toward opportunities offering greater upside potential.

Explanation of Performance

Monthly performance stands at: -2.87% compared to the MSCI EMU Small Cap Index: -3.63%, representing a relative performance of 76 pb.

The top contributors are: Cirsa (+34%), which benefited from the announcement of its merger with Lottomatica, valuing the group at a significant premium and offering substantial synergies; Technoprobe (+22%), driven by strong demand related to artificial intelligence and advanced semiconductors, which is also supporting its capacity investments; Soitec (+36%), which significantly raised its growth outlook for the second quarter thanks to accelerating demand for Photonics-SOI for data centers related to artificial intelligence; and Cenergy Holdings (+5%), supported by a record order backlog and strong momentum in investments in power grids and interconnections.

The main underperformers are: Bilfinger (-33%), which sharply lowered its margin and cash flow targets due to delays in client investments and underutilization of its capacity; flatexDEGIRO (-24%), weighed down by governance uncertainties following the sudden departure of the chairman of the supervisory board and a major management shakeup, despite still-solid operational fundamentals; Renk (-20%), affected by questions regarding the timeline for major armored vehicle orders and reduced visibility on the potential for short-term earnings growth; and Danieli (-25%), whose annual re port highlighted a sharp decline in operating income and profitability outlook deemed disappointing despite a record order backlog.

Outlook and Strategies to Be Implemented

Geopolitical tensions in the Middle East are fueling uncertainty regarding the continuation of a low-interest-rate environment and contained inflation in Europe. The fund follows a disciplined investment approach focused on high-quality European small- and mid-cap companies with strong competitive positions, robust balance sheets, and sustainable growth drivers.

Many holdings continue to demonstrate strong operational execution and improved earnings visibility. The portfolio's positioning remains balanced among "compounders," companies undergoing transformation, and cyclical companies in a turnaround.