Investment approach

We employ a rigorous and proprietary fundamental bottom-up investment process to build a portfolio of 25-35 exceptional companies. The market cap ranges between EUR 250 million and EUR 5 billion at the time of initial investment. Our investments are listed on a stock market in a developed market.

Exceptional companies generate high returns on their invested capital, have strong cash conversion and long-term growth potential. Equally important is quality of management and their alignment with all shareholders. We believe a company can only be exceptional if it acts as a responsible corporate citizen. We incorporate environmental, social and governance factors into our investment analysis. People, Planet and Profit go hand in hand. We engage constructively with management where we believe a company can improve its strategy, always with a long-term mindset.

Core concepts

The investment process of SilverCross is based on four core concepts. Each of these is essential for the selection of stocks we invest in. We look for companies with defensible, strong business models. We invest with a time horizon of at least five years. Both an attractive valuation and honest, aligned management are essential to help reduce the risk of sustaining permanent capital loss.

We select companies that can generate sustainably high return on capital and benefit from a recurring need for their products or services.

We look for companies that can scale their business efficiently. Reinvestment dynamics determine how big a business can ultimately be.

A combination of earnings growth and the potential for valuation multiple rerating lies at the basis of strong long-term returns.

We look for management teams that act as owner-operators with a significant equity stake in the business. That creates alignment.

Time as ingredient for success

One of the core concepts of our investment philosophy is compound returns. An important part of our research is to assess the long-term growth opportunities of a company. Since stock prices follow earnings, growth is essential for long-term stock price appreciation. Smaller companies have more potential for sustained growth. We only invest in a company if we see it can scale its business meaningfully for at least five years. Our goal is to be a long-term shareholder in growing businesses.

Time is the friend of a company that generates consistently high return on invested capital. This is the essence of the power of compound returns. It forms the basis for a superior investment result.

 

The million-dollar question

What would be your answer if you’re asked this question: Do you want Eur 1 that doubles for 31 days each day, or do you prefer to receive Eur 1 million today?

The importance of the above question cannot be exaggerated. The effect of compound return is easily underestimated. In the first few years, it doesn’t really raise eyebrows. But as time goes by, the effect becomes very visible. It’s like a snowball rolling downhill. No wonder Albert Einstein once said that compound interest is the eighth wonder of the world.

The answer truly is mind-boggling. Eur 1 that doubles for 31 days becomes more than 1 billion. The first 20 days of the month, you will be behind the 1 million. Finally, on day 21 you break the 1 million mark. It starts slow, but it grows exponentially. That’s the power of compounding in action.

I hear you say “But this is unrealistic. Who makes 100% a day for 31 days?” True. So, let’s use a more realistic example. You invest Eur 1000 the day your child is born and continue this charitable act each birthday until the adult age of 18 has been reached. You invest it in stocks that compound at 10% per year until your child reaches the graceful age of 65 years. Altogether, you invest a total of Eur 19,000. How large will your child’s pension pot be? A staggering Eur 4 million! Alternatively, your child can start saving when he or she turns 19, putting aside Eur 1000 per year until retirement. Total invested Euros will be Eur 45,000. How much is there for retirement? Just Eur 800,000. For the avoidance of doubt, the assumed 10% return is based on a long-term historical average. Nobody knows what level of return the stock market will offer in the next few decades. It can be higher or lower.

There are two important conclusions. The first is that the rate of return on an investment doesn’t need to be outlandish for spectacular capital accumulation.

The second conclusion is the importance of starting early. This is by far the biggest secret to compounding. The longer you wait, the more you will have to save later in life. The amount you must save to invest every year grows exponentially.

SilverCross has a specialised team of dedicated, experienced investors that scour the globe in search for excellent smaller listed companies. Each of these is selected on their ability to generate an attractive long-term compound rate of return. The team stays on top of developments related to each company it has invested in. Because good companies can turn into bad companies and bad companies can go bust.

 

Let time work for you

If you decide to become an investor that embraces compounding, then consider investing in SilverCross Global Small-Cap Fund. It will liberate you from the urge to time the market. You will not be hounded by the perennial question if "now is a good time to invest." Instead, you become a part owner of a small group of excellent businesses that can compound in value over time.

Read more about the power of compounding in this SilverBullet Newsletter.

Our Goal

We aim to achieve a long-term total return in excess of the MSCI World Small-Cap index¹. We focus on investment opportunities with attractive absolute return potential versus the risk we take. For each investment we require an asymmetric risk/reward: our analysis must show at least twice as much upside potential versus downside risk.

Downside risk is reduced when a company takes its corporate citizenship seriously. It can also improve its growth outlook. Environmental, social and governance factors are therefore taken into consideration when we make an investment.

The value added of our investment strategy can best be judged over a time period of 5-7 years, which is generally considered a ‘full market cycle’, or a stock market moving from peak-to-peak. Successful investing is about beating the market over time, not every time.

In our pursuit to identify highly attractive investment opportunities, we are geographically unrestricted and invest exclusively in the developed markets. Currency exposure will ordinarily remain unhedged.

¹MSCI World Small-Cap Total Return Net index in Euro

 

Current investments

Sustainable Business Practice

Environmental, social and governance (ESG) factors are fully integrated into our investment analysis. We aim to invest in companies that act as a responsible corporate citizen. Taking these factors into account helps to mitigate risk and achieve our goal of above average long-term returns. Applying sustainable business practices in small-cap investing can be challenging as small-cap companies often disclose little ESG data and there is a lack of high-quality coverage from third-party ESG service providers. At SilverCross, all ESG analysis is carried out internally by our team of analysts as part of the bottom-up due diligence research process. We use a proprietary ESG research process consisting of four phases. When we meet management, our engagement is based both on traditional fundamental and ESG analysis.

We believe that:

  • Companies’ business models can be part of the solution to environmental and social challenges;

  • Companies acting responsibly reduce 1) finite and polluting resources; 2) the risk of reputational damage;

  • We have a fiduciary duty to our society to discuss any ESG concerns, including UN defined SDGs.

How we apply our Sustainable Philosophy:

  • MSCI ESG research supports our sustainability analysis;

  • ESG analysis is fully integrated in the global small-cap selection process.

IBS Fund Management, which is the manager of SilverCross Global Small-Cap Fund, is a signatory to the UN PRI and is committed to the UN Global Compact.

 

Engagement with companies

We engage with companies about their operations, including ESG risks. As we are long-term owners in the capital of the companies we invest in, management teams tend to value our feedback. They see we are truly aligned, with a focus on the long-term success of the company for all stakeholders, which includes society at large.

When we believe certain ESG risks are apparent and cause any of our beliefs to be under threat, we will encourage management to improve its performance. If persistent engagement proves unsuccessful, we will sell our investment. We prefer not having to vote with our feet though.

 

Proxy voting policy

SilverCross is committed to exercising its voting rights associated with the shares held in SilverCross Global Small-Cap Fund as well as any investment mandates where proxy voting is delegated to us. Proxy voting enables us to build continuous dialogue with our portfolio holdings helping to promote best standards in corporate governance. We are committed to the Financial Reporting Council’s Stewardship Code which aims to enhance the quality of engagement between investors and companies to help improve long-term risk adjusted returns to shareholders.

We use software provided by Broadridge for our proxy voting. 

 

Sustainability at SilverCross

At SilverCross sustainability is not only something we consider for our portfolio investments but is a philosophy deeply engrained in our day to day living.

Energy Saving

  • At our headquarters in Amsterdam, we have energy saving lighting that automatically turn off when motion is not detected. Our computers are always turned off every evening before departing the office.

Paper Usage & Plastic Recycling

  • At SilverCross we do our very best to reduce the amount of paper that we use at the office. Documents such as annual reports, quarterly results and company presentations are now all obtained electronically rather than in paper form. If in face to face meetings we are provided with paper copies of presentations, it is company policy to return this for re-use and an electronic copy is instead requested.

  • We strictly recycle all paper used in the office with both regular card, paper recycled as well as confidential waste.

Travel & Carbon Offsetting

  • We travel extensively across the globe to meet with companies in order to be able to better understand the cultures, something that is impossible to do from our desk in Amsterdam. At SilverCross we are fully committed to offset our Carbon Footprint.

Diversity

  • As part of our Phase 3 ESG analysis, diversity forms part of our corporate governance analysis. At SilverCross, we believe diversity is not only important at the companies in which we invest but is also important in our own organisation. We believe that diversity leads to improved group thinking and ultimately a more successful organisation. We have a multinational team and we promote equality throughout our company.

For further information about our sustainable investing policy, please contact us via enquiries@silvercross-im.com.

 

Sustainability-Related Disclosures

In this section we provide the regulatory disclosures required by the Sustainable Finance Disclosure Regulation (“SFDR”). The section summarises the integration of sustainability risks into our investment process and provides further details of our ESG research process. The headings used are mandated by the regulation.

Summary

We seek to invest in companies that are part of the solution, or at the very least do not materially contribute, to environmental and social challenges. In order to achieve this overall goal, we do not promote specific environmental or social characteristics. Instead, we aim to invest in companies that act as responsible corporate citizens. We only include investments in the SilverCross Global Small-Cap Fund that comply with minimum social and environmental safeguards, including those concerning labour rights, human rights, anti-corruption and environmental protection. Companies that are involved in significant controversies or materially detract from society achieving its sustainable development goals are not suitable investments for the SilverCross Global Small-Cap Fund.

 

We have developed our own proprietary ESG research process which is fully integrated into our company analysis. Screening is conducted to avoid companies which attain 10% or more of their revenues from controversial activities or have violated any of the UN Global Compact principles. “Controversial activities” are defined as any business activity over which the morality is heavily debated among international governing bodies. These activities are seen to cause net-harm to humans such as indiscriminate weapons and tobacco. Investee companies are then assessed against weighted environmental, social, and governance indicators within our proprietary SilverCross ESG template. Each ESG performance indicator is given a weighted score based on an investee company’s performance relative to its industry peers. While we utilise external ESG-research to support our analysis, we establish our own internally calculated ESG score. The score is used as a monitoring and engagement tool, as well as one for continual improvement.

 

A variety of data sources are used to assess the ESG performance of the SilverCross Global Small-Cap Fund. These include self-disclosures from investee companies (including one-on-one meetings, annual reports, company presentations, website disclosures and proxy statements), MSCI ESG Manager and Bloomberg.

 

Below is a selection of the sustainability indicators assessed in our ESG template:

  • Environment
    • GHG intensity
    • Waste production
  • Social
    • Violations of UN Global Compact
    • Exposure to indiscriminate weapons
  • Governance
    • Board gender diversity
    • CEO pay ratio

 

No sustainable investment objective:

This financial product promotes environmental or social characteristics but does not have as its objective a sustainable investment.

 

Environmental or social characteristics of the financial product:

We seek to invest in companies that are part of the solution, or at the very least do not materially contribute, to environmental and social challenges. In order to achieve this overall goal, we do not promote specific environmental or social characteristics. Instead, we aim to invest in companies that act as responsible corporate citizens. We only include investments in the SilverCross Global Small-Cap Fund that comply with minimum social and environmental safeguards, including those concerning labour rights, human rights, anti-corruption and environmental protection. Investee companies that are involved in significant controversies or have violated any of the UN Global Compact principles are excluded from the Fund. “Controversial activities” are defined as any business activity over which the morality is heavily debated among international governing bodies. Such activities include indiscriminate weapons, such as biological and chemical weapons, or tobacco and gambling.

 

Investment Strategy:

We employ a fundamental bottom-up investment process to construct a concentrated yet diversified portfolio of 25-35 stocks of undervalued companies with a market capitalisation of below EUR 5 billion at the time of investment. The Fund's investment process focuses on identifying what we consider to be high quality, undervalued companies that offer the potential for asymmetric risk/reward outcomes. Our in-depth investment approach focuses on seven key investment characteristics:

  1. Business quality
  2. Undervaluation
  3. Financial strength
  4. Understandable
  5. Aligned
  6. Proactive
  7. ESG

We believe that environmental, social and governance (ESG) factors can influence a company’s intrinsic value. A key factor in determining a company’s intrinsic value is its long-term growth potential, which is driven by its sustainable competitive advantage. We believe a company can increase its competitive advantage if it considers its  long-term impact on the environment and society. It allows a company to better attract and retain key  stakeholders, whilst reducing monetary, regulatory and reputational risks. Good governance practices and a strong awareness of ESG factors demonstrates the desire of management teams to mitigate these risks. We assess ‘good governance practices’ of investee companies as part of our ESG analysis. Companies are assessed against a variety of factors including board composition; board, executive and employee remuneration relative to peers; IT governance; voting right structure and governance policies.

 

Proportion of investments:

The SFDR requires financial market participants to distinguish between direct exposures in investee entities and all other types of exposure to those entities. The SilverCross Global Small-Cap Fund only includes direct investments in investee companies. The Fund does not include any indirect investments, such as through derivatives.

 

Monitoring of environmental or social characteristics:

Investee companies that meet our selection criteria are assessed against environmental and social factors at least annually under our ESG due diligence process. ESG analysis is carried out in-house by the SilverCross team. While we do utilise external data providers to support our analysis, we do not depend on any third-party. The full ESG process is reviewed by the team annually. This is supplemented by daily monitoring including one-on-one meetings with management, outputs of shareholder meetings, daily briefs, press releases and news alerts. As we are long-term owners in the capital of the companies we invest in, we believe in active ownership. We regularly engage with our investee companies about their operations, including environmental and social factors. If we believe significant ESG risks are apparent, we flag these concerns with management, provide guidance and encourage them to improve performance.

 

Methodologies:

We analyse a variety of sustainability indicators in our ESG template. Each of the sustainability indicators are given a weighted score based on an investee company’s performance relative to its industry peers. The score weights are determined by a double materiality assessment. The assessment is used to identify 1) the sustainability indicators that are most material to our investee companies and 2) the sustainability indicators which have the most material impact on society.  Below is a selection of the sustainability indicators assessed in our ESG template. The indicators are split between three themes: environmental, social and governance.

 

Environment:

  • GHG intensity: The sum of the investee company’s annual scope 1 and scope 2 GHG emissions (tCO2e) are added together to calculate the company’s ‘total GHG emissions’. This figure is then divided by the company’s annual total revenue in € millions.
  • Waste production: The investee company’s annual waste tonnage is calculated from company reports. Where possible, the total tonnage is split by recycled waste, non-recycled waste, and hazardous waste (as defined in Article 3(2) an Article 3(17) of Directive 2008/98/EC). These figures are then reported as a percentage of total waste.

Social:

  • Violations of UN Global Compact: The investee company’s ticker is run through MSCI’s Business Involvement Screening Research tool (BISR) to assess whether it has been involved in any violations of the UN Global Compact principles or OECD Guidelines for Multinational Enterprises. If MSCI does not cover the investee company, then company records, the internet and the Bloomberg terminal are searched.
  • Exposure to indiscriminate weapons: The investee company’s ticker is run through MSCI’s Business Involvement Screening Research tool (BISR) to measure the proportion of company revenue that is attained from the manufacture or distribution of anti-personnel mines, cluster munitions, chemical weapons and biological weapons. If MSCI does not cover the investee company, then company records, the internet and the Bloomberg terminal are searched.

Governance:

  • Board gender diversity: The number of women on the investee company’s Board of Directors is divided by the total number of Board members. This figure is represented as a percentage and is compared with the investee company’s peer and country average.
  • CEO pay ratio: The total annual compensation of the investee company’s median employee (excluding the Chief Executive Officer) is divided by the total annual compensation of the Chief Executive Officer. This figure is represented as a ratio of x:1.

 

Data sources and processing:

We use the following data sources to assess the ESG performance of our Fund:

  • Direct information from investee sources: one-on-one meetings, annual reports, company presentations, website, proxy statements
  • MSCI ESG Manager including the BISR tool
  • Bloomberg

We cross reference data sources to ensure data quality. To ensure accuracy, we do not include estimated data in our calculations.

 

Limitations to methodologies and data:

A key limitation of the SilverCross ESG process centres around the lack of available ESG data among our chosen asset class, global small-cap equities.  Gathering data on small-cap companies can be challenging as smaller companies often disclose little ESG data. Third-party data providers also frequently lack adequate levels of ESG coverage on small-cap companies, which means we are unable to rely solely on such providers. This highlights the importance of our engagement process. It is vital that we engage with our investee companies as it enables us to raise awareness and elevate the importance of ESG among our investee companies. Our ESG process allows us to facilitate continual improvement by providing guidance, as well as encourage more disclosure and transparency. A further limitation is that there is some level of subjectivity involved in the calculation of the SilverCross ESG scores. To address this limitation we have conducted a double materiality assessment to determine a weighting for each ESG metric within the total ESG score. The assessment aims to reduce subjectivity by selecting ESG metric score ranges guided by defined industry guidelines. Each metric in our ESG template is given a strict definition and measurable score range.

 

Due diligence:

Sustainability risks are considered under our ESG due diligence process. ESG due diligence is an integral part of our business operations and is fully integrated into the SilverCross Global Small-Cap company selection process. Before we make an investment decision, we conduct ESG research on the prospective investment. Investee companies that are included in the Fund are reassessed periodically.  The due diligence process includes the following stages: screening, proprietary ESG analysis, engagement and proxy voting.

 

Full details can be found in our ESG Due Diligence Policy.

 

Engagement policies:

As long-term investors, we believe in active ownership. Our focus is on building long-term relationships with our investee companies by engaging on material issues with the relevant personnel. We regularly engage with the management teams of our investee companies on their operations, including ESG factors. Engagement topics are determined by our bottom-up analysis and are prioritised in terms of sustainability risk and impact. Engagement is conducted through one-on-one meetings and supplemented with conference calls, emails and, where possible, site visits. Our engagement process can be broken down into four key stages: initial due diligence and engagement, in-depth engagement, proxy voting and continued monitoring and reporting.

 

Full details can be found in our ESG Engagement Policy.

Performance

As of Monday 29 November
Global Small-Cap Fund € 370.62

Performance (%) YTD 1-Year 3-Year¹ 5-Year¹ Since Inception²
SilverCross Global SC Fund (Net) 22.7 25.6 27.4 19.3 19.5
MSCI World Small-Cap TR (Net) 23.3 27.5 15.1 11.1 12.0
Excess return -0.6 -1.9 12.3 8.2 7.5

Filter Results

Performance (%) 2021 2020 2019 2018 2017 2016 2015 2014
SilverCross Global SC Fund (Net) 22.7 18.7 53.9 -6.9 11.2 17.5 25.0 8.72
MSCI World Small-Cap TR (Net) 23.3 6.5 28.7 -9.6 7.6 16.1 11.0 8.66
Excess return -0.6 12.2 25.2 2.7 3.6 1.4 14.0 0.06

1 Average annualised total return
2 Average annualised total return since Fund inception 30 July 2014
Columns 2019 and YTD: Year To Date (last working day)

The Fund’s NAV is the value of a single participation and is computed daily using closing prices as of the NYSE closing time – usually 10:00 p.m. Central European Time. Securities for which prices are not readily available (such as when highly volatile global markets cause extreme distortions) are valued at a fair value under the Funds’ Valuation principles as described in the Terms & Conditions of the Fund’s prospectus.

SilverCross Global Small-Cap Fund return is stated net of fees since inception.
Total annual fee is 1.40%. Management fee is 1.15%. Operational Service fee is 0.25% up to EUR 250 million assets under management and 0.20% above that level.
Performance 2014 is measured from 30 July 2014 through 31 December 2014.