Why do you think 2022 so far has been a rough year for non-U.S. quality small-caps?

My view is that we live in a world of growing uncertainty, and when uncertainties spike, time horizons shrink. Investors become less discerning about the business attributes in which they’re investing. So for example, if we look at the factors that were most influential in the first quarter of this year, the companies that did best were those with low multiples, low profitability, and high leverage.

It’s natural that investors crave instant gratification but, to be clear, doing so is speculating on the short term. If you want to be a long-term investor, it’s best to buy businesses that are built to last, and those are businesses with strong balance sheets, high and consistent returns on invested capital, and pricing power, and those are the only types of businesses that we invest in.

What opportunities are you seeing amid all the uncertainty?

So we have a relatively concentrated and high-conviction portfolio with low turnover, and many of our companies during the course of the quarter suffered from price decreases, making their valuations more attractive. So perhaps it’s not too surprising that during the quarter we deployed a significant portion of our capital into our existing holdings.

One of the areas in particular that I might mention is what I’ll call COVID hangover stocks. These are businesses that during the early stages of the pandemic attracted lots of investor attention, but now that the pandemic is waning, they’re thrown out with the bathwater. I’m talking about high-quality, reasonably priced businesses with durable income streams, pricing power, and that create shareholder value. So, for example, we added to GVS, one of the global leaders in high tech filters to the healthcare industry. We also added to DiaSorin, which is a provider of consumable reagents used in diagnostic testing.

Can you discuss a stock that’s a laggard and one that’s had success?

So one company that comes to mind is XP Power, which is a business that sells power converters which are embedded into its customers’ products. Now in March the company reported full-year results. It saw revenues up 10%. But the company is not immune to supply chain disruption, and so it saw shortages in electrical components, and it also saw freight costs much higher than it’s typically used to.

XP Power (XPP LN in US$) 12/31/22-5/23/22

So as a long-term investor, we look at this and we say, well, XP Power has pricing power because it is selling low-cost but very mission-critical components, and it can raise prices over time. And so we took the opportunity and we topped up our position during the quarter.

So Hansen Technologies was one of our top contributors for the quarter, up some 12%. Hansen is an Australian company, and what is does is it provides software used by the telecom and the utilities industries to manage their own client interactions, everything from client acquisition to client service and billing.

So Hansen by many investors is viewed as a sort of sleepy, lower-growth business and, on top of that as an IT company, Hansen was also presumed to be subject to the same personnel-related pressures that a lot of businesses are subject to in this operating environment, including wage inflation, high employee turnover, and so there were relatively muted expectations for Hansen for the quarter.

Hansen Technologies (HSN AU in US$) 12/31/22-5/23/22

And in the first quarter when it released results, it again earned its stripes by beating consensus expectations and also by winning a significant contract with a Fortune 100 company. Despite this good performance in the last quarter, we think it is attractively valued relative to its quality and its growth potential.

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