Each country in the Nordic region possesses its unique attributes, yet all share the common trait of well-functioning societies with a high degree of social trust. This shared foundation blends social benefits, such as free education and healthcare, and generous guaranteed pension payments, which, combined with free-market capitalism, foster an ideal landscape for business innovation and value creation for all stakeholders, including stock investors.
These small, innovative economies have nurtured an environment conducive to the growth of small and mid-cap companies. The Swedish small-cap market, for instance, surpasses the market capitalization of major stock market indices in Brussels and Vienna. Janne Kujala, portfolio manager and head of Nordic equities at the Finnish fund management company Evli, notes, “The Swedish stock market is notably larger, particularly in terms of the number of listed companies, compared to most other stock markets across European countries, except for the United Kingdom and France.”
“Sweden has a very active stock market culture, which is reflected in the palette of companies and business models operating in the Swedish market,” emphasizes Kujala, who has been managing a Sweden-focused equity fund for about five years and a Finnish-focused fund for about 20 years. His co-portfolio manager, Ville Tiainen, further elaborates, “The assets under management of private equity funds and venture capital funds are significantly higher in Sweden compared to Finland, for example. Sweden boasts about 1,000 listed companies, while in Helsinki, there are 176. This results in a significantly broader ecosystem for equity investment in Sweden.”
Same Approach Across All Three Funds
Despite variations among Nordic economies and their stock markets, Janne Kujala and Ville Tiainen adopt a consistent approach to managing the all their funds; both Evli Swedish Small Cap, Evli Finnish Small Cap and the recently introduced Evli Nordic Small Cap. Their strategy centers on portfolio concentration, ensuring that each position significantly contributes to the fund’s performance. “We aim to maintain discipline in the number of holdings within each portfolio, with each position well-considered, overweight, and meaningful to contribute to the fund’s performance,” explains Kujala.
As dedicated stock pickers, Janne Kujala and Ville Tiainen diligently examine businesses through fundamental analysis by analysing business metrics, meeting management teams, estimating valuations, and ultimately constructing their portfolio from the bottom up. The duo also evaluates the top-down perspective to identify any unintended risk concentrations or risk exposures associated with the broader macroeconomic environment. “We are typical fundamental stock pickers,” says Kujala. “I don’t think our approach to business analysis is a major differentiating factor among our peers. What makes a bigger difference is how both winning and losing positions are dealt with over time.”
Post-Selection Portfolio Management
While stock selection is pivotal to active investment, Kujala and Tiainen underscore the importance of effective post-selection portfolio management. “We are stock pickers and the ability to select good stocks should be a given for any portfolio manager in this business,” says Kujala. However, he emphasizes the importance of focusing on “what happens after you pick a stock and get it into the portfolio.” According to Kujala, “It is very important how a manager handles the actual portfolio management, including how you size the position and how you manage it over time.”
The Nordic-equities-focused team at Evli wants to make the distinction between companies and stocks. “We study businesses and their underlying fundamentals, but we invest in the stocks that represent these businesses,” says Kujala. “These are two different aspects. The behaviour of a stock is not always correlated with the development of the underlying business.” Hence, the duo applies a ‘trader mentality’ to investment and risk management.
This trader mentality involves employing technical analysis, especially for timing the entries and exits of trades. According to Kujala, the technical analysis helps with being aware and getting the benefit out of momentum in stock markets. “For a portfolio to work, you need big enough exposure to positions and stocks that outperform the market while minimizing exposure to underperformers. The goal is to find that portfolio. Stocks tend to exhibit trends over time, not always, but this is a defining feature of stock markets,” emphasizes Kujala.
Recognizing Market Dynamics
Kujala emphasizes that stock prices do not always follow the fair value or intrinsic value of a business. Fair value represents an estimate of what a business is truly worth based on its underlying financial fundamentals, unaffected by market sentiment or short-term price fluctuations. “A company reaching fair value does not hinder its continued appreciation,” says Kujala. “Therefore, it may not be wise to exit a position or reduce a position solely due to appreciation,” he continues. “Similarly, if a highly valued stock begins to decline and appears cheaper, it does not necessarily mean that it’s going to stop at some sort of a fundamental fair value.”
“Stock markets tend to exhibit overshooting both on the way up and on the way down,” concludes Kujala. He argues against the ‘average down’ approach to position management, stating, “Setting specific valuation targets for positions would have caused me to miss out on many good cases that multiplied in value by ten, twenty, or even thirty times.” Kujala stresses that seizing such opportunities is crucial to a fund’s performance.
While Janne Kujala and Ville Tiainen place a strong focus on portfolio and position management, Janne Kujala and Ville Tiainen continue to put a lot of focus on security selection. Kujala seeks stocks with attractive business characteristics, a sustainable competitive advantage over rivals, solid profit margins, and revenue growth, among other features. “These are just some of the attractive features of a company. No company ticks everything there,” says Kujala.
Ville Tiainen underscores the importance of skilful portfolio management, particularly on the selling side. He points to recent research suggesting that “while fund managers, on average, display skill in buying, their selling decisions underperform substantially, even relative to random-sell strategies.” According to Tiainen, “Buying is much easier than selling stocks, which means that you have to be better in portfolio management and especially in selling in order to create alpha consistently.”
Original article published as part of HedgeNordic’s in-depth series on Nordic Equity Markets.