Written by Hans-Marius Lee Ludvigsen, Lead Portfolio Manager at DNB Asset Management

Company visits are an important element in our fundamental research, so I have already discovered some beautiful places in Scandinavia.

Karlstad in Sweden is one of them. Karlstad is known for its sunny climate and the hospitality of the locals. In Sweden, people like to compare the number of hours of sunshine they get in summer and Karlstad is usually way ahead. 

If I still have time, I pay a visit to the «Rosteriet». Coffee has been made in Karlstad for four generations and over 100 years. The production building is right by the harbour. At first you think it's an ordinary residential tower block. However, the tower block is actually home to the production of the Löfbergs Lila coffee brand. Hand-picked coffee beans from Guatemala and Ethiopia, for example, are processed here. On the ground floor of the production building there is a café where you can sample all Löfberg varieties. The café is called «Rosteriet» and is a real tip for coffee lovers. Tea is also available here.

Hans-Marius Lee Ludvigsen, DNB Asset Management. (Bild: zVg)

What brings me to Karlstadt? It's the company Embracer. Within the Nordic small and mid-cap stocks, the gaming industry with its technology companies within video and mobile games continues to be a sector we look at. Karlstad is the location of Embracer’s HQ and famous games archive, preserving 75,000 gaming artifacts like physical games and rare consoles.

Embracer: Phase of Reorganisation And Restructuring

While Embracer has pursued an aggressive growth path in the past, the company is now in a phase of reorganisation and restructuring in order to improve its financial situation. The game developer Coffee Stain is to be spun off by the end of the year. At the same time, the remaining core business will be continued under the new name Fellowship Entertainment.  Both units are to operate independently of each other in future.

The future Coffee Stain Group comprises around 250 developers and publishers from Scandinavia, including Ghost Ship Games and Tuxedo Labs. Their portfolio includes successful brands such as «Deep Rock Galactic», «Goat Simulator», «Valheim» and «Teardown». Fellowship Entertainment will simultaneously unite over 40 studios under one roof, including Crystal Dynamics, THQ Nordic and Dark Horse. The company also manages more than 300 game brands, such as «Tomb Raider», «Dead Island», «Kingdom Come Deliverance» and the rights to «The Lord of the Rings» and «The Hobbit».

Historical Outperformance

nvestors may wonder whether Nordic small and mid-caps such as Embracer are not a niche. We would rather see it as an insider tip. The Nordic small-cap indices - above all the MSCI Nordic Small Cap - have achieved an annual return of around 11 per cent in euros since 1999. This means that this asset class not only clearly outperforms Nordic blue chips, but also global small and large cap indices. The companies are also convincing in operational terms: With average annual sales growth of 11 per cent and profit increases of 17 per cent, the growth momentum is impressive. It is no coincidence that around 40 companies from the small-cap universe are acquired each year for more than 35 per cent of their market value.

Contrary to what the name suggests, the Nordic small-cap segment is broadly based. In total, there are almost 2,000 listed companies from five countries to choose from. The diversity ranges from regional retailers to specialised industrial companies and global technology leaders.

Better Than May Expected 

Contrary to popular belief that small caps could face greater challenges than large caps in a recession due to their increased liquidity risk, a look at financial history shows that small and mid caps fare better operationally in downturns than their large cap counterparts. Thanks to their lean structure and flexibility, they can reduce their costs faster and protect their profit margins better, especially as they often operate in niche markets rather than the mass market. On the other hand, we have seen in the past that small-cap stocks fall more sharply than their large-cap counterparts in times of crisis and financial market turbulence, but also recover faster and more strongly, so that in the past the times when small-caps underperformed were the best times to invest.