Media Release of April 28, 2020

The best protection in a crisis situation: solid balance sheets and low debt

How do European family-run or -owned businesses cope when a crisis strikes? Birgitte Olsen, Lead Portfolio Manager of BB Entrepreneur funds at Bellevue Asset Management, comments on the opportunities and challenges for entrepreneur-led businesses amid the current Covid-19 crisis.

"We aren't spending any time negotiating with banks," remarked the Spanish CFO and co-owner of a family-run pharma firm in our talk earlier this week. Instead, management is concentrating on protecting jobs and sharpening the company's competitive edge, so it can emerge from the crisis stronger than before. Production worker wages were increased by 20% and private transportation was arranged for all employees who could not work from home. The CFO reiterated the company's initial guidance for mid-single-digit growth in 2020; we expect 10% growth and steady margins.

The current crisis has put a considerable strain on corporate cash management and supply capabilities, even for family-led companies. But the latter's distinctive qualities put them in a better position to navigate the crisis. These include strong balance sheets with low levels of debt and a constant focus on FCF yields, as cash flow from operations is their main source of funding. This "corporate hygiene" guarantees a company's ongoing independence, both in a financial and strategic sense. Investment plans and innovation projects can be pursued without any constraints, which ensures a company's viability and keeps its growth prospects intact.

The differences in corporate debt levels before the crisis is striking. Listed European companies had an average net debt/EBITDA ratio of about 1.4 while the ratio for their counterparts in North America was at a historical high of >2. If a company's operating income falls by more than 25% as a result of the corona crisis, debt covenants will very likely be violated. European companies are more cautious when it comes to debt risks. Company size is a significant factor, too: small and mid cap companies tend to be even more risk-averse. Empirical evidence shows that family-led companies have lower leverage ratios and it follows that the BB Entrepreneur Europe Small Fund's average leverage ratio of 0.2 is well below the benchmark ratio. The following graph illustrates these facts.

Our recent research and investment activity has focused on two other important aspects besides a company's financial independence: Is a company capable of maintaining its output from a supply-side perspective and producing a reliable flow of products and services? And, from a demand-side perspective, are there any structural changes underway; how long could demand for its products or services be depressed; how fast can it recover? Can we assume that a company will emerge from the crisis as strong, if not stronger, as before the crisis? We're also looking at the action a company's executives are taking in response to the crisis when determining the fair price of its stock. Our good contacts with company executives and extensive industrial network help us as we do our research.

Development and position of BB Entrepreneur Europe Small Fund
The BB Entrepreneur Europe Small Fund (LU0631859229) has outperformed its benchmark, the MSCI Europe Small Cap (ex-UK) Index, by 4.3 percentage points year to date (as of April 20, 2020). This outperformance was driven in part by the adjustments we made to the portfolio beginning in June of last year, by which we increased the weighting of healthcare and consumer stocks and reduced our exposure to more cyclical sectors on strength. We maintained our overweight in tech stocks.

During the Covid-19 crash, we actively managed the portfolio and took advantage of new investment opportunities. We've opened five new positions since the beginning of this year, including a German manufacturer of micro batteries, a Swedish candy producer and an online pharmacy based in Switzerland.

Update on BB Entrepreneur Swiss Small & Mid
Our Swiss small and mid-cap fund (LU1477743543) has also generated good returns and it has beaten its benchmark the SPIEX by 8.5 percentage points since July 2019, after the successful realignment of the fund's portfolio. The fund has delivered a top-quartile performance year-to-date and on a 12-month basis.

For further information:
Bellevue Asset Management AG, Seestrasse 16 / P.O. Box, CH-8700 Küsnacht/Zurich
Tanja Chicherio, Tel. +41 44 267 67 09, tch@bellevue.ch

www.bellevue.ch

Bellevue Asset Management

Bellevue Asset Management and its sister company StarCapital based in Oberursel outside Frankfurt, Germany are part of Bellevue Group, an independent, Swiss financial group registered in Zurich and listed on the Swiss Exchange SIX. Bellevue was established in 1993 and is a leading investment boutique specialized in healthcare equities and traditional as well as alternative investment strategies with assets under management of CHF 10.6 billion.

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