Risk optimization in the Swiss small and mid-cap equity universe

The OLZ Equity Switzerland Small & Mid Cap Optimised ESG fund has been running for more than two years and has already grown to over CHF 100 million.

Since its launch, the fund has achieved a solid outperformance of 2.5% p.a. compared to the SPI-Extra, clearly outperforming the benchmark. The OLZ fund also outperformed the largest funds in the Swiss small and mid-cap equity segment, both in risk-adjusted and absolute terms.

The OLZ risk optimization delivers significant added value in the small and mid-cap universe, which is structurally exposed to significantly higher risks (volatility and drawdowns).

Why to invest in Swiss small and mid caps?

The long-term size premium is driving returns in Switzerland

In the long term, small- and mid-capitalized companies have demonstrated a clear outperformance compared to large-capitalised companies. This so-called size effect was first scientifically documented and analysed by the Swiss Rolf Banz in 1981 and is now broadly established as a return factor.

Looking at the Swiss equity market, it can be seen that the size premium is also very pronounced. Over the last 20 years, the SPI-Extra (small & mid caps) has generated an additional 91% return compared to the SMI (large caps), which corresponds to an additional return of around 3.3% p.a.

Why to invest in Swiss small and mid-caps now?

Small and mid-caps have recently lagged large caps

Despite the scientifically established size premium, the outperformance of small and mid-caps vs. large-caps is subject to cycles. The cyclical sensitivity of small and mid-caps is particularly evident in the Swiss equity market: while the three SMI heavyweights Nestle, Novartis and Roche generate relatively stable returns regardless of the economic cycle, the SPI Extra is much more dependent on the economic circumstances in Switzerland, the eurozone and the USA.

This effect was particularly evident during the COVID pandemic in 2020 and the subsequent global inflationary surge, during which the performance of Swiss small and mid-cap equities lagged that of large caps.

The rolling 3-year outperformance shows that small and mid-caps have not been able to keep up with large caps in the last three years, although small and mid-caps have now been ahead again since the third quarter of 2024.

Why to invest actively in Swiss small and mid caps?

Plenty of potential within the universe

There is also a lot of return potential within the small and mid-cap universe: while the differences in returns between the top and bottom performers in large-cap universes are much closer to each other, there are significant differences in small and mid-cap universes.

In 2024, for example, the top 20% stocks in the SMI generated 42.9%% compared to -17.7% (bottom 20%). In the SPI-Extra, this difference in returns is 62.8% (top 20%) compared to -46.5% (bottom 20%).

These significant differences in the distribution of returns benefit active approaches, as there is more potential to distinguish outperformers from underperformers.

High volatility of small and mid-caps makes risk management essential

In addition to the substantial spread in returns mentioned above, Swiss small and mid-cap equities also have significantly higher risks than large-cap equities.

At individual stock level, there is a considerable difference in risk distribution, similar to the distribution of returns. The annual volatility of the 20% riskiest stocks in the SMI is 25.4% vs. 32.3% in the SPI-Extra. In relation to the 20% least risky stocks, the annual volatility in the SMI is 16.2% and in the SPI-Extra 17.1%. 

Why to invest with the OLZ risk optimisation?

Skimming off the strongly pronounced low-risk premium

If we now look at the return characteristics of the riskiest and least risky small and mid-cap stocks compared with the large caps, it becomes clear that there are also considerable differences. While the 20% least risky stocks in the SPI Extra generate 8.0% p.a. in the long term, the 20% riskiest stocks can generate 1.0% p.a. The so-called low-risk effect is therefore much more pronounced for small and mid-cap stocks than for large-cap stocks (7.3% return p.a. for the 20% least risky stocks vs. 3.4% return p.a. for the 20% riskiest stocks).

The OLZ strategy places this effect at the center of its investment strategy. Through our systematic risk optimization, low-risk securities are overweighted and high-risk securities are underweighted, resulting in a portfolio with lower risks and higher potential returns compared to the benchmark.

Risk management reduces volatility and drawdowns

In terms of volatility, it can be shown that the OLZ strategy consistently reduces the volatility compared to the benchmark at all times. It should be emphasized that the risk reduction is particularly reduced when it matters: more so in stormy phases than in positive market phases. Volatility was reduced by over 30% in 2008 and also in 2020.  Aggregated over the entire period, the annual volatility was reduced from 15.0% p.a. (SPI Extra) to 12.4% p.a. (OLZ), which corresponds to a reduction of 17.5%.

While volatility is minimized directly via the OLZ risk optimization, drawdowns are also significantly reduced. During the 2008 financial crisis, the SPI Extra suffered its maximum drawdown of 55.9% compared with 48.3% for the OLZ strategy. The analysis below also shows that drawdowns were also significantly reduced in all subsequent crises.

OLZ with strong performance across peers

With its focus on risk optimisation, OLZ's systematic investment process clearly outperforms the benchmark.

A comparison with the largest Swiss small and mid-cap equity funds - which are characterized above all by their fundamental approach – also shows: OLZ has the best risk-adjusted performance and is also one of the best funds in terms of absolute return. In terms of the market risk of the rather volatile SPI extra, it can be observed that the OLZ fund has the lowest beta (approx. 0.75), while the performance of its peers can often be explained by a high beta (>1) and thus a higher market risk.

In addition to the separate consideration of the individual peers, the OLZ equity Switzerland small & mid cap fund can also provide added value in terms of style diversification, particularly in combination with the fundamental peers. Due to the typically pronounced quality/growth focus of the peers, their performance can be smoothed by a combination with the OLZ fund.

Review your implementation of Swiss small & mid cap equities. We will be pleased to advise you and prepare a customized peer group analysis with your positions.

Update 2025

The success story of the Small & Mid Caps fund continues in 2025: With lower losses and better performance, it picks up exactly where it left off at the end of 2024.