2025 has been another year for investors to worry about market concentration and the ever-growing contribution of a small number of technology stocks to the earnings and composition of the broader index. Despite these concerns, AI-related companies have continued to thrive – the Bloomberg MAG 7 index is 17% higher this year and up 58% since the market’s Liberation Day lows in April.
Their persistent strength has largely driven global large-caps to outperform small-caps – and growth stocks to lead value ones – year-to-date[1]. Against this backdrop, SKAGEN Focus, our small and mid-cap fund, has returned 6% in EUR terms in 2025, around 3% behind the MSCI All Country World Index but ahead of the MSCI All Country SMID Index, which the fund also leads over a five-year period.
Korean kicker
Half of the fund’s top ten contributors this year are South Korean, led by Eugene Technology. The semi-conductor company has re-rated as investors have recognised its strong position as a major supplier to Samsung and SK Hynix – two companies which benefitted this year from the AI theme. Hanwha is the fund’s second-best contributor as the Korean defense company’s huge conglomerate discount has partially closed. Both positions have been exited after hitting our price targets, but South Korea remains the fund’s largest country exposure, both in absolute terms and relative to the index weight.
Korea has been one of the best performing equity markets year-to-date with the KOSPI up over 60%, boosted by the country’s Value-Up programme and broader corporate governance reforms which are back on track after the June election. The initiatives aim to boost minority shareholder rights and transparency by closing the long-standing ‘Korea discount’.
European steel boost
Another portfolio theme is the ‘European steel shield’ which has developed while most of the market’s attention has been on US and AI-related news flow. In October the European Commission introduced substantial trade defenses to its loss-making domestic steel industry, including protection for both carbon and stainless-steel production. The Steel Action Plan and Carbon Adjustment Border Mechanism (CABM) will limit steel imports to Europe, reducing overseas competition and raising prices for domestic producers who are also expected to benefit from increased defense spending in the region. Our portfolio exposure to this potential game-changer – which could trigger a normalization of the European steel industry’s earnings power – is substantial with positions in Spanish stainless-steel producer Acerinox (2.4% of NAV), Dutch steel conglomerate Aperam (2.1% of NAV) and German steel waste recycler Befesa (3.3% of NAV).
Market polarization
The estimated $400 billion to $600 billion annual spending by the largest tech companies into AI and data centre capacity, which is equivalent to the total capital expenditure of European listed companies, has created a polarised global equity market where different investment rules seem to apply.
The first ‘AI investment world’ is characterised by stock valuations mysteriously rising in line with increased capital spending, despite uncertain returns on these investments, cross-shareholdings and circular investment flows – structures that have been unwound in countries like Japan and Koreas to boost shareholder value – and valuations that are not anchored to current cash flow generation.
The second ‘real-economy world’ contains stocks, primarily outside of the US, typically smaller companies in the construction, auto, retail, industrial and certain material sectors, that have successfully emerged from the tariff shadow but still trade at rock-bottom valuations.
This has created a top-heavy global equity market where the ten largest companies – nine of which are US-based and all are AI-related – represent over a quarter of the index’s total capitalisation, compared to the top ten stocks of the small and mid-cap equivalent, which are spread across five different sectors and represent only 2.3% of the overall index[2].
The difference is even starker in valuation terms with the former ten stocks trading at 60x earnings and 30x book value, on average, compared to 13x and 1x, respectively, for the smaller peers. Indeed, global small and mid-caps, which have historically traded at a premium to large caps, are now valued at record discounts based on earnings and book value multiples.
AI euphoria also means that value stocks globally have now given back all the outperformance they accumulated relative to growth stocks from 1975 (when MSCI records began) to 2007 (the financial crisis). With many commentators’ likening today’s extreme environment to the IT hype at the turn of the century, the potential for a repeat of value’s multi-year relative gains once that bubble had burst is similarly stark.
Contrarian and price-driven
Our contrarian approach of only investing in companies whose shares trade at a steep discount to their fair value based on normalised earnings power over a 2–3-year investment horizon has led to the formation of a portfolio that currently has very little US exposure (9% of NAV vs. 65% of the global index) and is overweight European stocks (40% of NAV vs. 15% of the global index).
SKAGEN Focus comprises 48 holdings with an average market capitalisation of $5 billion and roughly a third of positions initiated within the less 12 months. This process and price discipline means that the fund trades at 9.3x earnings and 0.7x book value, which represent discounts of 52% and 80%, respectively, to the MSCI All Country World Index, and has estimated weighted upside of 81% over a 2–3-year horizon.
The fund’s largest holding is Methanex, in which we recently increased our position. With estimated upside of 65%, we believe the Canadian methanol producer is undervalued given the company’s potential to generate strong free cash flow and its solid progress in integrating recent acquisition of OCI which should boost underlying earnings. Another recent investment is KCC, which recently joined the portfolio and is now a top five holding. The South Korean industrial conglomerate operates in paints, silicone and building materials – segments currently at cycle-low levels – with significant potential for mean reversion. The company also holds a large portfolio of non-core investments, valued at approximately the same level as its entire market capitalisation, adding to the upside potential.
You can watch the recent SKAGEN Focus webinar hosted by Jonas Edholm and David Harris here: Market update with SKAGEN Focus
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All information as at 31/10/2025 unless started.
[1] Source : MSCI. MSCI ACWI SMID vs. MSCI ACWI Large Cap and MSCI ACWI Growth vs. MSCI ACWI Value indices as at 31/10/2025.
[2] Sources: SKAGEN, Bloomberg. MSCI All Country World and MSCI All Country SMID indices as at 01/11/2025.