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Note that the information below describes the share class (I SEK), which is a share class reserved for institutional investors. Investments in other share classes generally have other conditions regarding, among other things, fees, which affects the share class' return. The information below regarding returns therefore differs from the returns in other share classes.
Return to Fund pageThis material is marketing communication
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Monthly Newsletter Coeli Absolute European Equity December and Summary of 2021
The fund's value increased by 0.4% in December (share class I SEK). Stoxx600 (broad European index) increased during the same period by 5.4% and HedgeNordic's NHX Equities tentatively increased by 1.2%. The corresponding figures for 2021 are an increase of 22.3% for the fund, 22.3% for Stoxx600 and 9.8% for NHX Equities.
EQUITY MARKETS / MACRO ENVIRONMENT
History repeated itself and it was once again a strong end to the year. After a hesitant start with risk on and off every other day, investors increased their risk during the last 10 days of the year. The broad European index returned 5.4% in December, while the S&P500 increased by 3.7%. The fund's return ended at a more modest 0.4% and we will come back to the reasons for that later.
The main event of the month, together with the development of the omicron virus, was the US Federal Reserve's meeting on the 15th of December. It was a dramatic change of language to a more aggressive policy to curb the acceleration of inflation. “
We tend to use the word transitory to mean that it will not leave a permanent mark in the form of higher inflation. I think it's probably a good time to retire that word”. After contemplating for a few days, the world's investors realized that they might have had a too gloomy view on markets and began to increase their equity exposures again.
As previously mentioned, the trump card for the development of the world's economies is how assertive politicians want to be with varying degrees of social restrictions. Increasing the vaccination rate by restricting the freedom of those who have been vaccinated will probably be difficult. Compared with many other countries, Sweden is, once again, faring relatively well.
Media coverage of the virus and the new restrictions remain relatively one-sided. The focus is primarily on infection control, while the consequences for individuals, companies and other businesses are described in much less detail. The aim is to ensure that the healthcare system does not get overloaded. Why no one among the traditional media questions why Sweden is at the absolute bottom in Europe in terms of beds per capita (including intensive care units), while we have the world's fourth highest tax burden, should be of some interest to the citizens.
The image below from Bloomberg data shows the global Covid-19 death toll. It is encouraging to note that we just saw a new low point and we are now at the same level as in June 2020.
Source: Bloomberg data
There was still an extremely high concentration of companies that drove the broad stock indices upwards in December. Many of the members of the broad indices (equities) were well below their peak levels. A trend that started before the summer and which also had an impact on our fund's return in recent months. The picture below shows the breadth of the 600 largest companies in Europe and, as is clear, it is a sharply declining proportion of companies whose shares trade above their 200-day average (now at a low of 50%). The corresponding figure for the fund's long holdings at the end of the year was 50%.
Illustrated in a different way and for the 500 largest companies in the USA (data from the end of November 2021). When Nasdaq had risen by 23%, only 61% of the companies showed a positive return and the average decline from its highest level for equities in the Nasdaq index was as much as -41%.
In recent months, the world's stock markets have behaved a bit like an addict who sometimes does not get his fix (stimuli from central banks). The risk appetite has fluctuated sharply, which the picture below clearly illustrates. From an oversold position a month ago, the market is now back at a more normal position.
Source: Kepler Cheuvreux
The volatility in the market during December is clearly seen in the chart below, which shows the average daily movement of the Nasdaq index. We experienced the third highest volatility in 20 years.
This led to a clear preference for defensive stocks over cyclical stocks. The difference between the two types was the largest since April.
Goldman Sachs hedge fund customers with a long/short strategy (like us) have had a tough year with sharp underperformance. The blue bars in the image below show weekly excess returns (positive and negative). The red curve shows the accumulated downside return, which is -11% for the year.
As the picture below suggests, it seems that Price/Sales is the new P/E ratio.
Elon Musk has sold Tesla shares to pay some tax, more specifically USD 11 billion. Democrat Elisabeth Warren is not impressed. Not Elon either.
We present a good laugh in a less serious feature about
Elon Musk.
Last but not least more headlines about Boris Johnson. The crisis is getting worse and anger over new pandemic restrictions and alleged Christmas parties last year on Downing Street is growing. Critical voices are also being raised within his own party.
Source: Ryan Air / Twitter
Our new energy minister, Khashayar Farmanbar, probably has the country's greatest self-confidence. When asked what they should do about electricity prices, the answer was: "we work around the clock to push back the price of electricity".
Our new Minister of the Environment did not do well in the hearing on how many nuclear power plants Sweden has in operation and how many have been taken out of service. She guessed that two have been shut down and three are in use. The correct answer is that six have been shut down and six are still in use. She's probably great at other things.
Source: Steget efter
Long positions
Evolution
After a challenging November, to say the least, where the share fell by as much as 32%, the Evolution share recovered significantly in December. (As most of you readers probably know, in November Evolution was subjected to anonymous allegations that the company operated in blacklisted countries. When the stock fell, the journalist corps followed with critical eyes.) As the worst part of the storm subsided, Evolution began repurchasing programs that have partially restored some of the confidence lost in November. We increased our position at low levels, which contributed to the share being the fund's largest contributor in December. By the end of the month, the share had risen by 35% and the gain for the full year was 54%.
Lindab
Lindab was the fund's second-best contributor for December after the share rose just over 9%. Among other things, the sale of Building Systems was approved by Russian competition authorities. With this, Lindab now has a wholehearted focus on its core business. In addition to this, Alig Ventilation, a Swedish company in residential ventilation, was acquired. Thus, Lindab acquired four companies during the fourth quarter, and we hope that the pace will continue in 2022. Finally, it was announced that Lindab has now been moved to Nasdaq's large cap list after Lindab continued two positive years with an increase of 89% during 2021 - impressive.
Wincanton
One of the fund's more distinct value cases, the British transport and logistics company Wincanton, made a positive contribution to the fund after a few challenging months. The stock has been hit by the news flow regarding the shortage of truck drivers, which has affected Europe in general and in particularly the UK. This in turn has the marked worried above wage inflation. However, Wincanton has shown that this can be managed with the help of proactive price increases. The management has for a long time worked to improve the balance sheet and for the first time in many years, Wincanton has a net cash position. We estimate the profit will increase by 10-15% per year for the foreseeable future. As such, today's valuation of 8-9x free cash flow, based on our estimates, appears very attractive.
Sedana Medical
Sedana leaves an eventful December behind. At the beginning of the month, the decision to invest in in-house sales staff in the USA was announced, which resulted in a direct share issue. The net proceeds will be used to build up operations in the United States. This is in preparation for the commercial launch that is expected after market approval in 2024. In addition, the company received a so-called IND approval, which means that it is now possible to start phase III studies in the USA. Sedana continues to deliver within its communicated time frame, which is far from guaranteed for this type of business. The share rose 9% in December, but only by a modest 14% in 2021. However, the fund's earnings were better as we bought at low levels and sold at high levels.
ISS
The ISS share also recovered after some tough months. Since we invested during the first half of 2021, it has been mainly positive tones around the company. The financial results have been in line or better than market expectations. Management has bought shares across the market and the overall feeling is that market participants are gradually regaining confidence in the company. However, we are still waiting for that sharp course, which has probably been partially halted by renewed Covid worries. The share rose 6% in December and by 21% in 2021.
Atai Life Sciences
The fund's great despair is spelled Atai. The holding has had a negative effect on returns for several months. In December, a lock-up period ended for some early investors (including ourselves). This created an enormous selling pressure which in just two days caused the share to fall from 11 dollars to about 7 dollars and affected the return for the fund by about -1.4%. Although the share was a major headwind during the second half of the year, it has been a very good investment for the fund. Our average acquisition cost is approximately $1.30. At the time of writing, we have invested approximately two percent of the fund's capital in the company.
Short positions
The short portfolio contributed with a negative result during the month. Our short derivative positions in Swedish OMXS30 and German DAX had the largest contribution. Some stock-specific short positions that contributed positively to the result were German Daimler, Swedish Dometic and American Teva Pharmaceuticals.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 70 and 77%, respectively.
The Year that’s been
First, a brief attempt to sum up our 2021.
- Performance: When we breathe a sigh of relief and find that the fund has risen by 22.3% during the year we are satisfied, even though we gave back some gains from our peak two months earlier.
- Largest contributors: This year's five largest contributors were Truecaller, Surgical Science, Lindab, Swedencare and Victoria. CVS Group came in at a strong sixth place. The top five accounted for a total of 17% points of the fund's positive performance. Truecaller rose by 119% since the IPO on October 8. The corresponding annual return for Surgical Science was +201%, Lindab +89%, Victoria +83% and CVS +49%. At the end of 2021, we chose to sell our Swedencare shares after a phenomenal price increase (+137%) during the year.
- Unlisted holdings: Within this asset class, the contribution in 2021 eventually became relatively modest. Until Atai's IPO in June, the contribution was significant, but when the year ended, the contribution finished at a modest +0.7%. For other unlisted holdings, there are good opportunities for more value-creating transactions in the coming months.
- What we are most satisfied with: The work that we put into Truecaller prior to the listing and the large allocation we made to the company in connection with the IPO. The fact that we then took measured risks and further increased our exposure prior to their first report did only added to the success. In addition, and in general, we made very few mistakes during the year, which of course had a positive effect on the year's results.
- What we are least satisfied with: That the fund's performance during the latter part of the year was negative by a couple of percent. Our explanation for this is 1) a weak development in Atai, which cost about two percent during the period. We had a lock-up here. 2) A weak price development in general for smaller companies 3) A sharply weakened Swedish krona in the last two months, which cost an additional two percent.
- Our company: We just marked the fourth anniversary since the undersigned started the business with SEK100 million in assets under management. Including the European Opportunities sister fund, which started on 1 April 2020, we now manage almost 2 billion. Even better is that we, ourselves, accounted for a significant part of the growth as the hedge fund has risen by just over 80% and the sister fund by just over 100%. Staffing has also never been stronger; we have more resources and we put another year of experience behind us.
- Four years track record: We have consistently had a significantly higher return than other global long/short strategies. The annual return in 2018 was -1.9% for us (compared to -5.9% for our strategy group), in 2019 we generated 18.3% against 12.1%, in 2020 we achieved 27.5% against 17.8% and in 2021 we finished at 22.3% against 9.5%. The best strategies of 2021, Distressed Debt and Event Driven, are also lagging our performance.
Source: EurekaHedge
Now a brief attempt to summarize our environment during the past year.
- A strong stock market year is added to the books. Below are various indices measured in local currency and euros.
Source: Bloomberg
Source: Bloomberg
- Out of the ten best shares last year in Stoxx600, five are Swedish. Unbelievable! We owned the Finnish QT Group in 2020 (and thus sold too early).
Source: Bloomberg
- It was finally 68 all-time highs on the US stock market in 2021. Second most ever after 1995 which had 77 ATH.
- The Qanon jackal embodied the madness of January 6th a year ago during the storming of the Capitol.
- (Temporarily?) Game over for Donald Trump
- The beginning of last year offered the biggest hedge fund destruction ever (short squeeze) when the people revolted against the establishment and pushed up some shares to unimaginable levels. Gamestop, which had a market capitalization of $800 million, was the world's most traded stock for one week. Higher turnover than Apple and Microsoft!
- Few had heard of Bill Hwang and Archegos Capital Management before Hwang broke world records in rapid losses. In a week or so, Archegos lost up to $30 billion in pyramid schemes. As recently as January 3rd this year, Credit Suisse announced that it had fired 69 people in the wake of the losses ($5.5 billion) incurred in connection with Archego's collapse.
- Inflation rose from 1.4% yoy when the year began to 6.8% at the end of the year. At the risk of crediting ourselves too much, we take the liberty and quote what we wrote in November 2020 and April 2021. "It would not surprise us if next year's problem is going to be to tame the monster that the central banks have created when the economy is back with almost full force”.
- We allow ourselves another quote from our letter in September. "European gas prices which have risen in a seemingly uncontrolled fashion and recorded the highest September prices ever. A silent prayer for the mild winter. We guess that this development will soon be a major topic in the media, and it will undoubtedly create various problems and somewhat reduce next year’s expected growth. It feels reassuring that Per Bolund (Swedish Green Party MP) claims that there is no electricity shortage in Sweden because then the costs for ordinary people would be unbearably high during the winter (which of course they will be)”.
Source: Nyhetsbyrån TT
- The front page of Bloomberg News from November 26th which became the worst trading day of the year after the first reports of the Omicron variant.
Summary
After absorbing and dissecting endless amounts of facts, events and noise during the year, it is now the time of year when you have to summarize everything and have an idea of how the coming year will turn out. With the risk of starting at the wrong end, had we known that inflation would rise from just over one percent to almost seven percent, that we would get a third Covid wave like the one we are now experiencing and that there would be huge bottleneck problems for various industries, we might have not guessed that the S&P would hit 68 all-time highs, that the inflow to the world’s equity funds in 2021 would be as high as the last 12 years combined and that the US 10-year interest rate would be around 1.5%. To quote Morgan Housel who, among other things, wrote the book Psychology of Money.
“We think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance). Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors.”
As previously expressed - the inflow to the world's stock markets in 2021 was greater than the total inflow over the past 12 years.
Source: Goldman Sachs
When 2021 began, we were in the best of worlds. Company profits were in strong acceleration, fiscal and monetary policy at maximum levels and the optimism among investors that the vaccines would soon end the painful pandemic was strong. Now, after rising sharply in the second quarter, the US Federal Reserve has flagged several rate hikes in 2022. Acceleration of gains has slowed (but remains at high levels) and the Omicron variant has once again made world politicians react with determination and utmost care. That caution prolongs the problems most industries experience regarding various bottlenecks in the economy. Of course, it also further increases the fragmentation we see in society between those who have and those who have not. The picture below illustrates this well.
Source: Goldman Sachs
We are experiencing a historically strong recovery, see red line for current development.
The expansive policy will gradually decrease in 2022 and first out is, as usual, the United States. On the other scale is China, which after a very problematic 2021 is now communicating that it must accelerate to fuel growth in the economy. Europe, which still has a negative interest rate environment, will probably only experience minor changes in monetary and fiscal policy. A point of reference is the Swedish Riksbank (Swedish Central Bank), which last communicated that the interest rate would not be raised until 2024, despite high economic activity in Sweden. A rare, difficult-to-solve equation.
All the above has affected the world's stock markets where the leaders (in the stock market) have gone from the smaller companies to the larger companies and where the breadth of the market has gradually decreased to today's record low levels. One consequence of this is that as many as 85% of active managers in the US had a worse return than the S&P500 in 2021 (source Morningstar). The corresponding figure in 2020 was a high 64%. Underperforming two years in a row. Hedge funds have also had a challenging year as a collective. If you study the return on Goldman Sachs '"VIP basket" (which contains hedge funds' most popular stocks) and multiply it by 3x, they still do not reach the S&P500's return.
Nasdaq is at the highest levels, but only 35% of the companies are above their 200-day moving average.
The biggest variable in the equation about the development of the stock market is inflation and how the US Federal Reserve should deal with it. It will be a delicate task and we would not be surprised if the Fed takes a step back in a few months from its now hawkish stance. This of course assumes that inflation stabilizes or falls back, which we believe is reasonable since much of the upward pressure comes from "Covid-related" causes. In the stock market, Omicron now seems to be history and even we are slightly optimistic that we are now starting to see the end of the pandemic. We have a difficult month ahead of us with high infection rates, but thankfully with much milder symptoms.
We would like to see the curves meet again during the year. It can be clearly seen that it was in the second quarter that the development changed in nature. The surprise index began to fall, and inflation rose.
If the fixed income market is right, the US ten-year interest rate will not rise above two percent. Global fixed income investors will continue to buy US government bonds in search of some form of return (Europe offers little). If the fixed income market gets it right, inflation will come down, which means that the real interest rate peaks around zero percent! Maybe even continue to be negative, which means that one should continue to own fixed assets and preferably those that contain some form of growth.
In summary, our best assessment for the year is that the world will continue to have high economic growth. Interest rates will rise to varying degrees from extremely low levels and, all other things being equal, it will put some pressure on multiples, but not enough to withstand earnings growth (in our opinion) and thus we expect a positive return, but significantly lower than 2021 and combined with a higher volatility.
Historical median return 12 months after year with more than 25 percent return: 13 percent.
Source: LPL Research, FactSet
Value stocks are likely to challenge faster-growing companies. Below the index levels, cheap cyclical shares such as car shares that trade at 6-7x the profit will challenge, for example, Nibe which is trading at 75x the profit. For our part, we will continue in the same style, but probably increase the element of cyclical companies in combination with a gradual shift upwards in the size of the companies we invest in. Liquidity becomes increasingly important as the fund grows.
The positioning is below the normal level at the end of the year, which is a good starting position. The fourth quarter was turbulent, and many increased their cash positions.
Source: Goldman Sachs
In conclusion, I would like to extend a big thank you to Cecilia and Fredrik who in a brilliant way delivered a lot of value to the company and thus to you, the investors. That is also the reason why they are both now co-owners, which makes me both happy and proud. In a few weeks, Gustav Lill will also start working with us as an analyst. Gustav, who is 32 years old, is a trained industrial designer and economist and during his studies has worked as an analyst at Grenspecialisten in Malmö. A very warm welcome to Gustav!
A big thank you for your trust and we look forward to 2022.
Mikael & Team
Malmö January 10th.
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Coeli Nordic Corporate Bond Fund
| Performance in Share Class Currency | 1 Mth | YTD | 3 yrs | Since incep |
| Coeli Nordic Corporate Bond Fund - R SEK | 1.30% | -0.93% | 3.38% | 14.52% |
| | | | |
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Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund
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Alexander Wahlman
Senior Analyst
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Top Holdings (%)
| LANSBK 1.25% 18-17.09.25 | 4.1% |
| NORDEA HYP 1.0% 19-17.09.25 | 4.1% |
| SWEDBK 1.0% 19-18.06.25 | 4.1% |
| WHITE MOUNT FRN 17-22.09.47 | 3.9% |
| B2 HOLDING FRN 19-28.05.24 | 2.9% |
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Note that the information below describes the share class (I SEK), which is a share class reserved for institutional investors. Investments in other share classes generally have other conditions regarding, among other things, fees, which affects the share class' return. The information below regarding returns therefore differs from the returns in other share classes.
Return to Fund page
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Utveckling september
Fondens värde sjönk -5,1 procent i september (andelsklass I SEK). Stoxx600 (brett Europaindex) sjönk under samma period med -3,4 procent och HedgeNordics NHX Equities var preliminärt oförändrat. Motsvarande siffror för 2021 är en ökning om +21,6 procent för fonden, +14,0 procent för Stoxx600 och +6,4 procent för NHX Equities.
Equity markets / Macro environment
After seven consecutive months of positive performance the world’s stock markets were poised for some degree of turbulence. Volatility was especially high in some equities and on Monday, September 20, the highest nominal volume ever traded was reached in options on the S&P500 (!) The broad European index fell by 3.4 percent in September compared to the S&P500 which fell by 4.8 percent. The fund also had its first negative performance since October last year with a decline of 5,1 percent. More about that later.
Despite high levels for many stock indices, sentiment among investors has been relatively gloomy. Bank of America's monthly survey recently showed that only 13 percent of managers expect a positive market in the future, which is the lowest figure since April 2020 (and that was clearly wrong). The reasons cited are China's growth problems, the crisis-stricken Chinese real estate giant Evergrande, the development of the delta variant, declining profit growth and, of course, rising inflation. However, they are still overweight equities which is perhaps not so strange when you have to pay to lend your capital to countries. As interest rates rose at the end of the month, the German 10-year interest rate followed with a giant step from - 0.25 percent to - 0.17 percent… The picture below is an overall risk indicator, and we are around zero (neutral).
The news flow in September began with record high inflation figures in Europe at +3.0 which exceeded market expectations. The corresponding figure in July was + 2.2 percent. It was the fastest growth rate since November 2011 and several countries recorded up to five percent in inflation rate. The pressure on the ECB to reduce its support measures is increasing. On Friday, October 1, new inflation figures came in for September, which showed a further acceleration in the inflation rate by +3.4 per cent.
The rate of change can be mostly attributed to rising energy prices that are starting to create real problems in the world's economies as well as agricultural shifts. The picture below shows that food prices are at record high levels over the past 60 years. The biggest losers are the poorest part of the population.
In the slightly longer term it is forecasted that it is not excessive demand that will drive inflation, but rather a limited supply, and then both in terms of products and labour. At the end of September, long queues were reported at petrol stations across the UK when fuel ran out and there were not enough truck drivers to refuel. Prime Minister Boris Johnson urges his citizens to refuel sensibly and at a normal rate. You wanted Brexit, so there you go. In sheer desperation, Johnson has now issued 5,000 temporary short-term visas for temporary drivers. Good luck.
M25 spring 2022?
Below are European gas prices which have risen in a seemingly uncontrolled fashion and recorded the highest September prices ever. A silent prayer for the mild winter. We guess that this development will soon be a major topic in the media, and it will undoubtedly create various problems and somewhat reduce next year's expected growth. It feels reassuring that Per Bolund (Swedish Green Party MP) claims that there is no electricity shortage in Sweden because then the costs for ordinary people would be unbearably high during the winter (which of course they will be). Rising gas and electricity prices have led European politicians to start discussing billion-dollar subsidies (in euros) to households and manufacturers who will experience sharply rising electricity bills over the winter.
Source: Bloomberg
Henrik Svensson, site manager at the oil-fired power plant in Karlshamn (south Sweden), does not agree with Per Bolund that we have a surplus of electricity in the country. For large parts of September, the power plant ran at full capacity and burned 240k liters of oil per hour. Henrik Svensson believes that it is electricity shortages and high electricity prices that are behind the high production. He also says that there is a lack of planned power production in southern Sweden and that it will take many years before the electricity grid is strengthened and new electricity production is in place. Sweden today burns more oil than we have done in 10 years. A gigantic energy policy and climate policy failure signed by the Green Party.
Source: Steget efter
Winning candidate for this year's Christmas presents below.
The change in the US 10-year interest rate created considerable pressure on, primarily, growth stocks at the end of the month. The performance dispersion for different sectors was very large in September with oil shares as a clear winner. This was also felt in the last days of September.
Source: Bloomberg
Below is the development for the US 10-year interest rate. The turbulence in the stock market was caused by the change in interest rate level breaking through on the upside, as can be seen in the chart.
There have been countless attempts to explain the turbulence in recent weeks. The recent and significant amount of options being exercised, Evergrande, interventions by the Chinese government, Fed tapering, Bank of England expected to raise interest rates, delta variant, inflation, bottlenecks in production, difficulties in finding staff, rising energy prices and declining growth rates. We think it is enough to look at the picture below. Rising interest rates hit hard at growth companies' valuations.
Goodbye Mutti and thank you for an extraordinary effort for Europe!
Source: Nyhetsbyrån TT
She was politically in a class of her own during the euro crisis ten years ago and Sweden also has her to thank for a lot. Despite a somewhat weaker performance in recent years, German citizens have experienced significantly better economic development than many others.
On September 29, the covid-19 restrictions in Sweden were finally removed and we can now, in principle, start living a normal life again. The number of bookings for winter holidays skyrocketed to the great joy of the tourist and transport industry. In recent months, tourism activity in the Mediterranean has been "extraordinary" and much better than forecasted before the summer. Luxury travel is also reaching new heights. Private jet passengers to Mallorca increased by +70 percent in July compared to July 2019 with an average of 83 private jets per day landing in Palma. If you want to rent a yacht, you are being referred to next year as basically everything has already been fully booked.
We now belong to a minority group. Passively managed capital exceeds actively managed capital for the first time ever. This will give us more opportunities as mispricing increases.
In addition to being one of the world's best stock markets this year, Sweden also has the most listed companies in the entire EU. Bloomberg drew attention to the fact that there are now around 1,000 listed companies on the various trading platforms in Stockholm. More than 80 percent are smaller companies, and the list is filled with new listings every day until Christmas! For us, it is interesting as we are constantly looking for new potential core holdings. In recent weeks, we have identified one which we write about under Long Positions.
We end this section with a picture that well reflects today's political level.
Source: Kluddniklas
Long positions
Truecaller
During September, we did a lot of work on the Swedish company Truecaller which will go public on October 8th. Truecaller is one of the most interesting companies we’ve seen in recent years. Truecaller has developed a phone application that can, among other things, identify unwanted calls from, for example, telemarketers. The app is one of the top ten most downloaded applications globally, and in some of the main markets such as India, Nigeria and Indonesia, it is one of the three most downloaded apps. As a Swedish company with headquarters in Stockholm, the firm has chosen to list on the Swedish stock exchange, which we are very happy about.
Truecaller was founded in 2009 by Alan Mamedi and Nami Zarringhalam. They met at the Royal Technical University in Stockholm, and they continue to be active in the company as the CEO and Chief Strategic Officer (CSO), respectively. When they released the first version of the app, they received 10,000 downloads within one week. By 2013 they had reached over 10 million users globally and in Q2 2021 they had reached 278 million monthly users. Throughout their journey, Truecaller has attracted several well-known investors such as Sequoia Capital (early investors in Apple, Whatsapp, and Zoom among others), Atomica (Skype-founder Niklas Zennström’s investment company), and Kleiner Perkins (early investors in Google, Amazon, and Spotify among others).
Until recently, revenue streams have mainly consisted of income from in-app advertising. In addition to this, there is a premium version where paying users can get additional functionalities. That business accounted for around 20 percent of revenues in 2020. During the fall of 2020, Truecaller launched a corresponding offering that targets corporates. This part of the business allows B2B customers to be listed as verified callers when they call private people. It can for example be a security company that calls about an alarm or a courier company that needs to get in contact with a receiving customer. It is a common problem that these types of companies get rejected when the call-receiver doesn’t recognize the number.
Truecaller declares that their product benefits from network effects. i.e., the product gets better the more people who use it (think Facebook). This can be relatively easy to appreciate since phone number identification inherently evolves from reporting of unwanted calls by the users, i.e., when enough people have reported an unwanted call Truecaller flags for this in the app). Over time, Truecaller has built a database containing 5.7 billion unique phone-identities. Network effects doesn’t just build a better product over time, they also increase the entry-barriers for potential competition.
The majority of Truecaller’s income comes from developing countries. The company explains that the problems related to spam emails, harassment, unwanted calls, and messages are more common there than in the western world. India is Truecaller’s largest market where these types of problems are significant. One positive aspect of the geographical exposure is that it allows for a nice structural tailwind: the population growth in developed markets is much higher than in the west (driven by an increasing average age) and the smartphone penetration is growing fast.
Historically, 97 percent of all app downloads have been organic. However, management has begun to experiment with user acquisitions by the way of advertisements through, for example, Facebook. The returns on user acquisition looks extremely attractive. In some markets, such as India, Truecaller could achieve a return on investment of up to 20x on every spent dollar. In more mature markets, such as the USA, the same multiple amounts to 4x, still very attractive. Indonesia, which is a relatively new market to the company, has a multiple of 0.8x. This means any user acquisition spend in Indonesia is unprofitable at this point. However, management is confident that the return profile will wander above the 1x as more users join and the network effects take place. In summary, the investment opportunities are plentiful and attractive – and unique.
In summary, several things speak for significant growth in the future. The investment in paid user acquisition, a sharpened premium-offer, the newly launched B2B product and continued growth of the advertising business. In addition to this, acquisitions may likely follow.
Growth has been prioritized over profitability and it is only recently that the company began to report profits. In 2019 sales grew by 57 percent. In 2020 the corresponding figure was 64 percent, and during the first half of 2021 the company’s sales grew with as much as 151 percent in comparison to the same period last year (which was partly affected by the pandemic). During the first half of this year, the company’s operating margin was 32 percent. As you can imagine, Truecaller is very capital-efficient. Working capital is very low which gives a nice cash conversion and a very high return on capital employed – all attributes that are required to create a very successful and valuable company over time.
Truecaller targets a revenue growth of at least 45 percent between 2021-2024e. After 2024 the EBITDA-margin should be at least 35 percent. The sum of the year-on-year growth and the EBITDA-margin should amount to at least 70 percent (a variant of the rule of 40 that tries to balance growth and profitability). We don’t think it will be difficult to reach these targets and the analyst estimates we have looked at are cautious, especially regarding profitability. In our preliminary prognosis for 2023, our EBITDA-estimate is around 16 percent ahead of the analyst estimates that we’ve studied. This is based on that Truecaller can continue to grow sales much faster than hiring new people while the gross margin improves slightly in coming years.
The gross margin is an interesting aspect of the equity story. Truecaller’s gross margin amounts to approximately 70 percent. Most of the cost of sales consists of platform fees to Apple and Google. Since Apple and Google practically control the distribution channels for apps together, a duopoly has occurred and prices for app-developers such as Truecaller have remained high around 25-30 percent of sales. This situation is now heavily criticized from all parts of the world since the situation is not considered competitive, for example
look at this analysis about an American court ruling concerning a twist between Epic Games and Apple. We believe Google and Apple’s fees will decrease over time – which would be a positive event for Truecaller. Furthermore, Truecaller’s new business deal bypasses Goggle and Apple, which gives a gross margin of close to 100 percent. This will strengthen the profitability even more.
There are of course risks associated with the dependence on Google/Apple (which is the case for every company in the application business); the geographical exposure and one should never write off the threat of competition even if it seems far away at this stage. However, we do believe the benefits outweighs the negatives. Truecaller has excellent financial characteristics, operational founders with large shareholdings who will remain active in the business and some of the world’s most well-known investors behind it. We therefore look forward to being included as an anchor investor ahead of the stock exchange listing on October 8th. We are even more excited to follow the company’s successes in current and new markets in the coming years.
CVS Group
One of the happiest days of the month was when our veterinarian company CVS Group released their interim numbers. Once again, the company beat analysts’ expectations which have been raised several times over the course of the year. In the first two months of the new financial year (which begins in July), the company has grown by 17 percent. This can be compared with the growth expectations for the full year which, before the report release, were 7 percent. Once again, analysts have thus far been “forced” to upgrade their assumptions. In a sour September stock market, the share fell 3 percent.
It becomes clear that the positive effect of the pandemic on pet ownership is more tenacious than ever. Pets live for many years, and we believe many underestimated the importance of the large number of new customers during the pandemic. Below is a graph of Google searches for veterinarians in the UK as well as data from the Swedish Board of Agriculture regarding the number of newly registered dogs. We speculate that the UK has similar trends as Sweden. The data points are also positive for our other pet company Swedencare. Pet companies are obviously still hot; right now there’s a bidding war going on over the German pet company Zooplus, where EQT is currently in the lead with the highest bid. We also note that there have been several venture capital-led acquisitions of veterinary companies at higher multiples than CVS is valued at.
Source: Jordbruksverket, Coeli
Source: Google Trends, Coeli
Lindab
Since our first investments in Lindab in the autumn of 2019, the thesis has always been that the building systems business segment did not fit into the business and in September, management finally found a buyer for the company. The transaction entails a write-down of goodwill corresponding to SEK 430 million, but it is cash flow neutral. Lindab took the opportunity to update its financial targets; the company now wants to grow by 10 percent per year (of which approximately two thirds are through acquisitions) and reach an operating margin of at least 10 percent (previously 10 percent over a business cycle). The share responded positively to the message.
We noted broad insider purchases in Lindab during the month, also from CEO Ola Ringdahl himself, which we think bodes well for the report in October. Despite this the share price decreased 8 percent in September.
Victoria
We have written several times about the British flooring company Victoria, which in September had a weak share price development of 17 percent. By all accounts, the company is doing well – during the month it was reported that sales rose 70 percent compared to 2020, and 50 percent compared to 2019. If you only partially extrapolate these figures for the rest of the year, it is obvious that analysts’ expectations are too low. We believe that this month’s decline is related to flows: growth companies and small and mid-cap companies were some of the most affected sectors in September – Victoria was hit from both sides. We have increased our position in recent days.
The Pebble Group
One of the month’s (few) joys was Pebble Group. As we previously wrote, the company is active in the market for gift advertising, i.e. gifts that companies give to customers, employees, and other stakeholders for marketing purposes. In September the company came out with its half-year figures that were better than expected. Pebble’s software division, Facilisgroup, is growing better than our expectations. This is also the part we believe the market is valuing too low. The stock rose 10 percent in September.
Knaus Tabbert
During the last trading day in September, our German motorhome manufacturer Knaus Tabbert announced that the forecasts for 2021 must be lowered due to component shortages. We are not particularly surprised that this has happened given what we have seen from other vehicle manufacturers. If the company can remedy these supplier problems, management believes that 2022 will be unaffected at best, as Knaus still has a bursting order book, increased production capacity and more suppliers from January next year. The share fell 7 percent in September.
Short positions
The short portfolio contributed with a negative result during the month. Our short-term negative positions in the German DAX had the largest negative contribution. Some stock specific short positions that contributed positively to the result were Swedish Dometic, German Henkel and Norwegian NEL.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 76 and 74 percent, respectively.
Summary
September's negative return of x percent also meant the end of the fund's, so far, longest period of positive return (10 months). We are obviously disappointed with that, but we have been in the game long enough to understand that equities sometimes must fall to be able to refuel and continue their upward trajectory. In general, September was the weakest month for many equities since the crisis started 1.5 years ago. September, otherwise, started strong for us and was a continuation of an unusually good performance at the end of August. Our companies presented many good news (except for Knaus Tabbert on the last day of the month) but small-caps and especially those categorized as growth shares, had a very weak performance during September. The main reason for this was, as previously mentioned, the change in the US long-term interest rate and general "risk off".
The picture below shows the development since March last year compared with the corresponding time intervals in the financial crisis in 2009 and onwards. Both periods have shown an unusually strong recovery and the current trend is even stronger than when the financial crisis raged 12 years ago.
Source: Goldman Sachs
Since the crisis started 1.5 years ago, we have had three different phases. The first and shortest, "despair", showed a decline in prices of 33 percent. The second phase, "hope", ended at the beginning of this year and showed a very strong return of 79 percent despite declining earnings. The last, “growth”, where we are now, has shown +11 percent in share prices with sharply rising growth for companies' earnings, but at lower valuations.
Source: Goldman Sachs
The recovery for American companies (below) has been extremely strong and compared to 2019, the 2021 profits will be approximately 36 percent higher. Very impressive.
Source: Goldman Sachs
It is very gratifying that Europe, for once, is keeping up with the United States and showing strong profit growth. Compare this with the non-existent profit growth between 2007–2019 (!)
Despite rising equity prices, valuations have fallen and Europe is now trading around 16x the profit 12 months ahead. It's not very strenuous (we think). For an average commercial property, you can get a return of maybe 3 percent before net financial costs. After financing, this corresponds to at least P/E 50x. And paying to lend to different countries does not feel like an exciting alternative either.
Source: Goldman Sachs
The valuation of global shares in relation to global GDP looks more strained. A major reason for this is the central banks' aggressive policy.
The valuation of the major leading technology companies is at an average level seen from the last five years.
Source: Goldman Sachs
The image below is striking. It shows that Swedish property prices, which have risen by almost 200 percent over the past 15 years, have had the same development as the money supply. In theory, price per m2 and krona is unchanged for the past 15 years. Is there anyone who still doubts that the world's central banks are responsible for the largest wealth creation in human history? It is important to be on the wagon because when it is gone you’ve missed it. And what central banks cannot push, the price of bitcoin for example, rises even more as central banks cannot make more of it. The opportunities for central banks to reverse the band are few. In the long run, this means that the next 10 years will, overall, be a good period for, for example, stock picking. All forms of uniqueness (growth) will be highly valued to compensate for the fact that the value of money decreases at a rapid pace.
If there is anyone who is still not convinced, take a look at the picture below. The market capitalization of the S&P500 divided by the Fed's balance sheet….
Source: Bloomberg
Onwards and upwards. The wealth of American households is accelerating away from the change in GDP.
Thank you Fed and all the world central banks!
Citigroup's surprise index has weighed down and analysts' profit estimates are also starting to soften. Not a good combination and it has undoubtedly contributed to the weak development in the stock markets recently.
It took a full 219 days for the S&P500 to have a decline of 5 percent. We will see how high the next bar will be.
Timing is everything. A fascinating graph that shows the importance of having reasonable timing in decisions.
Source: Goldman Sachs
Despite a difficult month behind us, it feels reasonable to expect a stronger market during the last quarter of the year. Our view is that we are still in a rising market, although we are likely to experience some turbulence for a few more weeks. "Bear markets" are constantly declining with sharp rallies while "bull markets" continue to rise with some strong drawdowns. We therefore believe that we are still in a rising market.
Some statistics to cheer you up. The S&P500 managed to rise by 0.2 percent in the third quarter (Europe -1.9 percent) which means six consecutive positive quarters. This has only happened eight times before and only on one of the (eight) occasions has the following quarter yielded a negative return. Two quarters later, it has in all cases yielded a positive return. In addition, for the past 20 years, October has been the fourth best month, thus much better than its reputation. Having pointed that out, October takes first place in terms of most frequent daily movements that exceed one percent.
The Stockholm Stock Exchange, which is an excellent reference point, had risen by 30 percent at its highest about a month ago, but is currently at 20 percent. Even more important is that measured in USD, OMX has "only" risen by 13 percent, which is in line with the US stock markets. This is hardly excessive given the profit growth among the companies. The risk premium in the market is high.
Investors are reasonably careless, and we are approaching the turn of the year. Global growth is well above average and interest rates are extremely low. Given how cruel the market has been to many investors this year, with sector rotations and a high concentration of companies driving performance, it almost feels obvious that the broad mass of investors will continue to reduce risk in their portfolios and then be short equities at year-end when the market rises. We'll see, but that's our main scenario right now.
We are now closing the books for the third quarter, and we look forward to the end of the year and above all the entrance for Truecaller on the Stockholm Stock Exchange on October 8!
Thank you for this month and we'll hear from you later.
Mikael & Team
Malmö on 5 October
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Coeli Nordic Corporate Bond Fund
| Performance in Share Class Currency | 1 Mth | YTD | 3 yrs | Since incep |
| Coeli Nordic Corporate Bond Fund - R SEK | 1.30% | -0.93% | 3.38% | 14.52% |
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Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund
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Alexander Wahlman
Senior Analyst
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Fund Overview
| Inception Date | 2017-12-20 |
| Investment management fee (share class I SEK) | 1.00% p.a + 20% Performance fee (OMRX T-Bill Index) |
| Performance Fee. Yes | 20% |
| Risk category | 5 of 7 |
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Top Holdings (%)
| LANSBK 1.25% 18-17.09.25 | 4.1% |
| NORDEA HYP 1.0% 19-17.09.25 | 4.1% |
| SWEDBK 1.0% 19-18.06.25 | 4.1% |
| WHITE MOUNT FRN 17-22.09.47 | 3.9% |
| B2 HOLDING FRN 19-28.05.24 | 2.9% |
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IMPORTANT INFORMATION. This is a marketing communication.
Before making any final investment decisions, please refer to the prospectus of Coeli SICAV II, its Annual Report, and the KIID of the relevant Sub-Fund. Relevant information documents are available in English at coeli.com. A summary of investor rights will be available at https://coeli.com/regulatory-information-coeli-asset-management-ab/.
Past performance is not a guarantee of future returns. The price of the investment may go up or down and an investor may not get back the amount originally invested.
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