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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.
Before making any final investment decisions, please read the prospectus, its Annual Report, and the KIID of the relevant Sub-Fund here
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This material is marketing communication
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Monthly Newsletter Coeli Absolute European Equity - February 2022
February performance
The fund's value decreased 6.0% in January (share class I SEK). The Stoxx600 (broad European index) decreased during the same period by 3.4% and HedgeNordic's NHX Equities fell provisionally by 1.3%. The corresponding figures for 2022 are a decrease of 16.8% for the fund, -7.1% for Stoxx600 and -3.9% for NHX Equities.
Equity Markets / Macro Environment
On Thursday, February 17th, the author along with several international investors, were invited to the annual security conference in Munich to participate in roundtable discussions with heads of state, foreign ministers, defence ministers and high-ranking military officials. All the world's leaders were there, including the Vice President of the United States. The consensus was that a major military intervention by Russia against Ukraine was unlikely. It would be incomprehensible why Putin would risk so much for so little. In addition, it was said that President Putin grossly underestimated the joint force of the Western world and NATO in response to Russia's aggressions. Unfortunately, one of those assumptions were wrong and that became painfully apparent on Thursday morning, the 24th of February. That morning was the most dramatic and brutal awakening for Europe since World War II.
During a few minutes Putin delivered an icy cold and threatening speech at 04.00 on Thursday morning and thus the geopolitical map of Europe, for the last 25-30 years, dramatically and irrevocably changed. It was a hefty and terrible day for Europe and the rest of the world. With full force, a paranoid ex-KGB agent attacked his brethren and forced young people on each side to kill each other in order to satisfy an old Tsar dream and the desire to go back to a time before the collapse of the Soviet Union.
Source: The official Twitter account of Ukraine
At the same time, the dream of a reasonably synchronized and globalized world was also shattered. Immediately and from now on it is the Western world against Russia and China.
The following two authoritarian leaders (a politically correct description of dictators) are now being helped to disrupt the democratic forces of the world in various ways. They were last seen together in connection with the Olympic opening ceremony, where they concluded an agreement based on a partnership "without borders". Well thank you, we noticed that it took effect immediately. China's Foreign Ministry spokesman refused to call the Russian attacks an invasion and blamed the United States instead. "They lit the fire and gave oxygen to the flames. How are they going to put out the fire now,” she wondered? She also said that the United States went into Iraq and overthrew Saddam Hussein, so what's the difference?
Partners in Crime
Source: Getty Images
The Russian news agency, Interfax, reported that Putin and Xi spoke on the phone on Friday evening, February 25th. Xi emphasized his respect for the actions of the Russian leadership in the current crisis. How long (weeks?) will it take before China seriously threatens Taiwan while the West is under pressure? The Chinese threat to the West is palpable and growing, and the entire West must step up to face it.
On the theme that the world's democracies are under pressure. Only 20% of the world's population lives in completely free conditions, compared with 46% as recently as just over 10 years ago. Scary and this is what we must defend with all available means.
As I write this on Sunday, February 27th, the news is pouring in regarding re-armament and energy supply. True to habit, Europe has lived in a fairy-tale dream since the fall of the Berlin Wall in 1989 and believed that there would never be another war. Naively and eagerly encouraged by populist leaders, defence spending has fallen while rising sharply in Russia and China. In the financial world, some illusionist officials have concluded that it is unethical to invest in companies that manufacture weapons that protect democracies against attacks from aggressive foreign powers. However, it is no problem to invest in Russian or Chinese funds. It's almost more than you can handle.
Europe's politicians trump the above mistake by also underinvesting in the energy sector for many years and becoming dependent on Russian gas and oil. Green energy is not yet sufficient and is not reliable enough. Sweden took out 10% of electricity production in 2019 with the closure of Ringhals (nuclear power plant). At the turn of the year, Germany shut down three of its nuclear power plants and within a year, three more (the last) nuclear power plants will be taken out of service. Congratulations. That makes Stefan Ingve's (Governor of the Swedish central bank) rate hike in the days before the Lehman crash appear brilliant. With the clock about to strike midnight on Monday, news is breaking that Germany is debating whether to reassess their decision on nuclear power and keep the plants. At least you cannot complain about the flow of news.
As the picture below illustrates, Russia accounts for almost a third of gas supplies to Germany. It will hurt Europe a lot and most likely it will hurt Germany, who is basically sitting in Russia's lap in terms of its energy supply. The United States does not have these problems at all. There you control the supply yourself and can increase your domestic production.
All this leads to a rise in the risk premium in Europe compared to other regions. It was very revealing on the day the war broke out as the US dollar rose at the same time as the euro fell sharply. European stock markets were down just over 4.0% while they rose (!) in the United States.
The euro has fallen sharply since last summer and the US dollar has risen. We save you from a picture of the Swedish krona, but we can reveal that it is not the first priority when world trembles.
Source: Bloomberg
Europe's leaders are now in a hurry. Every two hours during the weekend as this is being written, there are updates, one more ground-breaking than the other. We see in real time a fundamental reorganization of European defence policy and a complete course correction to Putin's Russia. Germany sends weapons to Ukraine, which was previously unthinkable due to the collective bad conscience from war crimes during World War II. The defence budget is raised from 1.2% to 2.0% of GDP. This year, the German defence will receive 100 billion euros (!) in special funding for arming and equipping.
Let us hope that the violence is reduced, and diplomatic negotiations begin. A positive development in this tragedy is that the United States has stepped up as the world leader they are and is driving development forward. Their actions have led to Russian banks being excluded in the SWIFT system, which makes it very difficult for the country to bank. We should probably be grateful that the former American president is not in power, as it probably had not led to a calmer development.
It's starting to get cheap now. Russian shares are traded at P/E 3x. We adhere to old principles of not allocating capital to Russia. On Sunday evening, news came out from Norges Bank that they will sell all their Russian holdings. The sales pressure will probably reach biblical proportions.
Source: True Insights, Bloomberg
The risk that Russia will not be able to repay its bond debts exploded to 44% on the day of the outbreak of war.
Source: True Insights, Bloomberg
The Moscow Stock Exchange was having a bit of a hard time. The index fell by 39% on the day the invasion began. Trading stopped, but on the London Stock Exchange on February 28, some of the major Russian bank shares fell by 75%, in one day.
Source: Bloomberg
Gold has made a grand comeback and won by far the first round this year over Bitcoin in the discipline “store of value”. Prices are from middle of February and bitcoin finished the month strong.
Source: Bloomberg
Elon Musk - The King of everything and everyone. Ukraine's Vice President tweets to Elon Musk and asks for access to Starlink's internet service. 10 hours later, Elon replied that it was activated.
Source: Twitter
We were probably all surprised by the power and speed of Russia's attack. Prime Minister Magdalena Andersson had a hard time finding words to describe
her reaction.
When you thought you had seen everything. The Taliban in Afghanistan are calling for peaceful talks between Russia and Ukraine.
Source: The Islamic Emirate of Afghanistan
Long positions
Photocure
During the month, Photocure released its financial statements for 2021. Sales were about 7.0% higher than expected, which was enough for the share price to rise on the reporting date. The company has had a few tough years where growth has been weak due to the pandemic but has under the circumstances done an acceptable job. In a presentation, the management said that they increased volumes sold in the US by 24% in 2019–2021, even though the number of procedures where Photocure's product is used has decreased by -11% in 2019–2021 due to the pandemic.
As we now approach a reopening of society, Photocure should be able to approach growth levels of 40-50% in the US and 20-30% in Europe from the second half of 2022 onwards. The business will benefit from societies starting to manage the healthcare debt accrued during the pandemic, partner Karl Storz launching new hardware, increased investment in health care in general and improved accessibility for sales staff in hospitals. The stock rose 7.0% in February and is valued at a low 9x EBIT 2024e (our estimate).
Surgical Science
Surgical Science offered a nice year-end report. For comparable units, currency-adjusted sales grew by as much as 38% in the quarter and the operating margin was 26%. Overall, operating profit beat analysts' expectations by 34%. The company seems to have done a good job of integrating the two acquisitions that were completed in 2021 and the prospects ahead look promising. As in the case of Photocure, the business will benefit from increased investments in healthcare in the future. Despite the good report, the share price fell by -7.0% in February.
Tate & Lyle
The British ingredient company Tate & Lyle is a new medium-sized position in the fund. The company has a product portfolio that mainly consists of sweeteners, starches and fibers that are sold to manufacturers of food and beverages. A couple of well-known customers are, for example, Coca-Cola and Nestle. The core competence of the company consists of replacing sugar with sweeteners. This is a structurally growing market with a growth of at least 5.0% per year.
The company has long been one of the lowest valued in its category. European ingredient companies are often highly valued. The reason for the low valuation can be explained by Primary Products - a segment within Tate & Lyle's operations that is characterized by low margins, low growth, and high exposure to volatile commodity prices. Last year, it was announced that Tate & Lyle will sell 50% of this business to the private equity company, KPS. The transaction is due be completed before the end of March and following that Tate & Lyle's exposure to Primary Products decreases significantly.
In its new form, Tate & Lyle wants to grow sales by at least 5.0% annually and the operating margin will be improved by at least 0.5 percentage points annually. Overall, we expect profit growth of 10-15% per year. The company is already well on its way after recently upgrading its expectations for the full year regarding the remaining operations. With a net debt close to zero, organic growth will also be supplemented by acquisitions in growing categories for sugar substitutes (e.g. stevia).
The investment thesis is based on Tate & Lyle being gradually upgraded as the new company structure becomes clear to the market. In addition, the company must of course continue to deliver operationally. On our estimates, the stock is trading at approximately 13x EBIT 2024e (the year ends in March), which is not demanding compared to historical multiples or competitors, which are often valued at more than 20x EBIT on forward-looking estimates. The investment has so far been good for the fund as the share price rose 7.0% in February. We hope to have reason to return to this subject later.
Sedana Medical
Sedana Medical also delivered a good quarterly report. Sales expectations were beaten by 34%. We have owned Sedana for several years now and cannot recall ever been disappointed with the company’s performance. During the period, the first units of recently approved Sedaconda were sold to customers in Germany. In the coming quarters, Sedana will roll out the product to more European markets as price discussions in the various countries are completed. The share fell 8% in February.
Truecaller
After Truecaller released a reverse profit warning in January, the full report for the fourth quarter of 2022 came out during the month. For the full year, sales grew by 130% to just over SEK 1.1 billion (!) and the adjusted operating margin amounted to as much as 40%. The growth conditions for the coming years continue to look very bright. We outline that the company can grow 40–50% over the next five years to continued high margins. Combined with low capital requirements, the cash conversion will be very good. The stock is trading at 16x EBIT on our estimates for 2024e and rose 3.0% in February.
Lindab
After beating expectations in the last 8 of 9 quarters, Lindab released a report with 9.0% lower operating profit than analysts estimated. The main reason for the deviation was an operating margin that was lower than expected in the Profile Systems segment. If you sum up the full year 2021; however, it must be stated that the management has done a phenomenal job. Following the report, a string of insiders bought shares, including CEO Ola Ringdahl. At the time of writing, Lindab has also just announced its first slightly larger acquisition in a long time. The acquisition adds about 7.0% to full-year sales. The share fell 15% in February.
Rugvista
We continue to be impressed by Rugvista. Management has defied the laws of gravity in the e-commerce sector by delivering as expected or better since the IPO. In the fourth quarter, sales grew by 7.0% organically despite being compared to a “pandemic doping” quarter in 2020, when growth amounted to 55%. In 2022, a new website will be launched, which we believe will significantly increase the conversion rate (the proportion of web visitors who also shop). The valuation is very low. In our estimates, the share is traded at single-digit multiples 2024e. The share price fell 11% in February. During the last day of the month, 1 million shares in Rugvista were brokered, which is just under 5.0% of the company. This is positive as there has been an overhang of shares for a long time.
Finally, we would also like to mention the British companies Wincanton (which raised its full-year guide), CVS Group (which provided a positive trade update) and Finnish Sampo, which released good financial statements.
Short positions
The short portfolio contributed with a positive result during the month. Our short-term derivative positions in the German DAX and the American Nasdaq had the largest contribution. Some stock-specific short positions that contributed positively to the result were Swedish
Vimian,
Dometic and German
Gerresheimer.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 74% and 60%, respectively.
Summary
Market development in February was volatile to say the least and the world's stock markets were under continued strong pressure. The broad European index fell by a relatively modest 3.4%, with the English FTSE dampening the decline. The German DAX fell by 6.5% and the fund's value decreased by 6.0%. Three companies, Victoria, CVS Group and Arcticzymes together negatively contributed with 4.0%. Our view is that there are no fundamental reasons for the negative price development of these shares, but that it is basically solely due to large sales flows.
There is an unusual amount of information to process right now for the world's investors and volatility and direction are determined, day by day, to a large extent by the war headlines on the screens. We continue to focus on our companies, risk management and trading gently. It is more important than ever to have an open mind and assume that what is apparent rarely happens and vice versa. The summary we made in last month's letter still applies, but with the invasion of Ukraine, we hit a new bottom on most European stock exchanges in February. However, the US stock market performed better.
It is paradoxical that we had the best reporting period ever in terms of outcomes compared to expectations while at the same time the fund has had a two-month negative streak. It is not the worst drawdown since inception four years ago and last time (February/March 2020) the fund experienced its largest drawdown we came back strong and recovered all losses in about three months. We cannot say that the recovery will be as quickly this time around, but we are confident in our process and believe that will pay off in the long term. We interpret this dispersion between company expectations vs. outcomes to be a result of that the correlation between different shares and asset classes has increased in recent weeks, which means that when there is a "risk off" in the market, selling occurs across the board. You care less about how the company has performed, you just want to increase your liquidity and sell fast.
The picture below shows some of the Q4 market expectations for several our large holdings. For each we also show how the share price performed during the first two months of the year. It is evident that despite very strong company reports, most shares have been under great pressure. This has of course been frustrating in the short term, but in the longer-term fundamental development should correlate with share price development.
Source: Coeli Absolute European Equity
On the theme of having an open mind and being prepared for the unexpected. If you had received all the information the day before the invasion of Ukraine, you probably would not have expected the Nasdaq in the US, after an initial fall of just over 3.0%, to close, up just over 3.0%. The turnaround coincided quite precisely with a 20% decline since the peak at the end of 2021. The broad European index closed the next day, Friday 25 February, at +3.0%. It is the first Friday since November 12 (!) that the index closed on a positive number.
At the beginning of the year, German producer prices have risen to the highest rate since 1949. This means that central banks can hardly assist in lowering interest rates soon. Our view remains that inflation will reach its highest level in the next 2-3 months. However, the Ukraine conflict increases uncertainty, as it drives energy prices, among other things.
The above pushed up the German 10-year interest rate to over zero percent for the first time in three years. When the war broke out in Ukraine, interest rates retreated, and the ECB communicated that the conflict "may delay stimulus exit".
Source: Bloomberg
The US 10-year interest rate, which until recently largely dictated the stock market, has also come under pressure. Our view has been that the interest rate will probably reach its peak during the second quarter. The outbreak of war has probably preceded this event and we may have already passed the highest levels.
Source: Bloomberg
After a strong development, the cyclical companies are now starting to fall in relation to more defensive companies. A rising interest rate indicates increased economic activity. A falling interest rate has the opposite effect and cyclical companies tend to move when profit estimate rises or falls. We will most likely have lower growth in the coming period than we recently forecasted. Bank shares should also find it more difficult to assert themselves in this scenario.
All other things being equal, a falling interest rate should rekindle interest in growth equities.
Source: Kepler Chevreux
The difference in price development between "higher" and "lower" quality on Nasdaq is huge. A selection of companies that are included in each class can be seen at the bottom of the picture.
Europe's equivalent of growth stocks are small and medium-sized companies. The decline has in many cases been enormous (to be frank, in many cases we came from high levels). For smaller quality companies such as our own Surgical Science, there should be good conditions for the negative price trend to be broken soon.
Source: Kepler Cheuvreux
American consumers are really depressed despite a hot economy. High inflation has a negative effect on consumers, including rising interest rates. Sharply falling share prices in many private savers' favourites probably also play a role.
The application for new mortgages (below) has fallen sharply during the beginning of 2022. A rising interest rate level is of course a highly contributing factor, even though the levels remain historically low.
Source: Bloomberg, Goldman Sachs
The picture below is relevant as the correlation between consumer goods and a strong housing market is strong.
Source: Goldman Sachs
From covid to inflation concerns and now the (soon) focus on how strong the growth will be for the second half of the year. However, it appears that the market has already discounted a sharp slowdown, see below.
Valuations are starting to come down to low levels and are now trading below average for the last 25 years. The Ukraine conflict hangs heavily over stock market sentiment. What is positive is continued low interest rates, a world that is opening up after two years of pandemic and increased tax-financed investment in many countries. The companies' balance sheets are strong, and share repurchases are at a level not seen since the financial crisis.
Goldman Sachs risk indicator is now down to -1.5, which historically are usually good levels to increase equity risk at. The difference this time compared to many times before is that central banks cannot influence in the same way, as inflation must first come down.
The table below shows on the left the historical return at different levels of the risk indicator and on the right the accuracy.
The image below illustrates how long historical corrections have been going on. We are beginning to approach historically high levels.
Source: UBS
In summary, market sentiment is at rock bottom. Very few have a positive view of the stock market and the picture below sums it up well. That's a good starting point.
Source: Kepler Cheuvreux
The US stock market has so far held up well and we believe it will continue to hold up. If true, stock prices are likely to be traded flat until some new and visible information becomes available.
The risk on the downside is obviously the increasing problem in Ukraine and an inflation that continues to rise. On the upside, the opposite is true, as well as the fact that very few are positioned for a positive development. The interest rate risk itself is probably well discounted and the concern right now is mostly due to the geopolitical development. Let's hope it calms down and of course mainly for the sake of the Ukrainian people.
We end something unorthodox with a fitting
clip.
Mikael & Team
Malmö, March 3, 2022
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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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