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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 – June 2022
JUNE PERFORMANCE
The fund’s value decreased 6.9% in June (share class I SEK). The Stoxx600 (broad European index) decreased during the same period by 8.2% and HedgeNordic’s NHX Equities decreased with preliminary 2.6%. The corresponding figures for 2022 are a decrease of 26.4% for the fund, 16.5% for Stoxx600 and 6,7% for NHX Equities.
EQUITY MARKETS / MACRO ENVIRONMENT
Those with good memory remembers the strong end to May, which was followed by a calm beginning of June. It lasted only a week and then a new turbulent period began. It was more of the same as earlier in the year with poor inflation data and a rising fear of its consequences. The turbulence reached storm strength a few days ago when spreads in the credit market rose sharply. As usual, it was the biggest budget sinners who felt the most. Below is the Italian 10-year interest rate and two things are clear. First, the sharp rise in the first half of June, which was followed by an equally sharp decline in the second half. We'll be back soon on why.
Source: Bloomberg
It also became degradingly clear how far from reality the central banks have been, and it is best shown by our own Riksbank (Swedish Central Bank) which last week made its first double increase (50bp) in 22 years. It is only a few months ago (!) that the same Riksbank announced that an interest rate increase would not take place until the second half of 2024. Both astonishing and incomprehensible. The Fed made its first triple increase (75bp) since 1994 on June 15th. The ECB is expected to raise rates in July and in anticipation of this they will continue with their asset purchases in the market…
The Executive Board of the Riksbank is appointed by the General Council of the Riksbank, which in turn is appointed by the Riksdag. The Riksdag is led by the government, which is in full swing desperately sending out checks so that people can afford to pay electricity bills, refuel the car, etc., which, all other things being equal, drives inflation. Say what you will, but economics and politics are not directly like a Swiss clock movement. By the way, Switzerland also raised the interest rate for the first time since 2007 by 25bp. Inflation there is a moderate 2.9%. A small, export-dependent, and well-managed country of the same size as Sweden. The difference in the development of each currency says a lot. In the last 50 years, the Swedish krona has lost just over 90% in value against CHF. Imagine if the summer holiday in Mallorca would cost SEK 5,000 instead of SEK 50,000. In just seven months, the Swedish krona has fallen in value by 23% against the US dollar! We will not ruin your possible holiday abroad and leave the subject quickly.
The picture below shows the US two-year interest rate since 2016. This is one of the better pictures when looking for an explanation of the development in the world's stock markets over the past 2-3 years. Also note the sharp decline that has taken place in the past week.
Source: Bloomberg
Another explanatory picture of how the stock market correlates with the fixed income market. The S&P500's development in relation to the inverted US two-year interest rate.
What happened at the end of the midsummer week (third week of June) was simply that the market went from fear of inflation to fear of recession. The opportunities for central banks to avoid a recession are becoming increasingly difficult, and the decline in long-term interest rates is a clear indicator of this. As an example, the US 10-year interest rate, in just 10 days, has fallen from 3.5% to 2.8%. Below is the same drama, but for the German two-year interest rate. Largest decline since the financial crisis in 2008.
The risk of a recession within a year according to Goldman Sachs is now close to 30%.
It is not just in the stock market that a sharply rising interest rate has had an impact this year. US bonds (looking more or less the same in Europe) have had the worst development since data from 1973. The end of the first six months, however, finished strongly when interest rates fell sharply.
Source: Kepler Cheuvreux
Another excellent indicator is metal prices, where copper is the best economic indicator. During June, the price of copper fell by 13% and most raw materials (except oil) have fallen sharply since the price peaks a few months ago. It is, of course, gratifying in many ways and helps to curb inflation.
Source: Kepler Cheuvreux
A longer time series that shows the relative development between metals ("growth") and gold ("secure supply").
Source: Kepler Cheuvreux
If one is to summarize the development of the first half of the year in the stock market and put it in a historical perspective, it has been an extremely challenging six months. The last time the US stock market had such a weak start to the year, Richard Nixon was president. The technology-heavy Nasdaq index is down 30% during the same time period. An American 60/40 portfolio (equities/bonds) had its second worst start since 1900, i.e. 122 years ago! Only the depression of 1932 was worse. The Swedish small company index has fallen by about 31-33% and the real estate index by as much as 46% in six months.
But after sun comes rain, right? The picture below is from June 11th, when the S&P500 had fallen by about 18%. It was then the fourth weakest start of the year ever. When June ended, the corresponding figure was about 21%. Only the year of the Depression of 1932 and World War II in the first full year of 1940 were worse! Reality (our view) is not so bad, but we are recovering from the greatest party of all time with a monumental hangover. To cheer you up a bit on the day after, on all occasions below, the return during the second half of the year has given a good positive return, something we believe will also be the case this time. We will return to that.
Source: Compound
Another picture to further understand the power of this year's decline compared with other periods when the Fed began to raise the key interest rate. Data is from 1950 onwards. The decline this time is significantly stronger than the historical average and the picture also illustrates that we are close to the time when we have historically had a lasting rise.
Source: UBS
It looks like it will be a cold winter, especially in Germany. The Russians claimed that it was maintenance work that caused the gas to be throttled in June. It was, of course, a lie like everything else coming out of that country.
Source: BC@ Research
All of the above means that people are seriously depressed, while manufacturing is still in a good mood. The curves will converge again in the coming quarters (our view).
Berenberg has compiled a number of different factors that together form the micro/macro graph below. The conclusion is that we are currently in a perfect storm and therefore people are depressed as the picture above shows.
The Eurozone manufacturing and service PMI (Purchasing Manager Index). It is clear that activity has fallen this year but is still over 50 which indicates growth.
Source: Kepler Cheuvreux
Here at home, most people continue to be amazed at the political development. The political savage and former guerrilla soldier Kakabaveh who sits in Sweden's Riksdag and at least for us ordinary people give the impression of not only having Sweden and Swedish citizens in focus, has since last autumn had a major impact in Swedish politics. That she, expelled from the Left and a pronounced Marxist, has such a great influence on the biggest change in Swedish defence policy in 200 years is nothing but a disaster and internationally deeply embarrassing. It seems that the Social Democrats finally pulled a stop loss and broke agreements with her so that Turkey (an authoritarian alpha male who has an extreme influence over Swedish politics right now) agreed to begin the process of becoming a full member of NATO. Kakabaveh was named Swede of the Year 2016 by the magazine FOKUS. Thanks for the coffee!
Source: Steget efter
Two years ago, Zoom's market capitalization was greater than Exxon's. It feels very distant.
Elon Musk: to be super clear
Source: Twitter
Long positions
There were unusually few company specific news during June, but here are some events worth mentioning.
Tate & Lyle
Tate & Lyle (T&L) presented its year-end report in June, which was in line with expectations, including the guidance for 2023. The “Sucralose” business segment has previously been a cash cow without growth for several years. Interestingly, the business grew 15% in 2022, despite both price and currency headwinds. This was driven by continued market growth, but also an accelerated trend to use domestic suppliers where Tate & Lyle is the only player in the production of Sucralose in North America. We continue to like the stock, which has now begun to be revalued against its historical multiples, despite a significant discount to other ingredient companies. The share has risen about 15% this year and is now traded at P/E 16x for next year's profit.
Getinge
Getinge gave the market a real cold shower in the June heat when they adjusted down the forecast for 2022. We had a relatively new position that we halved just before the profit warning came in that evening. The previous forecast was a growth of 4-6%, but now sales are expected to be in line with 2021. The long-term goals remain. The share has almost halved since the earnings report in April, but we, like the market, look beyond 2022 and think that Getinge is now attractively valued. In addition, their business is relatively cyclical. Several insiders bought a lot of shares during May and June. The share has since risen by just over 15% and is traded at P/E 13 on next year's profit.
Lindab
Lindab held a capital market day in Grevie where we participated. Even though we have followed the company for several years, it was a good exercise which gave us and others incremental knowledge. In general the management team gave a confident impression and the demand for its products, which is somewhat late cyclical, remains strong . The share traded down as much as 22% in June and is down 55% this year. That is significantly more than many relevant peers and we believe it is clearly excessive. If we look forward a little, Lindab's business is driven by continued and intensified interest in sustainability and energy consumption.
The company is trading on single-digit forward-looking multiples, even though analysts have now begun (as we expected) to adjust down the estimates for the coming years. CEO Ola Ringdahl has done a fantastic job within the group, and we struggle to see that this would be a bad investment at these levels.
Short positions
The short portfolio gave a significant positive contribution in June at +3.6%. Many of our stock specific shorts was under a lot of pressure. Our negative position in SEM Small Cap gave isolated a contribution of +0.8%. Our largest contribution came from our put position in German DAX which added +1.0% to our result. We have now sold some of the options with a high delta and bought some with a lower delta. It has increased our net exposure somewhat, but our notional position has increased. Today we have a total position in puts in notional value of slightly more than 40% compared to our normal size of 30%.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 62% and 52% respectively.
Summary
After the first five months, the start of the stock market year was a record low. In June the trend accelerated, and we had to make do with the worst month of the year. Below is a selection of indices and their development in June measured in local currencies:
- SXXP600 -8.2%
- DAX -11.2%
- S&P500 -8.4%
- Nasdaq -8.7%
- Stockholm main index -11.8%
- Carnegie small cap index -14.5%
- Carnegie real estate index -26.2%
These are very sharp declines by all measures and the power at the end of the period surprised most, including us. It even becomes difficult to put on new short positions when share prices in most cases plummet. The fund was down -6.9% and few holdings made a positive contribution during the month. There was a negative price development from all sides with Lindab as the largest negative contributor. The few stocks that made a positive contribution were Tate & Lyle (+13% YTD), the London Stock Exchange (+10% YTD) and LVMH (-20% YTD) which we sold at just over 600 euros and bought back at around 545 the following week. The share closed the month at 582 euros and was thus down just under 3% per month. Enormous movements even for one of the world's largest companies such as LVMH.
So how do we think the second half of the year will turn out? The short answer is significantly better, but we will try to go through the conditions below.
The picture below shows the sector distribution and its development during the first half of the year. There has only been one sector to hide in during the first half of the year and that is the oil companies. The combination of sharply rising oil prices, a forgotten and undervalued sector, has attracted a lot of capital this year. Oil is also very political, which we have all become painfully aware of this year, and given the geopolitical situation, the risk premium has decreased. Even we, who are usually not interested in a sector where neither we, nor the companies, can influence the price of the product, have allocated capital to the sector and we have since February a medium-sized position in French Total (+12% YTD). With a constantly rising profit estimate, the share is traded according to consensus at 4.2x P/E 2022e. A high dividend and substantial repurchase mandates contribute further. The market capitalization is just over EUR 130 billion, which corresponds to almost six Ericsson and the company is expected to earn EUR 12 billion in the second quarter alone.
Source: Bloomberg
Falling rates have pushed multiples down considerably. Below is the S&P500 which is now at about 16x the next 12 months' earnings. It is a historical average based on almost 40 years of data. From 1985 to 2008, we had a completely different interest rate situation than today. Another relevant comment (we think) is that if you remove the largest technology companies (Apple etc), the other 495 companies are traded significantly below 16x. The corresponding multiple for Europe is currently around 12-13x, which is very low. The summary of this is in our opinion that 1) the multiple contraction is largely completed 2) now comes the next challenge in how much and where the estimates should be adjusted down.
As you can see in the picture below, analysts have trimmed their earnings expectations throughout the year, and especially recently. In the United States, however, not much has happened yet. The clip below the picture is from June 29, where CNBC gives an update on the profit estimate.
Here you can watch the clip from CNBC.
As you know, people are very depressed, and one can perhaps understand that. Many are of the opinion that we should go down another 10-15% before it turns around. We are not of that opinion, but still believe that we will tread around down here over the summer and then have enough inflation data that will stabilize the PMI and fixed income market, which will then be able to lift the stock market.
It is darkest before the sun rises. Fifty years of data on consumer confidence and returns on the stock market are shown below. On eight occasions, confidence has been at its peak, which has led to a return of a mediocre +4.1% in the next twelve months. On the eight occasions that confidence has bottomed out and most have thrown in the towel the return was +24.9% during the same time period. In addition to remaining humble, it is important to be able to look up. It is in periods like these that you make the best investments. It did not look brilliant in March 2003 or March 2009 either, but what a return was waiting. No guarantees that it will be like this this time, but if, for example, a small company index falls by 15% in one month, that says a lot about the optimism in the market.
In addition to the above, one can draw two conclusions from studying previous inflation peaks in the United States from 1940 onwards. The bad news is that the probability of a recession following an inflation peak is close to 50%. The good news is that when inflation peaks, the stock market tends to rise regardless of whether there is a recession or not.
The challenges in the market up to the peak of inflation are often significant with clearly negative sentiment among investors and rising interest rates. The central bank is putting the brakes on, the stock market is moving south, and the fear of recession is rising sharply. It is an excellent summary of what it has looked like this year and if history provides any kind of guidance, it is on these occasions when inflation peaks that you typically get a strong return in the coming years. Take, for example, Lindab, which has fallen by 55% this year and is trading around 10x P/E this year. If the share rises 50% from here, we are back where we were at the beginning of May. It had been a non-event and it still would have been down nearly 30% on the year.
In the short term, it is currently impossible to have a strong opinion, but the picture below shows that the first two weeks historically are the best two weeks of the year. Best not to promise anything, but soon we will know more.
Source: Goldman Sachs
The sharp decline on Nasdaq has meant that the levels are just around a 4-year rolling average.
When June came to an end, we received inflation data from Spain which showed a new high level of as much as 10.2%. Germany, on the other hand, received lower inflation for the first time, 8.2% against the expected 8.8%. Apparently, there were one-off effects that included free local transport (it is unclear what would be cleared for this), but a step in the right direction.
On June 30th, data came from the US showing lower private consumption for the first time and on July 1st, several different economic data showed that activity is retracting (from high levels), which caused the US market to regain momentum and rise.
We repeat our view from recent months, but with an addition. We have had a view that the low level in Europe was set on March 7th. Some (not all) of the major European indices have now just traded below that level, so this thesis is currently under some pressure. In other respects, we still believe that we are around maximum inflation levels right now and that the interest rate has peaked. We also continue to believe that we need a few more months before we can consider whether we can now have a more lasting upswing in the stock market. We are now rolling into the most exciting reporting season in a long time, and it will be very interesting.
Finally, we are pleased and very proud to announce that our team has received a new substantial European equity mandate for a large sovereign wealth fund. We have received this mandate in the absolute highest international competition, and we want to believe that it has to do with all the excess returns we have created for many years. We are well aware that we have not created any added value so far this year, but we have been through periods like these at least three times before in the last 20 years or so. The holdings in the new mandate will reflect this fund's large long positions well and we will go live on August 1st. We also take the opportunity to thank Coeli, who is now putting a lot of effort into the implementation.
We wish you a really nice July and we will hear from you again in a month.
Mikael & Team
Malmö, 6th of July 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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[cg_linear_graph id="31122"]
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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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