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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 - March 2022
March Performance
The value of the fund increased 2.7% in March (share class I SEK). The Stoxx600 (broad European index) increased during the same period by 0.6% and HedgeNordic's NHX Equities rose provisionally by 0.1%. The corresponding figures for 2022 are a decrease of 14.5% for the fund, -6.5% for Stoxx600 and -4.4% for NHX Equities.
EQUITY MARKETS / MACRO ENVIRONMENT
The first quarter of the year is behind us, and it will, unfortunately, forever be included in the history books. After a strong start with new ATHs at the beginning of the year, the US long-term interest rate rose because of rising inflationary pressures and put pressure on growth stocks. After the worst of the storm subsided and investors paused and calculated how big the public euphoria of regained freedom would be after COVID-19, a geopolitical catastrophe burst on February 24th with Russia's unprovoked attack on Ukraine.
With these conditions, the financial markets rolled into March. The first two weeks were exceptionally turbulent for, effectively, all available asset classes at once. The second half of March saw a significant increase in risk appetite and the stock markets showed a positive development. To demonstrate the extreme volatility, here are some examples:
- German DAX fell by 15% (!) In the first five days to rise by 11% in the next three days
- The Hong Kong stock market fell by 11% in two days and then rose by 17% in the following two days
- The oil price ranged between 95 - 135 USD
- The U.S. 10 Year Treasury Note rose from 1.73% to a high of 2.47%
- Bitcoin rose by 10%
- Price movements for individual shares were extreme. The share price in our own Victoria plc, for example, first fell a further 10% and then rose by about 40% in one week. Crazy and more important than ever to understand implicit valuation when stock prices move dramatically
- The Nickel price rose by about 100% in a few days and then fell back 40%
- Wheat and other raw materials also rose sharply by a high of 50%. This is really bad, especially for the world's poorest communities and we could see riots as a result (a new Arab Spring?)
- Our put options in DAX rose by about 500% from the end of February and two weeks forward and were at the top a significant position for the fund. We sold some and bought some further out and thus took a bit of profit. The price now from the highest levels is down 60-70%. Eyes on the ball.
- The Swedish Krona strengthened by as much as 6% in March.
That the Swedish krona strengthened by 6% in a few weeks is unusual and shows how wrong the Riksbank (Swedish Central Bank) interpreted its environment. An extremely skewed view of reality from the Riksbank put great pressure on the Swedish krona in February. When the reality came in the form of raw inflation data (+4.5%), the Executive Board woke up. What was communicated a few weeks earlier, that a first interest rate increase would not come until the second half of 2024, would now probably need to be revised. Astounding - how is it possible to make such significant forecast errors for several decades and still gain continued confidence? Since the Governor of the Riksbank is elected by the General Council of the Riksbank, who in turn is elected by the Riksdag (Swedish Parliament), it is probably due to a lack of understanding from politicians. Safe to say the above does not contribute to a long-term strengthening of the Swedish krona. Surely, it also fires up inflation. For everyone's convenience, we leave this topic.
The sharp rise in long-term interest rates in the western world put considerable pressure on bond prices. Never before, has the price of bonds fallen so sharply in such a short time and a 40-year-old bull market thus seems to be over.
Source: Bloomberg
With an extremely mediocre nominal return, the real return on bonds remains in clear negative territory.
Trying not to be too self-confident here, but over time, equities provide better inflation protection than bonds as there is a growth element in equities. The most important thing; however, is to choose the right stocks. The direct return on stocks in S&P500 remains positive compared with the real interest rate.
It is important to have the right perspective. The Bank of England demonstrates some skill in technical analysis below with a track record of 700 years.
Source: Bloomberg, Bank of England
The bond bubble continues to burst after inflation has taken hold in the world's economies. In the last week of March, the value of world bonds fell another $745 billion in value and has now lost a total of $48 trillion since its peak a few months ago. It is about -10% and translated into stock terms, it roughly corresponds to Apple and Microsoft's market capitalization combined.
Even Germany's three-year interest rate turned positive in March for the first time since 2014.
This in turn was due to Germany's inflation being 7.3% year-on-year in March. The last time this happened was in 1981, but then the Bundesbank's policy rate was 11.4%, compared with today's zero per cent.
Source: Bloomberg, Holger Zschaepitz
It’s never easy. The picture below illustrates both the US 10-year interest rate (white) and the bank index in relation to the S&P500 (green). Banks are typically a big winner when interest rates rise as it signals both increased economic activity and that it will be easier for banks to increase their margins. In recent weeks, there has been a clear decoupling and it is probably due to investors becoming increasingly concerned about stagflation and/or a recession. In addition, it could also be interpreted as meaning that the risk of recession is now so imminent that it is believed that the Fed will soon begin to back away from its aggressive rhetoric. The answer is probably somewhere in between.
Source: Bloomberg, Goldman Sachs
Below is one of the month's hot topics. The difference between the US 2-year interest rate and the 10-year interest rate is now non-existent, which is seen as a clear historical indicator that we have a recession to expect within 12 months. That may be so, but we note that the US economy is under too much pressure and that most historical connections have been completely obliterated by the unprecedented economic policies of politicians and central banks over the past two years. An open mind is to be recommended.
Source: Kepler Cheuvreux
A year ago, the US 2-year interest rate was 0.15% compared with today's approximate 2.4%. A year ago, the expectations were that the Fed would keep the interest rate unchanged until the end of 2023. Today, the expectations are instead that there will be 7-8 interest rate increases in 2022 and that the policy rate is 2.75% at the end of 2023. The point is that a lot has happened in a short period of time. The Fed and other central banks have been seriously wrong in their assumptions and that we are now only at the beginning of a longer period of interest rate hikes.
The picture below does not show a red-hot speculative stock but the US mortgage rate. It is three times higher than the Swedish housing interest rate and consumers are not happy. President Joe Biden is under heavy pressure, but the picture also illustrates how incredibly strong the US economy is at present.
Source: Bloomberg
Source: Twitter
European gas prices are 10-12 times higher than the corresponding price in the USA. A bit like the difference between the price of electricity in southern and northern Sweden. It can also be expressed as the difference between being a self-sufficient realist and being naive. It filters through all layers and levels, interweaving, and is one of many reasons why Europe has had, and probably will continue to have, permanent long-term lower growth and a permanently higher risk premium than the United States. This in turn attracts less capital, which dampens economic growth.
Another way of describing it is the development of Europe's engine, Germany, on a relative basis over the last 20 years. From a European and economic perspective, it is nothing more than an economic meltdown. Only two German companies are among the 100 largest companies in the world in terms of market capitalization: Linde and SAP. Our politicians are either unaware of what has happened, or they are fully occupied with handing out money to us ordinary citizens so we can afford to pay for their mistakes and so they can continue to keep their well-paid jobs. The Swedish design of fuel compensation and for "Putin prices" on electricity is so pathetically mediocre that one almost does not think it is true.
Source: Bloomberg, Goldman Sachs
And as if it were not enough with increased costs, the Social Democrats now also want to introduce a "Contingency Tax". It may be naive of us ordinary citizens, but we thought that a full defence was already included in the current social contract as we have one of the world's highest tax pressures.
Source: Stelbenta Sture
Prime Minister Boris Johnson survived politically once again after the Partygate scandal. He succeeded in comparing the driving forces behind Brexit (liberation, etc.) with the struggle of the people in Ukraine in an extremely disgusting way.
See the statement here.
It is a new low watermark of a, seemingly, increasingly internationally isolated politician.
Watch the video from the latest NATO meeting here.
What did we say? Which country wants to leave the EU after studying the picture below? Boris and his friends who continue to dream of times gone by - The Empire where the sun never sets. It feels as if the fuel has run out and that Britain will now, year after year, see a reduction in its economic and political power. Well done boys!
Source: CPB world trade monitor, FT
Long positions
SLP
Despite war, rising interest rates and general fears, Swedish Logistic Property (SLP) was the first stock exchange listing this year and it made a brilliant entry on the Stockholm Stock Exchange. The share rose by as much as 52% on the first trading day and made a 1.1% contribution to the fund's development in March.
The interest in the company was enormous and in fierce competition from Swedish and international investors we managed to become anchor investors. The offer amounted to SEK 750 million and was oversubscribed several times. We got in touch with the company last autumn and have met the management a few times since then. We saw this as a very good opportunity to join some of Sweden's leading real estate entrepreneurs. This is the third time we are anchor investors, where the first were K-fastigheter and Truecaller.
SLP is a real estate company based in Malmö. The business concept is to acquire, refine and manage properties within the logistics space. The company was founded in late autumn 2018 by Peter Strand, Mikael Hofmann, Greg Dingizian and Erik Selin. Since then, more property resources have been added, such as Sofia Ljungdahl, Unni Sollbe and Jacob Karlsson (K-fastigheter). It is difficult not to get excited when large parts of the real estate elite are gathered in one company and own all the shares together with the employees. Value creation tends to increase the greater the financial incentive you have.
The focus is on growth. The property value has gone from zero in 2018 to SEK 6.5 billion at the end of 2021. The overall goal is to achieve an average annual growth in net asset value of at least 15%. We believe that the company will surpass that. The management team was, after all, very much a contributing factor to Victoria Park's impressive development, which ended with German Vonovia placing a bid for the company.
The management combines previous strategies from Tribona and Victoria Park and acquires undervalued logistics properties (often off-market) with a rental potential. Value growth comes from efficient property management, property improvements and financing. The projects are labour-intensive and require solid craftsmanship, which means that SLP typically faces less competition. As such, SLP has the potential to acquire a more attractive yield and thereby create great value for shareholders.
Another reason why we want to own SLP is the logistics properties segment, which has a large structural tailwind. The acceleration in e-commerce is an important driving force and the modernization of supply chains is another. Although COVID-19 accelerated e-commerce growth (33% in 2020), it should be remembered that the trend was stable even before the pandemic (22% growth in 2019) and is expected to continue for many years to come (about 15% per year until 2025, SHB estimates). E-commerce has created a paradigm shift in the supply chain. Successful resellers try to drastically reduce delivery times to be able to compete for customers. At the same time, automation and "just-in-case" processes have taken over the previous "just-in-time" delivery that relies on costly and increasingly unreliable global supply chains.
SLP was listed at a valuation of just over SEK 4.9 billion (post-money). In relation to the most recently reported net asset value, this meant a premium of approximately 30%. We saw this as attractive as the premium was in the lower range in comparison with European real estate companies with a logistics focus. At the same time, we believe that SLP has better conditions for growing net asset value faster than many competitors. Our analysis indicates that the net asset value has good opportunities to grow into the valuation within 1-2 years, which we consider to be an attractive calculation.
In summary, we believe that SLP has the potential to become one of Sweden's leading real estate companies in logistics. The board and management team are some of the absolute foremost in Swedish real estate and have created significant value over time. In addition, everyone involved has significant ownership interests, which makes us believe this is just the beginning of a long journey. Logistics properties have interesting prospects in both the short and long term, but it is above all SLP's management team and business model that attracted us.
Victoria
The share price in Victoria has been extremely volatile during the year. From the beginning of the year to the bottom in March, the share had fallen by as much as -46% (!) even though no material news was released. As the holding in Victoria is one of the fund's largest positions, this has had a major negative contribution to the fund's development in 2022.
During the month, the company, positively, decided to begin a share repurchase program, which resulted in the share price recovering part of the loss for the year. We increased our position during the entire decline and at most at a price of 650 (the lowest level). The share price increased by 25% during March bringing the YTD performance to -25%.
Source: Bloomberg
Photocure
The Photocure share has worked well during the year. As we mentioned in our previous monthly letter, the report for the fourth quarter gave more insights - maybe this is what the market has taken note of? Our analysis indicates that the number of cystoscopes deployed in the US (an indicator of future sales) during the first quarter of 2022 was clearly better than we previously estimated. We look forward to the rest of the year which is one of the more exciting so far for Photocure. The share rose 18% in March and has risen 15% during the year.
London Stock Exchange
Since the beginning of the year, we have a position in the London Stock Exchange. The company had a turbulent 2021 when the stock market lost confidence in management after the company announced higher integration costs than expected of a major acquisition. Since then, operational development has been good, recurring revenues have more than doubled and valuations have nevertheless been lower than the historical average. The share has risen about 14% since we bought our first shares, which is 21% points better than the European index.
Sampo
With the turbulence that occurred during the first quarter of this year, we have been looking for companies/shares that are slightly larger than what we typically invest in to balance the portfolio. We have also historically owned Sampo on the theme of a well-run and attractively valued financial company. The company has cleaned up its assets and soon the management has sold off its entire Nordea holding. Above all, Sampo's insurance business, which has something of an oligopoly position in the Nordic region (which is probably the world's best insurance market), remains. This is a defensive holding where a large part of the return is likely to come from dividends and share repurchases. The stock rose 5% in March.
Short positions
The short portfolio contributed with a negative result during the month. Despite some profit-taking, the worst profit contribution was our put options in the German DAX, which fell in value when volatility decreased. Index positions in the American Nasdaq and Swedish small company indices also had a negative impact. Some stock-specific short positions that contributed positively to the result were Swedish Sectra, BHG Group and Danish Carlsberg.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 60 and 62%, respectively.
Summary
The month of March was clearly divided between great distress in the first half and "risk-on" in the second half. Many were naturally burdened and shocked in the first weeks of Russia's attack on Ukraine, but as always humans adapt, and the market was less and less affected by various war headlines on the screens. Regarding human suffering in Ukraine, it has become clearer with each passing day that Russia is undoubtedly committing war crimes with the indefensible executions of civilians. Their day will come when they are brought to justice.
Another reason that led to the turnaround in the market was the US Federal Reserve meeting on March 15, which was eagerly anticipated for several months. The Fed raised the key interest rate by 25 basis points, which was the first increase since December 2018. Few investors wanted to increase their risk before they knew how much the interest rate would be raised and what would be communicated. The cash levels of the world's institutional investors were at the time record high, which is always a good contraindicator.
Source: BofA Global Fund Manager Survey
The third reason why the market turned in the middle of the month was the Chinese central bank, which on March 16 communicated several market-friendly policies and thus effectively stopped the market crash that occurred on the Shanghai Stock Exchange during the first 10 days of the month, see picture below.
Source: Kepler Cheuvreux
The fact that the major technology companies in the United States coped with the worst of the pressure and withstood important technical levels contributed to investors increasing their allocations into equities again. See below MSCI Growth compared to MSCI Value.
Source: Goldman Sachs
Although the US consumer is gloomy at the moment, private individuals have started buying technology shares again. Technology stocks in blue.
Source: Goldman Sachs
The picture below was in our previous monthly newsletter as well. Then we were in an extreme situation, which usually indicates good buying opportunities. This was also the case this time and the rise in the broad European index from the lowest levels during the month was just over 12% until the end of March.
The fund was also under pressure at the beginning of the month with continued extreme price movements in some of our large core holdings. We remained calm and even went against the most extreme price movements. It is gratifying to note that the stock that fell the most, Victoria, was also the stock we bought most aggressively in. In six days, the price rose by almost 40% and Victoria was in the end the fund's best contributor in March with as much as 1.7%.
Price movements as the one above in Victoria often occurs when some investors face liquidity problems and become forced sellers. Given the outbreak of war, the entire European stock market received enormous outflows, see picture below, which led to sell-offs. During the first three months of the year, we ourselves have been in the fortunate situation that we have had continuous inflows into the fund. Something we are obviously extremely grateful and humbled for. Thanks!
Source: Goldman Sachs
We wrote in last month's letter that the favourable conditions have begun to emerge for smaller growth companies (Europe's equivalent to typical Nasdaq companies) to break a long-term negative price trend. It happened in March (at least temporarily), and it was also very clear that growth companies began to recover lost ground towards more classic value companies, despite the fact that interest rates rose.
Source: Kepler Cheuvreux
Below is a corresponding picture for the Swedish market. Smaller company price development in relation to OMXS30 - a similar pattern as in Europe.
Source: Carnegie
When the stock market turned around in the middle of the month, the fund's value rose in line with the market, despite a net exposure of 50-60%. It is many months since we last had a long period of strong days and the biggest reason for that (we think) is the increased breadth of the market that suddenly arose. The fund has a small part of the investments in what we call "market shares". The trend with a declining breadth has been going on since last summer, which we have felt, but in March the proportion of shares traded above its rising 200-day moving average suddenly rose and the fund began to develop strongly. Typically, a rising breadth in the market is an important factor for a more lasting upturn.
The large withdrawals from the European stock markets that were shown earlier, have also pushed down valuations in Europe to rarely seen levels. Compared with the US stock markets, these are the lowest levels in over 20 years, see picture below.
It becomes even clearer if you study the data below from Goldman Sachs. Based on the last 10 years, the S&P500 is now traded (based on the P/E ratio 12 months ahead) in the 82% percentile, i.e. in 82% of the observations, the P/E ratio has been lower. For Europe, the corresponding figure is only 31%. There is a huge difference, and our view is that it is largely due to the tragic development in Ukraine. There should be a certain "cushion" in the low values in Europe.
Source: Goldman Sachs
Given the values in the United States, it is perhaps somewhat surprising that the American private investor is still feeling miserable. It would have been interesting to see what the corresponding picture looked like for an average European private investor. The Bull-Bear Spread below is at least positive from a sentiment perspective, it cannot get much worse and is thus a good contraindicator.
We are now rolling into this year's first reporting season, and it is likely to be one of the more interesting seasons in many years. The profit warnings will probably be heard in companies with limited opportunities to raise their prices. Various bottleneck problems that arose during the pandemic and are now continuing with the war in Ukraine will probably hit hard in some places. Those who manage to maintain or increase their gross margins and have a growth in sales are likely to be rewarded properly and for the remainder of the year. We have worked hard to go through company after company and we hope our strong trend from the previous reporting period continues.
Profit estimates have begun to fall in recent weeks because of accelerating inflation and the war in Ukraine. We have seen the largest downgrades from analysts among consumer companies (such as H&M), but also cyclical companies such as in the chemical industry (oil prices hit hard). Two sectors that continue to see sharply rising profit estimates are oil companies and mining companies.
In summary, expectations have begun to fall in recent weeks and sentiment remains weak among investors. We believe that we are in a classic "pain trade" market, which provides support on the upside. At the same time, real interest rates remain strongly negative. We believe that the market reached its bottom on March 15 and now have help from both China (policy) and the USA (the big tech companies have rebounded).
Volatility in the market has fallen and the proportion of aggressive sellers is now significantly lower than a few weeks ago. For those of you who like statistics, we note that just over 90% of the shares in the S&P500 were above their 10-day moving average at the end of March. With those conditions and since 1982, the index has been higher 35 of 36 times a year later.
We continue to maintain a more balanced portfolio as we will probably trade around these levels for a few months to come. During the broad indices, on the other hand, there will be large movements. This is where we are most active, and we continue our work to create an excess return for ourselves and you this year as well.
An unusually big thank you for your patience during the first quarter and we are now pressing ahead for the next quarter.
Mikael & Team
Malmö, 6th of April 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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