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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 KID 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 2023
FEBRUARY PERFORMANCE
The fund’s value decreased by 8.2% in March (share class I SEK). The Stoxx600 (broad European index) decreased during the same period by 0.7% and HedgeNordic’s NHX Equities decreased provisionally by 1.5%. The corresponding figures for 2023 are a decrease of 1.8% for the fund, +7.8% for the Stoxx600 and +1.5% for NHX Equities.
EQUITY MARKETS / MACRO ENVIRONMENT
March was an exceptionally turbulent month triggered by a (temporary?) banking crisis which, for the vast majority, came with great surprise and force. This led to large movements in the stock market and very large movements in the interest rate market. The European stock market, which since the bottom in October last year had a significantly stronger development than the American one, suddenly performed significantly worse than the American one. The main reason for that was a remarkable return of the big US technology companies while European bank shares, which are heavily weighted in European indices, fell sharply. During the end of the month, the markets calmed down gradually and day by day.
If the broad European indices performed weakly, it was even weaker "under the hood", i.e., among the smaller and medium-sized companies. When there is sudden severe turbulence, the buyers of the smaller shares often disappear. In a company like LVMH, for example, there is always a buy side, but in a company like SLP, for example, a vacuum arises and what we consider to be a temporary air pocket when the share falls as much as 21% from its peak at the beginning of the month. In this case, most likely, real estate funds were affected by outflows, but when they had finished selling and generalists bought up shares the recoil came in many names. About half of the decline was recovered in the last days of the month and as of writing the entire loss for the month has been recouped.
The fund's holdings were strongly affected by the above factors and had a weak performance resulting in a loss of 8,2%, which means a negative result of 1,8% for the first quarter. Some stock specific events had a significant impact on the result. We are of course disappointed by this, and we elaborate further in this letter. The MSCI European Small & Midcap index fell by 4.4% in March, while the Stoxx600 fell by 0.7%. S&P500 rose by 3.5% and Nasdaq by as much as 9.4%! Measured in euros, however, the yield was lower by 1.0 and 6.8% respectively.
The Nasdaq rose during the first quarter by 16.8%, which is the fourth strongest quarter in the last 20 years! March showed the tenth strongest development in the last 10 years. The large Mega cap technology stocks rose as a group as much as 31%, while the rest of the S&P rose by 2%. It is an extremely unusual development in such a short time. In this context, the large technology companies were seen almost as a risk-free asset with very high liquidity and strong balance sheets.
Source: Bloomberg
How was it possible that suddenly and in just one week three American banks collapsed and the week after the long-established Swiss bank, Credit Suisse? Many of us have now learned that in addition to increased earnings for the banks when interest rates rise, major problems can also arise if you have not hedged or balanced your bond portfolio in line with your commitments to customers.
On March 8, it was announced that Silicon Valley Bank had problems as their bond portfolio declined sharply in value as interest rates rose. The bank tried to raise USD 2 billion in capital from investors but without success. Very large outflows from the bank's customers in just a few hours forced it into bankruptcy on Friday, March 10. On Sunday evening, a joint press release was sent out by the US central bank, the Treasury Department, and the agency responsible for the deposit guarantee, that US authorities took over the bank and guaranteed that all customers' deposits were safe. During the same short period of time, Silvergate Capital and Signature Bank also experienced major problems with the same dramatic consequences as a result.
These banks were nothing compared to Credit Suisse, which in a few days after had major problems. Credit Suisse's CHF530 billion balance sheet was double that of Lehmann's when they crashed in 2008. The Swiss National Bank quickly provided CHF53 billion in liquidity. It lasted a few days, but after closing on Friday, March 17, tough negotiations began, which ended with UBS buying Credit Suisse in a “shotgun marriage” on Sunday evening for a low three billion CHF. The market capitalization on Friday was CHF 8 billion, so shareholders took a real hit on Monday.
Even worse off were the bondholders of Credit Suisse who had CHF 17 billion in so-called AT1s and who, after the bailout, had their holdings written down to zero amid great uproar. EU authorities were quick to distance themselves from the Swiss decision to let shareholders come before bondholders in the event a bank is bailed out by authorities. The last word has not been said and it is highly likely that soon lawsuits will follow suit. Striking in this context is that during the 2008 financial crisis, no bondholders to the banks lost any of their capital. Also interesting is that Credit Suisse had a market capitalization in 2007 that was bigger than Apple's.
The drama will in the future affect banks' cost of capital, which in turn means lower loan volumes and thus a negative contribution to economic growth. The banking crisis was in practice an additional increase in interest rates by the central banks. Goldman Sachs estimates that the banking crisis will negatively affect the US economy by 0.25-0.50% in 2023.
The development quickly led to a crisis of confidence in the banking system and very large withdrawals were made from primarily the smaller American banks, see picture below.
The development prompted the US central bank to pump liquidity into the market to secure the banking system, which in turn caused the FED's balance sheet to quickly increase again after a year of decline with all the consequences that that entailed.
The concentration of banks in the USA is significantly lower than in most other countries, see picture below. As in a mantra from various leading business leaders and politicians, we have been told in recent weeks that the European banks are well capitalized and have high and healthy liquidity and do not have the same problems as smaller regional banks in the USA. We'd like to believe that's true, but the only thing you can be certain of is that you don't know everything for sure.
The chart below shows that since the Fed began its tightening a year ago, deposits in money market funds have risen sharply while deposits at banks have fallen sharply.
Deposits in money market funds exploded and only during the Covid crash have we experienced greater inflows, see image below.
Source: Goldman Sachs
The flight of capital from the banking system will force the banks to raise the deposit rate for their customers and thus their earnings growth will decrease somewhat. The figure below shows the 3-month bond rate relative to the FDIC's national deposit rate.
In the aftermath of Credit Suisse, the Deutsche Bank stock also came under intense pressure for no apparent reason. The CDSs (Credit Default Swap) rose sharply, which made the stock market nervous, see picture below. German Chancellor Olaf Schulz came out and defended the bank by saying that they are profitable and that the outlook of the bank is robust and stable.
Source: Bloomberg
It can be concluded that the volumes in the CDS market are relatively modest and it does not take that much capital to significantly move the CDS levels. It could be that there were actors who, with relatively small capital, traded up the CDS level and at the same time went short the stock for significantly larger amounts.
If you must pick one event during the month that stands out a little extra it has to be the movement in one of the world's safest asset classes, the US two-year Treasury bond. In eight trading days starting March 8, the rate fell 130 basis points from just over 5% to about 3.8%. It was in practice the world's safest asset class that brought down a few banks in the United States.
Source: Bloomberg
Such a sharp movement in government bond yields did not even occur during the financial crisis of 2008. The image below summarizes the magnitudes well.
In one day, the market's expectations about the final terminal rate for the various central banks also came down. The image below shows that the market's expectations for the US central bank's interest rate peak fell from close to 5.75% to around 4.75%. The corresponding expectation for the ECB went from just over 4% to just over 3.5%.
Source: Kepler Cheuvreux
The segments in the stock market that were most affected during March were simply put the large technology companies, which rose sharply at the same time as banks and real estate companies performed poorly. Another clear difference was that small companies had a weaker development than the large companies. Note the drastic change on the far right in the images below.
Source: Goldman Sachs
Seven of the eight largest companies in the S&P500 are the major technology companies (Berkshire Hathaway is the eighth). Since the turn of the year, their weight in the index has risen from 19 to 24%.
Source: Goldman Sachs
Since the beginning of last year, Nasdaq has now fully recovered its underperformance that began in early 2022. Note the difference in just the last twenty trading days.
Source: Kepler Cheuvreux
The opposite applies to European banks; during the last six months they have had the best conditions for several decades in terms of profitability, which meant that investors generally had greater exposure to the sector than they have had in a very long time. At the end of the month, the volatility of European bank shares also fell.
Source: Kepler Cheuvreux
The excellent picture below shows how high the concentration was during the first quarter. 495 out of 500 companies in the S&P500 this year have a return of 4% compared to 23% for the large technology companies.
Source: Goldman Sachs
Inflation continues to fall. Core inflation in many countries remains high and it will take time to push it down but given how quickly some commodities and costs have fallen, it is likely only a matter of time. Truflation.com (independent source) provides ongoing estimates of the current US inflation rate. With more than 10 million data points, they claim to be 30 times faster than traditional inflation estimation. The image below includes the latest reading as of March 31 and 12 months back. The trend is clear and positive.
Below is the euro zone's broad inflation and core inflation. Amid the tumult during the month, the ECB raised its key interest rate by 50 basis points. Given their lackluster track record no other action was expected. The likelihood of them overshooting the target again is high (our assessment).
Source: Bloomberg, Holger Zschaepitz
Spanish inflation has in a short time halved and on March 30 published a low 3.3% against the expected 3.9% and 6.0% the previous month. Things are moving fast now that the comparable numbers are improving. The biggest problem is food prices, but we are likely to see a decline here as well, presumably after the summer. Unfortunately, Sweden currently has the highest inflation in Western Europe and a record weak Swedish krona does not help. Sooner or later, reality always catches up and it is now visible with all undesirable clarity in the Swedish economy. But even if Sweden is among the laggards in Europe, we too will soon see improvements.
Consumers in Europe do not suffer as much as in Sweden. The percentage of people with variable loan rates is significantly lower, the amount of debt is lower, the electricity subsidies are higher, and they don’t have a dysfunctional exchange rate, to name a few. German consumers are starting to wake up and similar tones are also being heard from the UK.
Source: Bloomberg
Source: TwitterLong positions4Imprint
During the month, 4imprint released its 2022 full-year report, which was in line or slightly better than communicated in a January press release. Thus far sales are described as encouraging.
4imprint has been one of the fund's big winners over the past year. In one year, the share has risen around 72% and in March the share rose 8%. Despite a strong price trend, we believe that there is still upside from current levels if the company manages to maintain or improve the profitability it achieved in 2023. We believe conditions for that are good and we therefore keep the company in the portfolio.
Wincanton
March's big loser for the fund was the holding in the British logistics company, Wincanton. During the month, the company released an update for the fiscal year ending in March 2023, which was in line with market expectations. At the same time, however, they warned that next year will be more challenging. All in all, profit is currently expected to decrease by around 20% and there are two underlying factors for this. First, a general economic downturn that leads to lower volumes, and second, that the company has unexpectedly lost a major profitable contract.
That the macroeconomic situation would affect Wincanton should hardly come as a shock to anyone, but the loss of the important contract came as a surprise. As Wincanton's business is largely contract driven, individual contract losses are a natural part of the business. In this case, however, it was an unusually profitable contract, which means that the loss of it has a disproportionately large effect overall.
After a price decline of 31% in March, the stock is now trading at a profit multiple on the result after tax of approximately 7x and 6x for 2024 and 2025 respectively. With that said, the company already has a small net cash at the end of last year. It is incredibly low for a company that has implemented major structural changes which have improved business in recent years. The stock has been penalized for what we see as temporary problems, and therefore we have taken advantage of the price decline to increase our position. We believe that Wincanton will emerge from the economic downturn stronger and better than its competitors. The question is of course how long and deep it will be.
As one of the few national UK logistics companies, Wincanton is likely to have industrial value for other, larger players. Not too long ago, competitor Clipper Logistics was bought at a decent premium to Wincanton's current valuation. If the company's valuation remains at today's levels, we do not consider it too unlikely that Wincanton could be the subject of bids.
Lindab
The Lindab share made a nice contribution to the month's results after the share rose 9% in March. We have not seen any extraordinary news to explain the rise. However, we note that CEO, Ola Ringdahl, has been clear that they want to reach a 10% operating margin again in 2023, to be compared with the analysts' estimate of around 9 - 9.5%. If we assume that the sales forecasts remain and that Lindab reaches the operating margin of 10%, then the analysts' estimates for the full year should be beaten by upwards of 15%.
ISS
Another share that weighed on the fund's results in March was ISS, which fell by 9%. The reason for that was that the company's esteemed CEO, Jacob Aarup-Andersen, resigned in favor of the CEO job at Carlsberg. It is hardly strange that he chooses one of the finest CEO jobs you can take as a Dane. Aarup-Andersen has been highly appreciated by the stock market; partly because he carried out a successful turnaround of the business (which is still progressing) and partly because he has been very good at communicating with the market.
The stock fell 7% on the announcement of Aarup-Andersen's departure but recovered in the following days when several insiders bought shares. As a nice gesture, Aarup-Andersen bought shares, but also the company's CFO Kaspar Fangel.
We do not believe that ISS stands and falls with the company's CEO and the management team that remains have all bought in to the strategy that Aarup-Andersen helped launch. All in all, we thought it was sad that Aarup-Andersen left, but we understand, and he is now leaving a company in much better shape than when he joined a few years ago. We maintain our relatively large position in ISS, which has now become even more attractively valued as it trades around 11x current year earnings and below 10x 2024e.
Corem
After a strong start to the year, the property sector, including Corem, came under pressure in March. Corem's share fell by as much as 20%, driven by growing concern about the company's ability to refinance issued bonds and probably also concern about the main owner's (M2) financial situation. We are very satisfied with the sales Corem has completed or are about to complete. In total, properties worth close to SEK 7.5 billion have been sold since the end of last year, all basically at book value, which is remarkable given a material discount of 65-70%. In addition, Castellum shares have been sold for a total of 1.0 billion.
On April 3, a letter of intent was signed with a foreign actor who buys 25% of Klövern for 1.35 billion (Corem owns 49%) whose assets are mainly 24,000 attractive residential building rights. In addition, the international investor undertakes to invest up to 3 billion in new issues to operate and finance the construction project portfolio. The company is thus rigged and ready without Corem having to allocate more capital into Klövern. We assume that the banks are satisfied.
The transaction, which intends to be carried out during the second quarter, is an important step in the right direction for Corem, which therefore will likely give it a two-to-three-year head start as it is currently unable to launch major projects itself. Corem's focus for the last six months has been to consolidate the balance sheet. The company will also receive SEK 650 million, which will be very useful, not least for the repurchase of the costly hybrid that the company has outstanding. Since the lowest share price level on March 30, the share has risen by approximately 20%. The company is close to the point where you can buy back all the bonds due this year plus the hybrid. The share is traded based on the closing price in March of just under 10x cash earnings 2024e. We think this is a very low level and as the financial situation improves it should push down the risk premium and thus cause the share price to rise.
LVMH
The LVMH share is the closest Europe can get to the American major technology companies and the share also rose by seven percent during the month. YTD, the share has risen a whopping 24% and thus added 80 billion euros in market capitalization. The current market capitalization is 424 billion euros, which corresponds to half of the Stockholm Stock Exchange. An incomparable company.
Short positions
The short portfolio contributed with a small positive result during the month, which came from our short holding in a Swedish small company index.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 77% and 76% respectively.
Summary
The result in March mainly consisted of three different components:
- European small companies that suddenly found themselves out in the cold and with falling share prices as a result. At the end of the period, a recovery began.
- Two company events that each had a major impact on the result. The first was British Wincanton where we thought the price reaction after the company's update to the market was a strong overreaction which we took advantage of and bought more shares. The stock has risen just over 10% in the past week. The second event was ISS where the CEO left for a new position in the Danish crown jewel Carlsberg. It was the fund's largest holding and the share fell by 9% during the month. Here, too, the stock has risen from its lowest levels, and we note with satisfaction that both the outgoing CEO and some other insiders bought shares after the price drop.
- After a very strong performance run, Commerzbank's stock came under pressure like many other banks, falling 16% in March. We have more than halved our holding in Commerzbank and are awaiting developments. Our two real estate holdings in SLP and Corem were also under pressure, as was the entire real estate sector, when the banking crisis occurred. In both SLP and Corem, we have acquired shares at low levels as we believe that both shares offer good value in different ways. Both SLP and Corem rose in the last days of the month.
Overall, around 65% of the fund's negative monthly results came from Wincanton, Corem, Commerzbank, Accelleron and ISS. Wincanton was by far the biggest negative contributor. Commerzbank and Accelleron have given the fund a positive profit contribution this year, while the others have had a negative contribution.
In last month's newsletter, we spent some time explaining why the European stock market has performed so much better than the American one in recent months. This time we have had to do the opposite, although Europe YTD has risen more than the US. In a simplified way, the development of the last few weeks is explained by the progress of the large technology companies. Only seven companies in the S&P500 account for almost 90% of the index's rise. Apple and Microsoft alone account for 40%. The S&P500 has not been so dependent on two stocks since 1978.
Source: Goldman Sachs
The image below shows a ten-day difference in returns between, on the one hand, technology companies in the US and, on the other hand, a broad index with mostly smaller companies. At its most, a 16% difference (!) was measured in 10 days, which is on par with the Covid crash. At the time of writing, the situation has normalized.
Source: Goldman Sachs
Portrayed differently below, value stocks' large outperformance compared to growth stocks in the second half of last year has been completely neutralized in a short period of time.
Source: Goldman Sachs
There seems to be a correlation. The image illustrates the development of the largest central banks' balance sheets in relation to Nasdaq's development since 2010.
Source: Bloomberg, Holger Zschaepitz
Below is the volatility index of the last month for the stock market. It is amazing that now, after so much drama, we are back to low levels again so quickly.
Source: Bloomberg
The MOVE index, on the other hand, which shows the volatility of the interest rate market, is at significantly higher levels than on March 9, when the banking crisis started. A stock index simply contains the best and biggest companies, while in the bond world it is the companies that borrow the most (which for all intents and purposes are often excellent companies).
Source: Bloomberg
Sentiment among investors remains gloomy, as the images below show well. Never before has the relationship between buying puts and calling options been as extreme as in the past month.
Source: Sentimenttrader
Optimists vs. pessimists reach new low. It usually does not last long at these low levels. Maybe it's different this time?
Source: Kepler Cheuvreux
American investors added roughly $500 billion to cash holdings during the first quarter of this year. The last time these levels were reached was in the spring of 2020, which then led to a very strong rise.
Source: Themarketear.com, Bank of America
The sharp increase in money supply following the Covid crash led, after a few years, to rising inflation. When the money supply now falls sharply, inflation should follow, and we believe that is what we are now beginning to witness. In a year's time, the central banks may still have major problems, but then because inflation is below the target. Our view is that the central banks are too forceful instead of waiting and seeing how the effects filter through the economy.
The banking drama led to an immediate change in the market's expectations of future interest rate cuts. Now the market expects the FED to cut interest rates twice before the turn of the year compared to, the day before the banking crisis on March 9, two more increases. Before March 9, the policy rate was expected to be around 5.4% at the end of the year against the current estimate of 4.4%. A very big and immediate change.
Source: Bloomberg, Goldman Sachs
Historically, US stocks have performed strongly in the months following the FED's last rate hike with an average three-month performance of +8% (high +14% and low -1%). In 12 months, the development has been +19% and on none of the occasions has it been lower than +10%.
March offered unexpected and a great deal of drama. At the time of writing, the turbulence in the stock market has almost completely subsided. We'll see how long it lasts, but the authorities and central banks are fully prepared to intervene in case of any new problems. We are now rolling into the next reporting period, which we believe will generally show another period of surprisingly good earnings. Inflation undoubtedly helps on the revenue side.
In our portfolio, we see significant potential in many of our companies, not least those that have taken an undeserved beating in recent weeks. Corem is a good example where we bought more shares all the way down, and which in just over two trading days, rose close to approximately 20%. You might think that's crazy, but in several other cases it was also crazy on the way down.
If you look a little further into the future, rising interest rates and banking worries will lead to a slowdown in demand for new credit. Sweden is an excellent example of this, where we now have negative loan growth. This will lead to lower growth in the future, and it will be even more important to invest in companies that have something unique and preferably in combination with pricing power.
Inflation is likely to continue to fall and central banks will soon switch gears and start cutting rates. The problems with high indebtedness will gradually diminish as interest rates in a few quarters (our view) begin to fall.
We wish all readers and investors a Happy Easter!
Mikael & Team
Malmö on April 6th, 2023
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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 KID 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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