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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 – May 2022
MAY PERFORMANCE
The fund’s value decreased 6.6% in May (share class I SEK). The Stoxx600 (broad European index) decreased during the same period by 1.5% and HedgeNordic’s NHX Equities was provisionally flat. The corresponding figures for 2022 are a decrease of 20.9% for the fund, -9.1% for Stoxx600 and -5% for NHX Equities.
EQUITY MARKETS / MACRO ENVIRONMENT
The month of May began as April ended, which meant high volatility and super moody investors. The US long-term interest rate turned down in the middle of the month and the market changed character from a maximum fear of inflation to rising concerns about global growth. It was also the first month in which, even, the world's largest technology companies came under strong pressure. The end of the month offered a strong rebound where the catalyst was FED-minutes on May 25th.
If there was high volatility at index level, in many cases it was an extremely high volatility at stock level. We also experienced this, which we will return to later. Nasdaq had only five days in the past month where intraday movement was less than one percent. For a full seven days, the movement was greater than three percent. Owning shares during the company reports was in many cases a test for the owners with sharp declines in the share price for companies that did not deliver fully against expectations. By the end of the month, not much had happened at the index level, but the journey there offered very large price movements.
Source: Bloomberg
After a staggering seven negative weeks in a row and nearly the longest negative run in 100 years, the negative trend was broken with force at the end of the month. With an increase of 6.6% for the S&P500 it was the largest weekly increase since November 2020.
Source: Bloomberg
The main reason for the strong end-of-the month (apart from the fact that the market was heavily oversold) was the minutes from the last FED meeting. When FED-minutes was released, it became clear that the central bank intends to raise the interest rate as intended (50 basis points) in future meetings, but to then go data dependent. With an economy that is clearly unwinding (see picture below), the above was interpreted as meaning that the central bank can finish its increases much earlier than previously thought and thus the second half of the year would offer a positive market climate. In that case, it would also implicitly mean that inflation has passed its peak level.
The image below shows Goldman Sachs' financial surprise index. It clearly indicates that we are entering a cooler period, which is exactly what the Fed wants. Focus over the summer will now be on studying financial data.
Another clear indicator of a calmer phase in the economy is the picture below, which shows that newly established companies are starting to lay off staff. However, the US labor market remains the strongest in 70 years.
Source: Goldman Sachs
A clear change in the stock market took place in the middle of the month and as usual with high speed. From six months of the market being completely dictated by inflation data and rising interest rates, the fear of inflation decreased at the same time as interest rates retracted and simultaneously shifted to focus on global growth. Despite a significant decline in interest rates from the middle of the month, share prices continued to fall due to a perceived increased risk of recession. The picture below shows the US 10-year interest rate during the second half of May. From the highest level of around 3.1%, it is now down to about 2.75-2.85%.
Source: Bloomberg
If you zoom out and seen from a two-year perspective, it looks as if US interest rates have reached their highest level.
The picture below shows the unprecedented and extremely aggressive monetary policy from the Fed (and other central banks) where the money supply has literally exploded. It created massive growth in the economy, which was much needed during the first phase of the pandemic. The fact that they continued into the second phase has created the imbalances we now see with historically high inflation levels.
Finally, the ECB and Madame Inflation (Christine Lagarde) also stated that it is probably time to abandon the negative interest rate. Market expectations now are that the ECB will implement a first interest rate hike during the third quarter. Interest rate hikes by the ECB combined with stronger recent economic data from the euro area should mean that the euro starts to strengthen against the US dollar after a sharp depreciation in the past year. For example, the business climate in Germany unexpectedly turned positive at the end of the month. Above all, German corporates were very satisfied with the current turnover. As for the future, it was gloomier, but still no visible signs of recession in Germany.
Despite very clear and accelerating inflation in many European economies, the ECB continues with its asset purchases. Not easy to understand with a rational mind. Below is inflation in the euro area together with the ECB's balance sheet.
The Germans, who have bad experience with inflation, continue to buy real estate. Prices seem to have a certain correlation with the ECB's balance sheet (written with a slightly ironic undertone).
What's left in the central banks' toolbox?
Source: David Parkins
The EU's purchase of Russian oil continues and finances Russia's war. Many years of historical and significant wrong decisions among European politicians are a big part of the explanation. Finally, EU came to an agreement on the oil embargo against Russia. Hungary's Viktor Orbán, were given a few exceptions due to his country’s high dependency on oil.
A historically excellent contraindication is to buy shares when CNBC starts broadcasting its Markets in Turmoil episodes. On May 5th, they started and at the time of writing, the S&P500 is unchanged.
Source: @CharlieBilello
Long positionsTruecaller
Truecaller's turbulent stock market journey continued in May. After another report that sharply beat expectations, the share was at its highest 23% higher than the closing price on the last trading day in April. Shortly afterwards, a major share sale was executed by a number of early venture capital investors in a similar way as we saw earlier in the year. This was followed by an article in the Indian press which said that the Indian telecommunications authority TRAI is looking at creating a competing app for Truecaller. By the end of the month, the share had fallen by 4.5%, but from the highest to lowest intraday price, the decline was as much as 45%. Incredible. To clarify, the fund dropped in a few days at most about 3.5% because of the above event alone. Due to the fact that the share recovered and because we increased our position in the tumult, the result for the month was basically unchanged.
In short, the article (
which can be read here) states that the authority is trying to create a function that allows the user to see the name of the caller when a call comes, a similar functionality that Truecaller has today. At present, there are not many details about the potential service, but according to the article, it should be based on the KYC process (a brief background check) that customers go through when they buy a subscription or prepaid card.
Our view is that a service of the type described in the article will not have a negative impact on Truecaller. Some of the reasons for this are that the KYC process in India is not reliable, the function requires all telecom operators to join TRAI's service and the service will not detect spam and fraudulent calls, international or corporate calls. TRAI has tried to create a similar service several times historically and has failed on all occasions. Even if the service is released, it will take many years before it becomes a reality.
Truecaller's management was baffled as to the price reaction and has, among other things, commented on the spectacle in a
press release and in
Dagens Industri.
While at the same time technical factors have made it difficult for Truecaller's share price, the company is doing better than ever operationally. Since the listing, Truecaller has released three quarterly reports that have significantly outperformed analysts' expectations. We believe that Truecaller has some low-hanging fruit left to reap in the advertising business, while the company's new business segments look very promising. EPS growth in 2021–2024 is expected to be 45% per year (CAGR) and we believe that analysts are too conservative. For this you currently pay 15x / 11x EBIT 2023e / 2024e, which we think is very attractive.
Victoria
Victoria, our flooring company, continued its roller coaster during the month. In May, it was unfortunately downhill that took the lead. The reasons for the decline are probably due to gloomier macroeconomic prospects, combined with the fact that there have reportedly been some funds with large outflows that have required them to sell the Victoria share, regardless of price. With limited liquidity in the share, it had a large effect on the share price, which fell 19.7% in May. In addition to this, there is no major news to mention about Victoria in regard to the month of May, apart from the fact that the CEO and other people in the management team bought considerable amounts of shares across the market.
With the assumption that we are entering economically gloomier times and Victoria's exposure to the construction and renovation industry, historically high energy prices and inflation in Europe, it is a given that many wonder how Victoria will cope with the new situation. Historically, the company has succeeded well in getting price increases through to its end customers, and large parts of the company's energy costs are hedged 24 months into the future. Comments from relevant competitors and customers, such as Likewise Group and Headlam, also indicate that the market is still relatively strong. In April, the number of housing transactions in England (an important leading indicator) remained higher than before the pandemic. In our estimates, Victoria is now trading at single-digit profit multiples.
Lindab
Despite the good report for the first quarter of April, the Lindab share continued to fall in May by a further 18.3%. However, historical results are just that - history. The stock market is forward-looking, and fears of a gloomier economic climate are probably an important reason why the share has not functioned this year. However, we believe that the stock market is excessively gloomy in its view. Lindab is a relatively late-cycle company with a large element of renovation revenue, which is less sensitive to the economic cycle than new construction.
The share is now traded at single-digit profit multiples (!), which we think is incorrect given the large quality improvement that Lindab has undergone in recent years, not least regarding the return on capital employed. The insiders in Lindab also seem to think so, as they bought shares on a broad front during the month of May. We also note that Volution, a British ventilation company, recently came up with a positive market update that caused the share to rise by 7%. We have taken advantage of the weakness in the price and increased our holdings.
ISS
The ISS share ended on a positive note after the company released a market update at the beginning of the month. Organic growth was a good 5.4% and profitability continues to improve. Most positive was that the organic growth target for 2022 was raised to “over 4%” from “over 2%.” Since we bought into this turnaround case, management has met or exceeded the ex-ante estimates. They have also continued to buy shares across the market which is central to us from a risk perspective when being part of turnarounds.
We believe that the market is too worried about inflation and its impact on the ISS labor force, which is largely unionized and where the annual wage increase is known from the first day of the year. In addition, the majority of ISS contracts have embedded inflation clauses, which means that the company can relatively easily pass on price adjustments to customers. High inflation should also drive a certain positive effect on new customer intake as many companies review their cost items. The stock rose 6.8% in May and is now trading at a very low 9-10x P/E next year's profit on our estimate.
Teleperformance
For a couple of months now we have built up a medium-sized position in French Teleperformance, which deals with outsourcing of customer support services. The company is led by CEO and chairman Daniel Julien, who also founded the company in 1978. Today, it has over 420,000 employees with a global market share of 7-8 %. The financial history is very impressive; between 2011–2021, EPS grew annually by approximately 20% (CAGR). This year, the share has performed poorly, probably against the background of rising interest rates and inflation concerns. For similar reasons discussed above regarding ISS, we believe that the concern is excessive and have therefore taken advantage of the situation to buy the share. To conclude, the picture below is interesting. It shows analysts' profit expectations in the red line and the share price in the white. It is relatively unusual for them to trend apart as clearly as in the Teleperformance case. We hope to return to the subject later.
Source: Bloomberg
Short positions
The short portfolio contributed with a positive result during the month. The largest contributor was our futures in a Swedish small-cap index and Stoxx600. Some stock-specific short positions that contributed positively to the result were Cary Group and the wind power manufacturers Vestas and Nordex.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 62%, respectively.
Summary
We are of course very disappointed with our performance in May where we had the "wrong" shares in the short term. Our largest negative contributors were 1) Lindab with -18,3%) Victoria with -19,7% 3) Rugvista with -29,6% 4) The fund's put options also contributed negatively by -0,5% as volatility decreased while the index at the end of the month reached positive territory. To make matters worse, both SEK and GBP were reduced against the euro, which together cost about -0.7%. If not a perfect storm, it was many days of torrential rain. The best contributors were the Danish ISS with 0.5% and the French Total with 0.5%.
After a proper roller coaster during the month, the large broad indices ended largely unchanged. As mentioned earlier, several of the fund's large core holdings had very large price movements which, in our opinion, were solely flow driven. It ranged from funds that were forced to sell due to withdrawals from their investors to private equity funds that invested at significant discounts as they needed liquidity for new private investments (Truecaller for example).
The declines created, as usual, additional sales pressure as owners became increasingly nervous when they noticed that the value of their holdings had decreased. One of many paradoxes in financial markets. The greater the decline, the higher the risk according to many. We can willingly admit that the feeling when Truecaller drops from over SEK 70 to SEK 39 in just over a week had a limited entertainment value for us and there was a certain rich use of language in the office. The fact that we bought about 20% more shares at the lowest levels meant that Truecaller's contribution remained unchanged. At the lowest level, the negative contribution for the fund from the highest to the lowest level was around 3.5%! A little too hysterical even for our taste.
It is in moments like these when we open Benjamin Graham's legendary book from 1949, "the Intelligent Investor".
In May, the cash levels of asset managers were the highest since the terrorist attacks on September 11th, 2001! This of course contributed to us getting a rebound at the end of the month.
Source: BofA
The reason for the high cash level is a record in terms of the relationship between a positive and negative view of the stock market. We have been at the "extreme fear" level where we were last during the financial crisis.
Perhaps the biggest concern in recent months has been (and continues to be) what will happen when US private investors start selling. The answer is that they have now sold all the shares they bought in the last two years, at least according to Goldman Sachs' estimate below. That estimate will be very interesting to track.
If you study Goldman Sachs hedge fund investors' exposure over the past few years, you can see that May showed a substantial reduction in the balance sheet. On the far right is a decrease of 12%, which is the strongest decrease in active risk in five days since they started studying data in 2016. Even a sharper decrease than in March 2020! Unbelievable.
So to summarize the above pictures, in May 1) the cash balance of institutional clients was the highest since 2001 2) US private investors have sold everything they bought in the last two years and 3) hedge funds have in a short time reduced their gross exposure at a very fast rate 4) investors worldwide are super moody. It feels like all the ingredients to create a real boom in the market.
Before the stock market started to rise at the end of the month, even junk bonds had started to rise, which is a good indicator for understanding the stock market. The picture below shows the development for the last year.
Source: Bloomberg
One group that clearly went against the negative trend were insiders who increased their purchases of shares in their own companies and are now well above a historical average. The purchases were made widely across different industries. Below are US companies and their insiders.
Source: JP Morgan
The repurchase mandate began during the month with new and large mandates. Volumes in May were 45% higher than the corresponding period last year and the total mandate is as much as 429 billion USD (there will be many shares). Undoubtedly a factor that supports the US stock market and if European companies had understood the power of using some of the capital (which is ours, not the company's) for value-creating repurchases, perhaps European values would have approached the US somewhat.
Suddenly it happens! Sharply falling stock markets eventually led to a real inflow in the last week of May. It may be worth mentioning that the majority of our team in recent weeks also invested significant amounts in the fund.
Downgrades of the profit estimate have been dripping for months and are now down in negative territory. Before adjustments begin, the stock market has probably swung for a more lasting upturn. It is still unclear when this will happen, but it is quite clear that risk/reward today is significantly much better than a few months ago.
The acquisition of Swedish Match a few weeks ago will probably be followed up by several company acquisitions in coming months. Many companies have so far shown good resilience while values have fallen. Companies and private equity firms continue to have strong balance sheets and capital must be put to work. The picture below shows that with the current annual rate, 2022 will be a new record year.
To put the current correction in a historical perspective. The picture below shows the corrections since 1946 that have been at least 10%. The blue bars to the left show how big the correction was when there was no recession. The median drop in those cases is -12.5%. Until the end of May, the decline this time was -18.7%. The median decline when it ended with a recession is -23.9% and during the financial crisis, the S&P500 fell as much as 57%.
Defensive companies are now traded at very high premiums in relation to cyclical companies. When the curve is tilted as much as below, it usually reverses at high speed. A balanced portfolio is to be recommended.
So what is our conclusion after all the events these recent weeks? The short answer is that we stick to our market view that the lowest level in Europe was set on March 7th and that we will trade in a price range for the time being. The interest rate appears to have reached its peak in May and the central banks are starting to talk a little less hawkishly. The USD also appears to have reached its peak and a weaker dollar is generally positive for risky assets.
In May, the U.S. was the last major stock market to fall back. When the last generals fell in the form of the American FAAMG companies, the stock market also capitulated with steep declines as a result. With a very high concentration risk from a few companies in the S&P500 and Nasdaq, it hit the index hard. Nasdaq was, at most, down almost 15% from peak to trough in May and at the lowest point -29% YTD. The declines from the previous top level are for Netflix -72%, Facebook -50%, Amazon -40%, Alphabet -28%, Microsoft -23% and Apple -21%.
While the United States capitulated, many other segments actually stabilized when Europe (in our opinion) already have had its capitulation. Inflation data seemed to level off, interest rates fell and small companies, both in the US and in Europe, showed clear signs of stabilization. Somewhere the price is starting to become attractive even for the biggest pessimist. The image below shows the valuation for small companies over the past 27 years. The valuation does not seem strained.
Source: Goldman Sachs
We are not macroeconomists, but we consider it less likely that the U.S. will enter a recession this year as 1) the labor market remains very strong 2) positive effects from the post-covid continue to roll out 3) the housing market seems to be holding together 4) the profitability of the U.S. companies is still at high levels. In Europe, the picture is the same but on a smaller scale. We have not had such a strong economy, but not so high inflation, for example.
Finally, we continue to be close to our companies and follow them carefully. We have just started a recruitment for a third analyst who will work together with Fredrik and Gustav from the Malmö office, and we hope to be done by August.
Enjoy June with school graduations and upcoming sun and heat. Soon it will be midsummer, and we Swedes look forward to the herring!
Mikael & Team
Malmö, 3rd of June 2022
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Coeli Nordic Corporate Bond Fund
| Performance in Share Class Currency | 1 Mth | YTD | 3 yrs | Since incep |
| Coeli Nordic Corporate Bond Fund - R SEK | 1.30% | -0.93% | 3.38% | 14.52% |
| | | | |
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Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund
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Alexander Wahlman
Senior Analyst
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Top Holdings (%)
| LANSBK 1.25% 18-17.09.25 | 4.1% |
| NORDEA HYP 1.0% 19-17.09.25 | 4.1% |
| SWEDBK 1.0% 19-18.06.25 | 4.1% |
| WHITE MOUNT FRN 17-22.09.47 | 3.9% |
| B2 HOLDING FRN 19-28.05.24 | 2.9% |
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Note that the information below describes the share class (I SEK), which is a share class reserved for institutional investors. Investments in other share classes generally have other conditions regarding, among other things, fees, which affects the share class' return. The information below regarding returns therefore differs from the returns in other share classes.
Return to Fund page
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Utveckling september
Fondens värde sjönk -5,1 procent i september (andelsklass I SEK). Stoxx600 (brett Europaindex) sjönk under samma period med -3,4 procent och HedgeNordics NHX Equities var preliminärt oförändrat. Motsvarande siffror för 2021 är en ökning om +21,6 procent för fonden, +14,0 procent för Stoxx600 och +6,4 procent för NHX Equities.
Equity markets / Macro environment
After seven consecutive months of positive performance the world’s stock markets were poised for some degree of turbulence. Volatility was especially high in some equities and on Monday, September 20, the highest nominal volume ever traded was reached in options on the S&P500 (!) The broad European index fell by 3.4 percent in September compared to the S&P500 which fell by 4.8 percent. The fund also had its first negative performance since October last year with a decline of 5,1 percent. More about that later.
Despite high levels for many stock indices, sentiment among investors has been relatively gloomy. Bank of America's monthly survey recently showed that only 13 percent of managers expect a positive market in the future, which is the lowest figure since April 2020 (and that was clearly wrong). The reasons cited are China's growth problems, the crisis-stricken Chinese real estate giant Evergrande, the development of the delta variant, declining profit growth and, of course, rising inflation. However, they are still overweight equities which is perhaps not so strange when you have to pay to lend your capital to countries. As interest rates rose at the end of the month, the German 10-year interest rate followed with a giant step from - 0.25 percent to - 0.17 percent… The picture below is an overall risk indicator, and we are around zero (neutral).
The news flow in September began with record high inflation figures in Europe at +3.0 which exceeded market expectations. The corresponding figure in July was + 2.2 percent. It was the fastest growth rate since November 2011 and several countries recorded up to five percent in inflation rate. The pressure on the ECB to reduce its support measures is increasing. On Friday, October 1, new inflation figures came in for September, which showed a further acceleration in the inflation rate by +3.4 per cent.
The rate of change can be mostly attributed to rising energy prices that are starting to create real problems in the world's economies as well as agricultural shifts. The picture below shows that food prices are at record high levels over the past 60 years. The biggest losers are the poorest part of the population.
In the slightly longer term it is forecasted that it is not excessive demand that will drive inflation, but rather a limited supply, and then both in terms of products and labour. At the end of September, long queues were reported at petrol stations across the UK when fuel ran out and there were not enough truck drivers to refuel. Prime Minister Boris Johnson urges his citizens to refuel sensibly and at a normal rate. You wanted Brexit, so there you go. In sheer desperation, Johnson has now issued 5,000 temporary short-term visas for temporary drivers. Good luck.
M25 spring 2022?
Below are European gas prices which have risen in a seemingly uncontrolled fashion and recorded the highest September prices ever. A silent prayer for the mild winter. We guess that this development will soon be a major topic in the media, and it will undoubtedly create various problems and somewhat reduce next year's expected growth. It feels reassuring that Per Bolund (Swedish Green Party MP) claims that there is no electricity shortage in Sweden because then the costs for ordinary people would be unbearably high during the winter (which of course they will be). Rising gas and electricity prices have led European politicians to start discussing billion-dollar subsidies (in euros) to households and manufacturers who will experience sharply rising electricity bills over the winter.
Source: Bloomberg
Henrik Svensson, site manager at the oil-fired power plant in Karlshamn (south Sweden), does not agree with Per Bolund that we have a surplus of electricity in the country. For large parts of September, the power plant ran at full capacity and burned 240k liters of oil per hour. Henrik Svensson believes that it is electricity shortages and high electricity prices that are behind the high production. He also says that there is a lack of planned power production in southern Sweden and that it will take many years before the electricity grid is strengthened and new electricity production is in place. Sweden today burns more oil than we have done in 10 years. A gigantic energy policy and climate policy failure signed by the Green Party.
Source: Steget efter
Winning candidate for this year's Christmas presents below.
The change in the US 10-year interest rate created considerable pressure on, primarily, growth stocks at the end of the month. The performance dispersion for different sectors was very large in September with oil shares as a clear winner. This was also felt in the last days of September.
Source: Bloomberg
Below is the development for the US 10-year interest rate. The turbulence in the stock market was caused by the change in interest rate level breaking through on the upside, as can be seen in the chart.
There have been countless attempts to explain the turbulence in recent weeks. The recent and significant amount of options being exercised, Evergrande, interventions by the Chinese government, Fed tapering, Bank of England expected to raise interest rates, delta variant, inflation, bottlenecks in production, difficulties in finding staff, rising energy prices and declining growth rates. We think it is enough to look at the picture below. Rising interest rates hit hard at growth companies' valuations.
Goodbye Mutti and thank you for an extraordinary effort for Europe!
Source: Nyhetsbyrån TT
She was politically in a class of her own during the euro crisis ten years ago and Sweden also has her to thank for a lot. Despite a somewhat weaker performance in recent years, German citizens have experienced significantly better economic development than many others.
On September 29, the covid-19 restrictions in Sweden were finally removed and we can now, in principle, start living a normal life again. The number of bookings for winter holidays skyrocketed to the great joy of the tourist and transport industry. In recent months, tourism activity in the Mediterranean has been "extraordinary" and much better than forecasted before the summer. Luxury travel is also reaching new heights. Private jet passengers to Mallorca increased by +70 percent in July compared to July 2019 with an average of 83 private jets per day landing in Palma. If you want to rent a yacht, you are being referred to next year as basically everything has already been fully booked.
We now belong to a minority group. Passively managed capital exceeds actively managed capital for the first time ever. This will give us more opportunities as mispricing increases.
In addition to being one of the world's best stock markets this year, Sweden also has the most listed companies in the entire EU. Bloomberg drew attention to the fact that there are now around 1,000 listed companies on the various trading platforms in Stockholm. More than 80 percent are smaller companies, and the list is filled with new listings every day until Christmas! For us, it is interesting as we are constantly looking for new potential core holdings. In recent weeks, we have identified one which we write about under Long Positions.
We end this section with a picture that well reflects today's political level.
Source: Kluddniklas
Long positions
Truecaller
During September, we did a lot of work on the Swedish company Truecaller which will go public on October 8th. Truecaller is one of the most interesting companies we’ve seen in recent years. Truecaller has developed a phone application that can, among other things, identify unwanted calls from, for example, telemarketers. The app is one of the top ten most downloaded applications globally, and in some of the main markets such as India, Nigeria and Indonesia, it is one of the three most downloaded apps. As a Swedish company with headquarters in Stockholm, the firm has chosen to list on the Swedish stock exchange, which we are very happy about.
Truecaller was founded in 2009 by Alan Mamedi and Nami Zarringhalam. They met at the Royal Technical University in Stockholm, and they continue to be active in the company as the CEO and Chief Strategic Officer (CSO), respectively. When they released the first version of the app, they received 10,000 downloads within one week. By 2013 they had reached over 10 million users globally and in Q2 2021 they had reached 278 million monthly users. Throughout their journey, Truecaller has attracted several well-known investors such as Sequoia Capital (early investors in Apple, Whatsapp, and Zoom among others), Atomica (Skype-founder Niklas Zennström’s investment company), and Kleiner Perkins (early investors in Google, Amazon, and Spotify among others).
Until recently, revenue streams have mainly consisted of income from in-app advertising. In addition to this, there is a premium version where paying users can get additional functionalities. That business accounted for around 20 percent of revenues in 2020. During the fall of 2020, Truecaller launched a corresponding offering that targets corporates. This part of the business allows B2B customers to be listed as verified callers when they call private people. It can for example be a security company that calls about an alarm or a courier company that needs to get in contact with a receiving customer. It is a common problem that these types of companies get rejected when the call-receiver doesn’t recognize the number.
Truecaller declares that their product benefits from network effects. i.e., the product gets better the more people who use it (think Facebook). This can be relatively easy to appreciate since phone number identification inherently evolves from reporting of unwanted calls by the users, i.e., when enough people have reported an unwanted call Truecaller flags for this in the app). Over time, Truecaller has built a database containing 5.7 billion unique phone-identities. Network effects doesn’t just build a better product over time, they also increase the entry-barriers for potential competition.
The majority of Truecaller’s income comes from developing countries. The company explains that the problems related to spam emails, harassment, unwanted calls, and messages are more common there than in the western world. India is Truecaller’s largest market where these types of problems are significant. One positive aspect of the geographical exposure is that it allows for a nice structural tailwind: the population growth in developed markets is much higher than in the west (driven by an increasing average age) and the smartphone penetration is growing fast.
Historically, 97 percent of all app downloads have been organic. However, management has begun to experiment with user acquisitions by the way of advertisements through, for example, Facebook. The returns on user acquisition looks extremely attractive. In some markets, such as India, Truecaller could achieve a return on investment of up to 20x on every spent dollar. In more mature markets, such as the USA, the same multiple amounts to 4x, still very attractive. Indonesia, which is a relatively new market to the company, has a multiple of 0.8x. This means any user acquisition spend in Indonesia is unprofitable at this point. However, management is confident that the return profile will wander above the 1x as more users join and the network effects take place. In summary, the investment opportunities are plentiful and attractive – and unique.
In summary, several things speak for significant growth in the future. The investment in paid user acquisition, a sharpened premium-offer, the newly launched B2B product and continued growth of the advertising business. In addition to this, acquisitions may likely follow.
Growth has been prioritized over profitability and it is only recently that the company began to report profits. In 2019 sales grew by 57 percent. In 2020 the corresponding figure was 64 percent, and during the first half of 2021 the company’s sales grew with as much as 151 percent in comparison to the same period last year (which was partly affected by the pandemic). During the first half of this year, the company’s operating margin was 32 percent. As you can imagine, Truecaller is very capital-efficient. Working capital is very low which gives a nice cash conversion and a very high return on capital employed – all attributes that are required to create a very successful and valuable company over time.
Truecaller targets a revenue growth of at least 45 percent between 2021-2024e. After 2024 the EBITDA-margin should be at least 35 percent. The sum of the year-on-year growth and the EBITDA-margin should amount to at least 70 percent (a variant of the rule of 40 that tries to balance growth and profitability). We don’t think it will be difficult to reach these targets and the analyst estimates we have looked at are cautious, especially regarding profitability. In our preliminary prognosis for 2023, our EBITDA-estimate is around 16 percent ahead of the analyst estimates that we’ve studied. This is based on that Truecaller can continue to grow sales much faster than hiring new people while the gross margin improves slightly in coming years.
The gross margin is an interesting aspect of the equity story. Truecaller’s gross margin amounts to approximately 70 percent. Most of the cost of sales consists of platform fees to Apple and Google. Since Apple and Google practically control the distribution channels for apps together, a duopoly has occurred and prices for app-developers such as Truecaller have remained high around 25-30 percent of sales. This situation is now heavily criticized from all parts of the world since the situation is not considered competitive, for example
look at this analysis about an American court ruling concerning a twist between Epic Games and Apple. We believe Google and Apple’s fees will decrease over time – which would be a positive event for Truecaller. Furthermore, Truecaller’s new business deal bypasses Goggle and Apple, which gives a gross margin of close to 100 percent. This will strengthen the profitability even more.
There are of course risks associated with the dependence on Google/Apple (which is the case for every company in the application business); the geographical exposure and one should never write off the threat of competition even if it seems far away at this stage. However, we do believe the benefits outweighs the negatives. Truecaller has excellent financial characteristics, operational founders with large shareholdings who will remain active in the business and some of the world’s most well-known investors behind it. We therefore look forward to being included as an anchor investor ahead of the stock exchange listing on October 8th. We are even more excited to follow the company’s successes in current and new markets in the coming years.
CVS Group
One of the happiest days of the month was when our veterinarian company CVS Group released their interim numbers. Once again, the company beat analysts’ expectations which have been raised several times over the course of the year. In the first two months of the new financial year (which begins in July), the company has grown by 17 percent. This can be compared with the growth expectations for the full year which, before the report release, were 7 percent. Once again, analysts have thus far been “forced” to upgrade their assumptions. In a sour September stock market, the share fell 3 percent.
It becomes clear that the positive effect of the pandemic on pet ownership is more tenacious than ever. Pets live for many years, and we believe many underestimated the importance of the large number of new customers during the pandemic. Below is a graph of Google searches for veterinarians in the UK as well as data from the Swedish Board of Agriculture regarding the number of newly registered dogs. We speculate that the UK has similar trends as Sweden. The data points are also positive for our other pet company Swedencare. Pet companies are obviously still hot; right now there’s a bidding war going on over the German pet company Zooplus, where EQT is currently in the lead with the highest bid. We also note that there have been several venture capital-led acquisitions of veterinary companies at higher multiples than CVS is valued at.
Source: Jordbruksverket, Coeli
Source: Google Trends, Coeli
Lindab
Since our first investments in Lindab in the autumn of 2019, the thesis has always been that the building systems business segment did not fit into the business and in September, management finally found a buyer for the company. The transaction entails a write-down of goodwill corresponding to SEK 430 million, but it is cash flow neutral. Lindab took the opportunity to update its financial targets; the company now wants to grow by 10 percent per year (of which approximately two thirds are through acquisitions) and reach an operating margin of at least 10 percent (previously 10 percent over a business cycle). The share responded positively to the message.
We noted broad insider purchases in Lindab during the month, also from CEO Ola Ringdahl himself, which we think bodes well for the report in October. Despite this the share price decreased 8 percent in September.
Victoria
We have written several times about the British flooring company Victoria, which in September had a weak share price development of 17 percent. By all accounts, the company is doing well – during the month it was reported that sales rose 70 percent compared to 2020, and 50 percent compared to 2019. If you only partially extrapolate these figures for the rest of the year, it is obvious that analysts’ expectations are too low. We believe that this month’s decline is related to flows: growth companies and small and mid-cap companies were some of the most affected sectors in September – Victoria was hit from both sides. We have increased our position in recent days.
The Pebble Group
One of the month’s (few) joys was Pebble Group. As we previously wrote, the company is active in the market for gift advertising, i.e. gifts that companies give to customers, employees, and other stakeholders for marketing purposes. In September the company came out with its half-year figures that were better than expected. Pebble’s software division, Facilisgroup, is growing better than our expectations. This is also the part we believe the market is valuing too low. The stock rose 10 percent in September.
Knaus Tabbert
During the last trading day in September, our German motorhome manufacturer Knaus Tabbert announced that the forecasts for 2021 must be lowered due to component shortages. We are not particularly surprised that this has happened given what we have seen from other vehicle manufacturers. If the company can remedy these supplier problems, management believes that 2022 will be unaffected at best, as Knaus still has a bursting order book, increased production capacity and more suppliers from January next year. The share fell 7 percent in September.
Short positions
The short portfolio contributed with a negative result during the month. Our short-term negative positions in the German DAX had the largest negative contribution. Some stock specific short positions that contributed positively to the result were Swedish Dometic, German Henkel and Norwegian NEL.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 76 and 74 percent, respectively.
Summary
September's negative return of x percent also meant the end of the fund's, so far, longest period of positive return (10 months). We are obviously disappointed with that, but we have been in the game long enough to understand that equities sometimes must fall to be able to refuel and continue their upward trajectory. In general, September was the weakest month for many equities since the crisis started 1.5 years ago. September, otherwise, started strong for us and was a continuation of an unusually good performance at the end of August. Our companies presented many good news (except for Knaus Tabbert on the last day of the month) but small-caps and especially those categorized as growth shares, had a very weak performance during September. The main reason for this was, as previously mentioned, the change in the US long-term interest rate and general "risk off".
The picture below shows the development since March last year compared with the corresponding time intervals in the financial crisis in 2009 and onwards. Both periods have shown an unusually strong recovery and the current trend is even stronger than when the financial crisis raged 12 years ago.
Source: Goldman Sachs
Since the crisis started 1.5 years ago, we have had three different phases. The first and shortest, "despair", showed a decline in prices of 33 percent. The second phase, "hope", ended at the beginning of this year and showed a very strong return of 79 percent despite declining earnings. The last, “growth”, where we are now, has shown +11 percent in share prices with sharply rising growth for companies' earnings, but at lower valuations.
Source: Goldman Sachs
The recovery for American companies (below) has been extremely strong and compared to 2019, the 2021 profits will be approximately 36 percent higher. Very impressive.
Source: Goldman Sachs
It is very gratifying that Europe, for once, is keeping up with the United States and showing strong profit growth. Compare this with the non-existent profit growth between 2007–2019 (!)
Despite rising equity prices, valuations have fallen and Europe is now trading around 16x the profit 12 months ahead. It's not very strenuous (we think). For an average commercial property, you can get a return of maybe 3 percent before net financial costs. After financing, this corresponds to at least P/E 50x. And paying to lend to different countries does not feel like an exciting alternative either.
Source: Goldman Sachs
The valuation of global shares in relation to global GDP looks more strained. A major reason for this is the central banks' aggressive policy.
The valuation of the major leading technology companies is at an average level seen from the last five years.
Source: Goldman Sachs
The image below is striking. It shows that Swedish property prices, which have risen by almost 200 percent over the past 15 years, have had the same development as the money supply. In theory, price per m2 and krona is unchanged for the past 15 years. Is there anyone who still doubts that the world's central banks are responsible for the largest wealth creation in human history? It is important to be on the wagon because when it is gone you’ve missed it. And what central banks cannot push, the price of bitcoin for example, rises even more as central banks cannot make more of it. The opportunities for central banks to reverse the band are few. In the long run, this means that the next 10 years will, overall, be a good period for, for example, stock picking. All forms of uniqueness (growth) will be highly valued to compensate for the fact that the value of money decreases at a rapid pace.
If there is anyone who is still not convinced, take a look at the picture below. The market capitalization of the S&P500 divided by the Fed's balance sheet….
Source: Bloomberg
Onwards and upwards. The wealth of American households is accelerating away from the change in GDP.
Thank you Fed and all the world central banks!
Citigroup's surprise index has weighed down and analysts' profit estimates are also starting to soften. Not a good combination and it has undoubtedly contributed to the weak development in the stock markets recently.
It took a full 219 days for the S&P500 to have a decline of 5 percent. We will see how high the next bar will be.
Timing is everything. A fascinating graph that shows the importance of having reasonable timing in decisions.
Source: Goldman Sachs
Despite a difficult month behind us, it feels reasonable to expect a stronger market during the last quarter of the year. Our view is that we are still in a rising market, although we are likely to experience some turbulence for a few more weeks. "Bear markets" are constantly declining with sharp rallies while "bull markets" continue to rise with some strong drawdowns. We therefore believe that we are still in a rising market.
Some statistics to cheer you up. The S&P500 managed to rise by 0.2 percent in the third quarter (Europe -1.9 percent) which means six consecutive positive quarters. This has only happened eight times before and only on one of the (eight) occasions has the following quarter yielded a negative return. Two quarters later, it has in all cases yielded a positive return. In addition, for the past 20 years, October has been the fourth best month, thus much better than its reputation. Having pointed that out, October takes first place in terms of most frequent daily movements that exceed one percent.
The Stockholm Stock Exchange, which is an excellent reference point, had risen by 30 percent at its highest about a month ago, but is currently at 20 percent. Even more important is that measured in USD, OMX has "only" risen by 13 percent, which is in line with the US stock markets. This is hardly excessive given the profit growth among the companies. The risk premium in the market is high.
Investors are reasonably careless, and we are approaching the turn of the year. Global growth is well above average and interest rates are extremely low. Given how cruel the market has been to many investors this year, with sector rotations and a high concentration of companies driving performance, it almost feels obvious that the broad mass of investors will continue to reduce risk in their portfolios and then be short equities at year-end when the market rises. We'll see, but that's our main scenario right now.
We are now closing the books for the third quarter, and we look forward to the end of the year and above all the entrance for Truecaller on the Stockholm Stock Exchange on October 8!
Thank you for this month and we'll hear from you later.
Mikael & Team
Malmö on 5 October
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Coeli Nordic Corporate Bond Fund
| Performance in Share Class Currency | 1 Mth | YTD | 3 yrs | Since incep |
| Coeli Nordic Corporate Bond Fund - R SEK | 1.30% | -0.93% | 3.38% | 14.52% |
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Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund
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Alexander Wahlman
Senior Analyst
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Fund Overview
| Inception Date | 2017-12-20 |
| Investment management fee (share class I SEK) | 1.00% p.a + 20% Performance fee (OMRX T-Bill Index) |
| Performance Fee. Yes | 20% |
| Risk category | 5 of 7 |
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Top Holdings (%)
| LANSBK 1.25% 18-17.09.25 | 4.1% |
| NORDEA HYP 1.0% 19-17.09.25 | 4.1% |
| SWEDBK 1.0% 19-18.06.25 | 4.1% |
| WHITE MOUNT FRN 17-22.09.47 | 3.9% |
| B2 HOLDING FRN 19-28.05.24 | 2.9% |
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IMPORTANT INFORMATION. This is a marketing communication.
Before making any final investment decisions, please refer to the prospectus of Coeli SICAV II, its Annual Report, and the KIID of the relevant Sub-Fund. Relevant information documents are available in English at coeli.com. A summary of investor rights will be available at https://coeli.com/regulatory-information-coeli-asset-management-ab/.
Past performance is not a guarantee of future returns. The price of the investment may go up or down and an investor may not get back the amount originally invested.
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