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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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Monthly Newsletter Coeli Absolute European Equity November 2021
November performance
The fund's value decreased 4.3% in November (share class I SEK). The Stoxx600 (broad European index) decreased during the same period by 2.6% and HedgeNordic's NHX Equities fell provisionally by 0.8%. The corresponding figures for 2021 are an increase of +21.8% for the fund, +16.0% for Stoxx600 and +7.4% for NHX Equities.
EQUITY MARKETS / MACRO ENVIRONMENT
November was an unusually eventful month with Omicron, a new variant of the Covid virus, undoubtedly the event of the month. The broad European index returned -2.6% in November, while the S&P500 decreased by 0.8%. The fund had a weak return of 4.3% and we provide a detailed description of it in the summary section.
The Omicron variant was discovered in South Africa on Tuesday, November 23rd, and led to a sudden awakening on Friday the 26th of November. The belligerent headlines that hit investors around the world led to sharp price falls and we experienced the worst stock market day of the year so far.
Omicron was classified "as a worrying variant" by the WHO on November 26th, which has happened on four previous occasions. Alpha in the UK, beta from South Africa, gamma from Brazil and delta from India. With a clear disclaimer that we are not immunologists, we have read that Omicron displays 32 different spike protein mutations that the virus uses to enter the body. The delta variant showed nine different mutations. There are thus a very large number of mutations, which makes it difficult for the vaccine to achieve the desired efficacy. Nine of 32 mutations have been seen in other variants, eight have not been seen before and the rest are unknown. This is the reason why experts believe that there is a risk that this variant is more contagious and can get past the protection provided by vaccines or previous infections. Below shows the difference in how quickly the new variant spreads.
Source: Financial Times
It can be noted that the vaccination rate in South Africa is around 24%, so how it strikes in regions with a high vaccination rate is unknown. WHO also went out immediately and said that we should not overreact as we still have too few facts available to us. Over the weekend, the chairman of the South African Medicines Association also commented that the Omicron variant "is causing mild disease and no prominent symptoms". Let's hope so.
On the positive side, unlike other variants, Omicron can be detected by a simple PCR test, so the identification will be much faster than before. Those who understand this better than us believe that the most important thing for the near future is to follow the trend of hospitalization in the Gauteng province of South Africa where the outbreak took place. So far there has been no increase but, in a few weeks, we will know much more.
The combined led to sharp stock market falls on Friday the 26th of November and it was more than a year since we experienced something similar. It was also Thanksgiving in the USA, so the volumes were significantly thinner than usual which usually means larger movements in the market. Black Friday just got a new meaning.
It was not just stocks that were under pressure. The price of oil fell by as much as 12% (!) in one day and the price of Bitcoin also fell by 8% (but this is not an unusual movement in the context of cryptocurrency). The picture below shows changes in oil prices in recent years. Circled is Friday's movement, which eventually ended up at -12%. This is the same magnitude that was experienced in March and April last year when everyone panicked, which feels like a real overreaction (despite being unusually humble here).
The demand for oil is about 100 million barrels per day. The decline in demand last year, when it was at its worst, was a modest 1 million barrels per day. It feels highly unlikely that the collapse in oil prices on Friday, when vaccinations have been running for almost a year, reflects a significant drop in demand. Rather, it is algos and speculators who pushed down the price considerably and as usual it will rise soon again. Does the same apply to shares in that case?
Source: Bloomberg
In the days before the Omicron news, the number of Covid cases in Europe had begun to rise. In some countries such as Austria, Belgium and the Netherlands, the rise was and is steep, see picture below. Austria, for example, has announced a lock-down from 22 November to 13 December. The Netherlands has a curfew in place between 17.00 and 05.00 for three weeks. So far, things are calm in Sweden.
The difference and gap in vaccination rates between areas with a higher level of education and more vulnerable areas is large in many countries in Europe. The gap in Europe is also significant. Several countries, including Sweden, have a vaccination rate of just over 80%, compared with low numbers in countries such as Bulgaria, Romania, Ukraine and Albania, which are at approximately 20-30%. The common dark political history is likely to contribute to people not trusting the state and elected representatives, thus ignoring the message about the importance of getting vaccinated.
As customary nowadays, the shifts in market sentiment take place with ever higher speed and with ever greater force. The volatility index for Eurostox50 (important index in Europe) exploded when the Omicron news went over the wire. The price of our put options rose by just over 500% that day and that was one reason why we were down significantly less than the market that day.
Source: Bloomberg
It was interesting to note how different shares traded on Friday the 26th of November. Initially, everything was tanking, but already after an hour, the market had learned from last year which shares were Covid winners and losers, respectively. The picture below shows the relationship between value and growth shares on Friday, November 26. The magnitude is not far from November 9 last year, vaccine day, when Pfizer announced that the vaccine was ready. Fascinating!
Source: Bloomberg
Investor sentiment has moved very quickly from "greedy" to "fear".
In times of stress, our own Swedish krona behaves miserably. SEK decreased in value against the EUR by almost 5% in just a few weeks. This is a very large movement which has a negative effect on the fund's return as we do not hedge the shares we own, that are not euro denominated, such as our Swedish holdings.
Below is the development of the Swedish krona against the euro and it feels likely that it will recede soon (that the Swedish krona will strengthen). The tours in the Big Brother house, or the Riksdag as it is also called, have not improved the image of the Swedish krona as a safe haven (to put it mildly). The picture below indicates that foreign investors are moderately impressive of last week's political events.
Source: Bloomberg
To all those who point out how strong the Swedish stock market has been this year, we incline to agree, but only if we measure it in a small peripheral nomination unit called Swedish kronor. If we measure in USD, which should be done to understand how it is connected, it can be stated that the development on the OMX30 is relatively mediocre with only +8.4% return this year. Only a third compared to, for example, the S&P500.
Source: Bloomberg
The inflation ghost continued to elude the market in November. No one can be particularly surprised that inflation is rising, given that central banks and governments have pumped $10,000 billion into the world economy over the past 18 months (think one more time about how much money that is). Germany, among others, is now showing the highest inflation rate in decades. The history of hyperinflation in Germany in the 1920s has affected all subsequent generations' consumption behaviour, so the situation there is particularly anxious. In the 1920s, the large-scale war damages after the First World War were financed by reprinting banknotes. It was not a great success. This is also the reason why there has been a very negative attitude towards financing and supporting weaker European economies with loans and subsidies. But then came the pandemic and they felt compelled to participate, which Sweden also did for the first time.
Even ECB staff demand higher wages due to rising inflation….
The US economy is under immense pressure and the latest labour market statistics show the lowest unemployment since November 1969! At the same time, we have an economic policy that continues to act as if there was a huge crisis in the system. It does not feel like clockwork but will probably benefit those of us who own fixed assets for many more years.
Again, we had to endure a shameful battle in the Swedish political sandbox and the gap between citizens and the elected representatives probably increased a few units to a new record level. The quality is so low and the only reason we address the events in this noble forum is that the undersigned needs to sign off for a therapeutic purpose. A bizarre chaos was aired in real time for the Swedish (and international) audience and it is a mockery to us voters who also pay their salaries. These are basically the same people who sit there year in and year out with high service fees. They are in no hurry as they, it seems, see it more as an employment and less as a platform to change society. The policies of substance are completely subordinate, everyone involved can clearly see that.
Source: Jeander
Even the sympathetic and low-key speaker of the house, Andreas Norlén, after the debacle last week, sharply criticized the Green Party for not having flagged in advance that they would leave the government if the government's budget did not go through. "I think the fact that the Riksdag elected a prime minister in the morning who resigns seven hours later seems incomprehensible to the Swedish people." Indeed. Some politicians, journalists and political scientists in the world's most anxious country began to criticize the speaker for his views on the action. The Green Party will probably have to bring its own coffee and cakes to the speaker next time they are to explore the terrain.
Source: Steget Efter
Although one can discuss whether reduced petrol tax is the right way forward, it was excellent pragmatism for 96% of the Swedish people when the consequence was that the Green Party resigned. From an environmental perspective, the abolition of Swedish nuclear power is worse than a reduction in petrol tax.
The influential magazine Forbes also tears apart the Green Party and its
energy policy.
We change direction and visit Boris Johnson instead, who has had a lot to do lately. He describes with empathy about Peppa Pig. You can think what you want about him, but the entertainment value is
often top notch.
Not everyone was impressed by Deutsche Bank's upgrade by the rating institute.
There was a certain similarity between the market participants and the turkey that Friday morning, November 26th. The turkey spends its entire life being fed and cared for by its butcher. With each passing day that he is fed, love and self-confidence increase. When the risk is greatest, the love for the butcher is highest. Many market participants were also full of confidence when the news came (and to avoid any readers getting upset, no similarities otherwise).
Long positions
Truecaller
One of the joys of the month was, again, Truecaller. We note that Truecaller has now reached over 300 million active monthly users globally. An impressive figure for a Swedish tech company that has only been around for just over ten years. Following the IPO, analysts have now taken up coverage of the company with neutral or positive recommendations. Given that the price has roughly doubled since the first trading day, it is not very surprising that some analysts do not dare to recommend buying. However, we still see potential in the share, which rose 40% in November.
Lindab
The Lindab share rose 5% in November despite the price surge in October when the company released another report that beat expectations. The news in November consisted of insider buying from a board member, a partnership with SSAB regarding fossil-free steel and two acquisitions of the Danish ventilation company Klimatek and the Swedish roofing manufacturer Profilplåt. We are pleased to see that the company has increased the acquisition rate while at the same time there are many years left of attractive organic investment opportunities in the company. The price development for 2021 amounts to 73%.
CVS Group
In November the British veterinary company reported on the financial development from July to October, which was better than analysts had expected. It seems, though, that the market expected more than they got, and the share fell on the message. We struggled to understand the market reaction and bought more shares. For the foreseeable future, CVS will be able to increase the number of customer visits with rising margins, as the annual price increases are typically higher than the wage inflation for the employed veterinarians. In addition to this, there is an acquisition idea based on clear purchasing synergies. The share fell 12% in November but has risen 47% year-to-date.
Victoria
Our English flooring company, Victoria, also released good numbers in November. For the first half of the company's non-calendar fiscal year, sales grew by 31% on a comparable basis. The company has a long and successful acquisition history. The integration strategy is based on cost synergies particularly in purchasing, distribution and administration, while the company is keen to maintain a decentralized organizational structure. During the year, five acquisitions were made, which together increase operating profit before depreciation by approximately £64 million. The share rose 11% in November and has risen 80% in 2021.
Surgical Science
The precision in the company building Surgical Science has impressed us for a long time. The management has in the right order acquired the companies required to achieve the current monopoly position in the market in surgical simulation. During the month, a report was released that beat the preliminary predictions from the few analysts who cover the company. Sales grew by 36% on a comparable basis, to an operating margin of an impressive 31%. The integration with the major acquisition of Simbionix is going well and the CEO's note had an excited tone to it. The share rose 14% in November and has risen 212% in 2021. Surgical Science is so far the fund's best investment measured in rate of return. The block of shares we bought about three years ago from an aggressive seller has now risen approximately 20x. In more explicit terms: that purchase of roughly SEK 6 million plus now holds a value of approximately SEK 125 million. During the journey, we traded in and out but we still own the vast majority of shares. It should also be noted that when the company made its IPO in 2017, the market capitalization was 170 million. Now it is around 15 billion. Hats off and credit to everyone at the company for a phenomenal work. We also take this opportunity to send greetings to our network who chased us up and told us about the block that was for sale. Thanks!
Evolution
For a long time, we have held a medium-sized position in Evolution, which has served the fund well. In November, however, the share fell sharply due to anonymous accusations which, among other things, implied that Evolution operates in blacklisted countries. A lot has been written about developments in Evolution on various forums and news sites. We think that Evolution's written response to the allegations was good, but the subsequent conference call with analysts was not structured in the right way and did not reflect the confidence that the market was seeking. The share fell 32% in November and has risen 14% in 2021.
Atai
American Atai is one of the fund's major contributors this year, as we owned shares when it was unlisted thus received a substantial appreciation in connection with the stock exchange listing this summer. Unfortunately, the share hasn’t fared as well as expected in the public environment. The share now stands at about USD11, which should be compared with the subscription price of USD15. November was also a bad month for Atai as the price fell by 25%. We and other co-investors who have been with Atai for a long time entered into a lock-up in connection with the stock exchange listing, which expires in December. It is possible that the market has anticipated that this may give a certain sales pressure, which may have had an impact on the weak price development in recent times.
Knaus Tabbert
2021 has been a really tough year for our German motorhome manufacturer Knaus Tabbert, who has struggled with huge supply problems. As is well known, there is nothing wrong with the demand for the company's products - on the contrary, it is at record high levels. Unfortunately, it is difficult to sell motorhomes when there are not enough parts to build them. In November, the company was again forced to lower its full-year forecast. We can admit that we made a mistake with regards to the timing of our investment in Knaus Tabbert, but we still believe in the company long term. The share fell 19% in November and has decreased by 19% for the full year.
ISS
In November, the cleaning and catering company released a financial update in which the financial forecast for the full year was raised (and thus exceeded analysts' expectations for 2021). It is clear to us that the company under new management has always taken steps in the right direction. Unfortunately, these facts were overshadowed in November by fears of the new corona variant. More restrictions and closures of communities do not benefit ISS, whose share fell by 8% in November. We note that CEO Jacob Aarup Andersen bought shares towards the end of the month.
Blackrock Neurotech
During the month we made a new investment in an unlisted company, Blackrock Neurotech. The company develops technology for interfaces between the brain and computers and is the most advanced brain-computer interface (BCI) company in the world. This undeniably feels like science fiction, but the fact is that the company has successful studies behind it. With the help of our network we have the opportunity to be early investors, together with Christian Angermayer and Peter Thiel. Our allocation was almost 10 percent of the transaction. Those interested can read about Blackrock and Peter Thiel’s investment in this
article.
Shortly after we invested, Blackrock received a so-called "Breakthrough Designation" from the FDA for its product "MoveAgain". The system is intended to help patients without mobility to control, for example, a computer mouse, mobile phone or wheelchair by just thinking. If everything goes according to plan, Blackrock hopes to be able to launch the product in 2022. Those interested can view this
video or why not the
website.
Source: Blackrock Neurotech
Bullish
Our unlisted holding in Bullish, which is a cryptocurrency technology company, is preparing for its listing and we estimate that this will happen at the beginning of next year. We follow the project with great interest. Link with new updated presentation for those who are
interested.Short positions
The short portfolio contributed with a positive result during the month. Our short term position in the broad Swedish OMXS30 had the largest contribution. Some share specific short positions that contributed positively to the result were Swedish Dometic, Dutch JDE Peet's and Danish Carlsberg.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 70 and 71%, respectively.
Summary
November was a frustrating month. The fund was negatively affected by weak price developments in several of our companies as well as unusually volatile and falling stock markets. In some cases, there were explanations for the declines as in Evolution and Photocure (although Q3 results with a small miss should not result in a 17% decline). In most cases there were no specific company news, as for ISS, Wincanton and Pebble.
Although share prices have been weak in several areas, most of our companies have delivered strong results and positive outlook. Continued positive price movement for Truecaller and Surgical Science was not enough to compensate for the others. The five largest negative contributors to the fund during the month were Photocure, Knaus, Evolution, Atai and CVS Group, which together lost more than the fund's total negative results for the month. In addition, the fund's return decreased nearly one percentage point due to the weakening of the Swedish krona.
European equities as a collective showed a weak development in November and the various European indices were a few percentage points worse than their American counterparts. The main explanation is that demand for technology stocks increases when interest rates fall and there is significantly more of that in the US, compared to Europe which has more bank and cyclical stocks.
If we look at European companies by size we can see that small-caps continue to have a weaker development compared to large-caps. Right now the fund is not benefiting from that development, but it will probably change at some future price level; it is unclear when.
The lack of technology companies is noticeable in Europe and perhaps most in Europe's engine, Germany, which has undoubtedly lost some economic power in recent years. Below is the market value of Apple compared to the entire German stock market, which includes VW, Daimler, BMW, Bayer, BASF and Siemens to name a few.
Values in Europe have come down after last week's falling prices and now indicate modest P/E 15x 2023e.
Source: Goldman Sachs
Compared with the historical valuation of the last 25 years, we are now at average levels. A big difference from before is that we have extremely low interest rates.
Source: Goldman Sachs
If you study the cash flow for each geographical market, Europe also excels here. The United Kingdom has the highest cash flow, which is one of the reasons why we have allocated almost 25 percent of the fund's capital there.
Source: Goldman Sachs
European profit estimates have been adjusted upwards to highest levels (unusual). Analysts have thus been lagging the development for a whole year, which probably indicates continued upward adjustments. A big question mark now; however, is how much the new virus variant will hinder economic development in the future.
All in all, there has been an unusual amount of noise in recent weeks and in the end, it became too much for the market, despite a very strong reporting period.
So what do we think about future developments? It can be stated that events and flow of information spread at a very high speed, which leads to ever faster trading and increasingly sharp throws in the world's stock markets. Algorithms and computer-controlled strategies, together with a record share of passive capital, are increasingly determining the stock market mood in the short term.
In just over a week, the market climate has changed from a record low volatility to suddenly showing the largest rise in the VIX index this year. The picture below clearly shows the latest sharp throw in sentiment. The picture gives the impression that there is a limited downside before a new turning point occurs in the market.
Illustrated in another way, Goldman Sachs' risk appetite indicator is showing the lowest levels since the crisis last spring. Again, the tighter the bow is tensioned, the stronger the reversals tend to be (however, this did not apply in 2008 when the reversal didn’t happen for a long period, which the undersigned experienced painfully).
Source: Goldman Sachs
The market has been out of balance since last year with an extreme monetary policy despite a boom of unseen proportions. The inflationary pressure is of course reaching new heights with that cocktail, but central banks claim (with the stubbornness of a fool?) that inflation is transient. It is becoming increasingly difficult for them to back down and as a collective they have basically painted themselves into a corner. All other central bank governors piggy back on the Fed, it will be easier then if you are wrong. "Madam Inflation", ECB President Christine Lagarde, has been repeating the Fed's message for a long time now. And a few weeks ago, it was topped by our own Governor of the Riksbank who communicated that he does not foresee any interest rate increases until 2024!
As I am writing this on the evening of November 30, Fed chief Powell has communicated to the market that he may have to bring forward the dismantling of the extreme policy by a few months as inflation may be more "sticky" than previously thought. The US stock market immediately fell about 2% on the news. This is the first time that one can discern a certain change in the denial that we have inflation in the system.
To further fuel the imbalances the United States has a leadership that, in an extremely strong economic environment, pushes through gigantic infrastructure investments to further stimulate the economy. In Europe, old rules on budget deficits and financial discipline have been completely abandoned. Instead, they borrow gigantic sums that will stimulate, above all, the countries in southern Europe. In both the United States and Europe, a large part of the population has been enormously enriched while a large part of the population, those who do not own assets, receive subsidies from the leaders to avoid too much criticism. That development will also not stop where we are today, but the differences will increase further. The EU has become a debt and transfer union.
Finally, it can be stated that there has historically been turbulence when there have been significant negative real interest rates, which we have now. Companies tend to make less talented investments when they get paid to implement them and politicians allocate capital to projects that do not add much value. With inflation now at around 5%, real interest rates are sharply negative, but at least that reduces the debt pressure (is that perhaps the agenda?) Overall, it is not a bold guess that volatility will increase next year, at least during the second half year. But it also creates opportunities.
In conclusion and in the short term, we have quickly ended up in a nearly oversold position in the world's stock markets. No information on viruses and vaccines from the major pharmaceutical companies will probably be presented until about two weeks from now. In addition, several important central banks will have meetings in December, and new information is likely to be issued that will affect the financial markets.
Our best guess is that we trade around today's levels until we have new substantial data on Omicron. The outcome of course determines the direction, but we guess that the most likely scenario is that the risk appetite will increase again. A joker from the deck is a clumsy politician who wants to demonstrate real action and shut down societies.
We end with Goldman Sachs' excellent picture that shows how the market has developed yearly over the past 36 years. If we are to follow the typical pattern, a final rise will soon begin this year.
We thank you all for your interest and wish you a very Merry Christmas!
Mikael & Team
Malmö December 6th
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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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