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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 October 2021
October performance
The value of the fund increased during October by 4.7 percent (share class I SEK). The Stoxx600 (broad European index) increased during the same period by 4.6 percent and HedgeNordic’s NHX Equities increased by preliminary 0.1 percent. The corresponding figures for 2021 are an increase of 27.2 percent for the fund, 19.2 percent for Stoxx600 and 7.7 percent for NHX Equities.
Equity markets / Macro environment
October has again, as many previous years, shown that it has an undeservedly bad reputation in terms of returns. The broad European index returned a positive 4.6 percent while the S&P500 rose by 6.9 percent. It was thus the second-best month for Europe and best month for the U.S. so far. The fund's return landed at 4.7 percent up where the concentration of contributions, both positive and negative, was unusually high. Truecaller had the highest positive attribution by far, more about that later.
However, volatility has historically been at its highest in October. That was not the case this year if you look at the large broad indices. On the other hand, stock-level movements were very high in several places. Below is the volatility index for S&P500 which are now at pre-pandemic levels.
Source: Bloomberg
In other words, a limited number of large companies have recently driven the broad indices. Among the medium-sized and smaller companies, there has in many cases been a substantial correction since August when the market changed direction. For the SXXP600 and the S&P500, the decline during this period was at its most 6 percent. Here are some examples of return distributions of our holdings from the highest to lowest during roughly a month’s time: Photocure -32 percent, Lindab -12 percent, Victoria -16 percent. The sharp turnaround at the end of the month resulted in +18 percent, +27 percent (!) and +14 percent respectively.
The picture below shows that only 150 of a total of 500 companies were traded above their 50-day moving average at the beginning of the month. It apparently indicated an oversold market and the rebound also came entirely as a classic textbook scenario. Now, two weeks later, the corresponding figure is just over 60 percent.
Source: Kepler Cheuvreux
During the last week of October, market concentration was at extremely high levels. On Wednesday, October 27, we experienced the lowest breadth sessions in the market in almost a decade. Breadth is defined as equal weighted S&P500 versus market cap weighted S&P500.
Source: Goldman Sachs
Why did the market change character after the summer? During the first half of the year, we were all in the best of worlds with maximum acceleration of earnings, upward revisions of profit estimates every week and with inflation that remained low. Interest rate increases could not be discerned. Now we have a (temporarily?) sharply rising inflation and rising interest rates, even though interest rate is from extremely low levels. We can now anticipate the end of an unprecedented party where the host couple consisted partly of world central banks and partly of panicked politicians who invested huge sums to mitigate the effects of the pandemic. The hangover will come, but it is many monthly letters away (we think). Below is the quarterly profit development for American companies. The rate of acceleration decreases but is still very good.
Source: Goldman Sachs
The historical correlation between the world's total manufacturing industry and the US 10-year interest rate has been completely decoupled since the outbreak of the pandemic, although it is now beginning to contract. That the interest rate will continue to rise slightly next year feels reasonable. That activity in the world's manufacturing industry is declining somewhat also feels reasonable, given that we come from very high levels. The correlation is likely to increase next year (and thus the imbalances will decrease).
Source: Kepler Cheuvreux
Raw materials, including oil, petrol and natural gas, have been the largest contributors to inflationary pressures. Inflation is expected to reach its maximum soon and then fall. At present, inflation is expected to peak in December with a 6 percent increase in the United States and 4 percent in Europe. We neither believe nor hope that the development for raw materials will continue on the same track as in 1971, see picture below.
Source: datascience.arborresearch.com
Europe is particularly vulnerable in terms of rising energy prices, as in a short time we have been made very dependent on the weather to produce enough energy. Sweden is perhaps the clearest example in Europe where we have for a long time had a well-thought-out, functioning and cost-effective electricity system that delivered safe electricity with small environmental consequences (hydropower and nuclear power). Politicians carry a very large responsibility for this disaster, and we now face great challenges to get the entire energy system into balance. It will most certainly take ten years. The gift and transfer union, EU, is busy printing checks to economically weak households so they can afford to pay for the heat to the home. It does not feel completely stable.
Below is a new proposal for this year's Christmas present:
Inflationary pressures have meant that the market's expectations of the US Federal Reserve's first rate hike is going to be much sooner, see below.
German producer prices rose by as much as 14.2 percent in September. The sharpest increase since October 1974!
Euro inflation usually correlates strongly with the German 10-year government bond. That’s no longer the case and may well be interpreted as the market is of the opinion that it is temporary, or that the central banks are destroying all price dynamics. "Cash is trash" applies. If capital is not put to work through various investments, values are quickly diminished.
Source: Bloomberg
Another indicator that clearly shows how production capacity lags demand and creates imbalances in the systems, the stock of cars in the American market has plummeted and is now at record low levels. These inventory levels will be rebuilt in the coming years to return to the levels five years ago.
Source: Bloomberg
Sharply rising corporate profits in combination with rising interest rates have made equities the clear winner over bonds. China is excluded, but it can probably be attributed to a state apparatus that has greatly affected the business community in the country.
Source: Kepler Cheuvreux
Asset inflation has exceeded wage inflation. It's not so strange considering that 20 percent of all US dollars available have been printed this year alone! The relationship between price and income has deteriorated drastically since 1995 in most OECD countries and particularly in Sweden. Note the difference between Sweden and Germany.
Speaking of asset inflation, the total market capitalization of the US stock exchange is now as large as the combined economy of the United States, Japan, Germany and the United Kingdom. When you take a step back and grasp the size of the numbers it is astounding!
Tesla and Elon Musk are doing well now. Hertz placed a modest order for 100k cars from Tesla last week. The share price responded immediately and rose by 10 percent, thus exceeding the market capitalization of USD1000 billion. We'll take that one more time. Hertz, which had a market capitalization of $12 billion, placed an order with Tesla of $4 billion which caused Tesla's market capitalization to rise by $100 billion. We’re getting a vague feeling of euphoria. Elon Musk is in clear lead on Bloomberg's Rich List with a total fortune of USD302 billion, which corresponds to half of all goods and services sold in Sweden in one year. The only European is LVMH's founder Bernhard Arnault in an honourable third place. Elon has quickly climbed up the list. Just 18 months ago, he was not there at all.
Source: Bloomberg
Clearly the listing of Tesla 2010 has been successful (463x).
Source: Compound@CharlieBilello
In this regard, we cannot help but to past in the below tweet.
In conclusion and in the most absurd event since MFF (Malmö Football Team) left the Allsvenskan (Fotball League) in 1999. When the Norwegian police held a press conference about the recent tragic archery killings in Kongsberg, SVT (Swedish State Television) turned down the volume so that we would not hear what horrors had happened. We are undoubtedly the most anxious people in the world, but should we not at least be able to listen to the Norwegian police?
Source: Steget Efter
Long positions
TruecallerIn our previous monthly newsletter, we told you that we were an anchor investor in the upcoming IPO of Truecaller. Based on a range of SEK44 to 56, the listing price was finally set at SEK52 which meant a market capitalization of approximately SEK19.4 billion. The first trading day occurred on October 8th and we must, honestly, say that we were surprised by the price action. Many shares are listed on a stock exchange at a discount against a realistically estimated valuation and we thought that SEK 52 was an attractive entry price. The discount often gives a nice price development during the first trading day. That was not the case this time and the stock closed unchanged on the first day of trading.
We were frustrated and surprised by the price development, but we were all the happier when the management announced a few days later that the third quarter report would be brought forward from November 12th to October 27th. We could not interpret this as anything other than very positive and within a few minutes of the announcement we increased our already large position and increased it to the largest holding in the portfolio. Clearly aggressive given it was a new company in the portfolio, but we had a strong conviction that the market had not understood the power of the company's earning capacity. Despite this very positive news the share continued to hover strictly around SEK52, which was difficult to understand. As an anchor investor we had done a lot of analytical work of the company. Our sister fund, European Opportunities, has also owned shares (unlisted) since last spring, so we were well-informed, already, at the beginning of the listing process.
The fact of the matter is that at least one million shares had been lent out and thus sooner or later had to be bought back into the market. Of the 72 million shares invested on the day of listing, we estimated that up to 45 million were in relatively firm hands. That left a real free float of a modest 27 million shares. Since less than one million shares were traded on some of the days, we realized that a good report could make it difficult for short sellers who would need to cover their positions. This was additional motivation for us to buy more shares after the listing, as we thought that a potential short squeeze could give an extra boost to the share price once the report was out.
Then came the report day on October 27th. The figures were exceptionally strong, beating the analyst estimates we received by 22 and 68 percent respectively on sales and operating profit (before depreciation) and they were also better than our own high expectations. We acted quickly to buy more shares at the opening when the share price was only up 6-7 percent. Then began a spectacular price movement because of a spectacular report. The share price picked up speed and by the end of the day the share had risen by as much as 34 percent. As if that were not enough, the increase continued the next day with as much as 23 percent and the market value had then increased from about 20 billion to about 32 billion in two days. On the third day, the share was consolidated at high levels with a decline of around 5 percent.
We sold some shares the second day after the report as we breached certain limits due to the extreme increase in the share price (it was our largest holding). We sold at high levels and that corresponded roughly to the number of shares we bought in the market after the IPO. That the market did not understand that bringing forward the reporting date was in practice a reverse profit warning is a mystery to us. That some players also went short at SEK52 is even more strange. For us, it strengthens our view that in-house analysis and hard work are the only ways to generate excess returns over time (if you ignore luck, but that is not a great strategy to rely on).
Comment: The Truecaller share was trading weakly up until the reporting day. After that it rose 56% in three days.
Source: Bloomberg
A central part of our investment thesis is that Truecaller has only scratched the surface when it comes to making money from a user base which now consists of just over 290 million people. The company has focused on building a good product and with a focus on acquiring users. From now on follows probably several years of low-hanging fruit where Truecaller can optimize its advertising business to drive sales. In addition, Truecaller is continuing its development of Truecaller for Business where the management sees a lot of potential.
The share rose by 59 percent from the listing price to the last trading day in October. Even with today's prices, we do not think that the valuation around 20x EBIT 2024e is particularly strained.
Lindab
We mentioned in last month's letter that the large number of inside purchases in Lindab prior to the report was going to bode well. This turned out to be true when Lindab (again) beat the analyst estimates by almost 15 percent - this on pre-expectations that we felt were high. We bow once again to the management of Lindab who has made an incredibly impressive quality improvement of the company. The share rose 26 percent in October and has risen by as much as 63 percent this year.
ArcticZymes
It is an advantage to have the ability to keep your cool when Norwegian ArcticZymes announces its quarterly reports. The enzyme company usually shows a large variation in sales and results between individual quarters. (We think that ArcticZymes should be assessed on a 12-month basis.) A large variation on a quarterly basis in combination with a typical volatile Norwegian stock market can cause strong price reactions. It was therefore a little extra gratifying that ArcticZymes this time was able to release good numbers and maintain its forecast for the full year. The share price rose 12 percent on the reporting day and 2 percent for the month.
Sedana Medical
One of the losers of the month was Sedana Medical. The price drop is due to the commercial manager (and former interim CEO), Jens Lindberg, accepting an offer as CEO of the healthcare company Medivir. Admittedly, it is sad that a commercial manager is leaving Sedana in the current launch phase, but as we understand it, there is no other underlying reason behind Lindberg's decision other than that he was interested in a CEO assignment. The share price reaction is, as we see it, a real overreaction and we have therefore increased our position by about 30 percent. The share price fell 16 percent in October. The company will present its interim report on the 4th of November.
Photocure, Victoria and ISS
A couple of our larger holdings, Photocure and Victoria, have had a relatively weak share price development in the last few months. In October, that trend reversed. Photocure rose 16 percent, while Victoria retaliated with a 14 percent increase. ISS is another one of our holdings that performed weakly over a period and did not follow Photocure and Victoria in October. Hopefully, this trend will reverse in November when ISS reports on developments in the third quarter. In connection with this, we believe that the company will update its forecast on profitability for the full year. We have increased our position in ISS over the past week.
Short positions
The short portfolio contributed with a negative result during the month. Our futures on the broad European index, STOXX600, had the largest negative contribution. Some stock-specific short positions that contributed positively to the result were the British Admiral Group, Dutch JDE Peet's and Germany’s Henkel.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 70 and 72 percent, respectively.
Summary
During the first weeks of October stock prices fell and volatility increased. On October 15th, the PBOC (People's Bank of China) broke the silence about the real estate company Evergrande with the message that the financial risks are "controllable" and are unlikely to have any spill over effects. It was appreciated by the world's investors and a significant element of short covering contributed to the rise in equities (buy to close short positions). When the quarterly reports began to roll in, it provided additional fuel for the market to recover. The broad European index rose by 5.5 percent since the low level at the beginning of the month and the volatility index fell by about 35 percent.
Companies that did not deliver, on the other hand, were severely punished and price movements for various shares were sometimes very high, see picture below.
The picture below shows how risk appetite in the market has moved over the past 30 years. Falling ISM figures caused the risk appetite to fall after the summer, and then to rebound upwards in mid-October.
Source: Goldman Sachs
The central banks continue to light the inflation fire. A clear barometer is the price development for various commodities which has been very strong this year and which, together with cryptocurrencies, are the big winners so far. Below is the price development of raw materials compared with the stock market.
If you zoom out, the image becomes different. The peak in 2008 coincided with maximum growth in China. If you did not own a steel company during that period, you had problems with the portfolio.
The cryptocurrency victory marches continue as central banks reduce the value of money. Below is Bitcoin's price development over the last two years. On October 19, the Bitcoin ETF began trading on the New York Stock Exchange and experienced so much demand that it became the fastest ETF in history to reach $1 billion in assets under management. Our unlisted holding in Bullish in which we invested in almost a year ago has likely developed well and will continue to do so.
Source: Bloomberg
Interesting and clear pattern below. The correlation between Bitcoin and commodity prices. In general, rule number one for the next ten years is to own fixed assets. Rule number two and from a stock market perspective, allocate capital to companies that have pricing power and that are not pressured by rising costs. The companies that do not have that opportunity are structural and long-term losers which will be revalued at low multiples as a result.
The valuation of the world's most important stock market, the US, has declined during the year for the five major technology giants. The other 495 companies have seen a slightly rising valuation.
The difference in valuation between the technology companies and other companies is easy to explain when studying profit growth for the past ten years. Interesting that the profits went hand in hand for the previous 25 years.
European values continue to be at significantly lower levels than American values. The fact that it has disintegrated in recent years is simply due to the unprecedented success of the major American technology giants both operationally and in the stock market.
European companies are becoming increasingly global, which is clearly positive for the companies' earnings and their valuation.
It has been around for a long time now, the US stock market's excess return compared to Europe's, Australia’s, and Asia's. There are several arguments as to why Europe could now break the trend:
- Low relative valuation
- Less exposure to low growth and more to global growth
- Europe has (after all) emerged from the pandemic better than many regions
- Diversification compared to the US with a high concentration of growth companies whose valuation is more affected by rising interest rates
- Mergers and acquisitions are heading for a record year in Europe
We are now rolling into the end of 2021, which as usual has been a very eventful year. We are certainly not in nirvana like at the beginning of the year when there were no clouds in the sky, but it still looks good (we think). After the reports, the share repurchases have begun to take place and will certainly have a positive effect on the share price in both the short and long term. Megatech companies Apple, Microsoft, Google and Facebook bought back shares for $55 billion in the third quarter and have a mandate to buy for another $250 billion (a lot of money). The four companies alone account for 18 percent of the S&P500 and 32 percent of the Nasdaq.
The inflows to the world's equity funds break all records and are off the charts. What to do when the central banks reduce the value of money, and you get around zero percent return on a bond when inflation is currently 4-5 percent?
And the last picture for this time. With all the above said, we are now entering a period of historically strong returns and we believe that the same will happen this year as well. Profits continue to rise, repurchases start up after the reports, the options are few and who wants to buy bonds if interest rates rise, and you know you must pay to own them? Possibly we have a few weeks of minor turbulence, but then the path will continue again on its clear upward direction.
We round off with the following definition of a Bull Market:
Thank you for your trust and we are now changing gears for the final stretch!
Mikael & Team
Malmö November 3rd.
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Coeli Nordic Corporate Bond Fund
| Performance in Share Class Currency | 1 Mth | YTD | 3 yrs | Since incep |
| Coeli Nordic Corporate Bond Fund - R SEK | 1.30% | -0.93% | 3.38% | 14.52% |
| | | | |
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[cg_linear_graph id="31122"]
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Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund
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Alexander Wahlman
Senior Analyst
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Top Holdings (%)
| LANSBK 1.25% 18-17.09.25 | 4.1% |
| NORDEA HYP 1.0% 19-17.09.25 | 4.1% |
| SWEDBK 1.0% 19-18.06.25 | 4.1% |
| WHITE MOUNT FRN 17-22.09.47 | 3.9% |
| B2 HOLDING FRN 19-28.05.24 | 2.9% |
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Note that the information below describes the share class (I SEK), which is a share class reserved for institutional investors. Investments in other share classes generally have other conditions regarding, among other things, fees, which affects the share class' return. The information below regarding returns therefore differs from the returns in other share classes.
Return to Fund page
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Utveckling september
Fondens värde sjönk -5,1 procent i september (andelsklass I SEK). Stoxx600 (brett Europaindex) sjönk under samma period med -3,4 procent och HedgeNordics NHX Equities var preliminärt oförändrat. Motsvarande siffror för 2021 är en ökning om +21,6 procent för fonden, +14,0 procent för Stoxx600 och +6,4 procent för NHX Equities.
Equity markets / Macro environment
After seven consecutive months of positive performance the world’s stock markets were poised for some degree of turbulence. Volatility was especially high in some equities and on Monday, September 20, the highest nominal volume ever traded was reached in options on the S&P500 (!) The broad European index fell by 3.4 percent in September compared to the S&P500 which fell by 4.8 percent. The fund also had its first negative performance since October last year with a decline of 5,1 percent. More about that later.
Despite high levels for many stock indices, sentiment among investors has been relatively gloomy. Bank of America's monthly survey recently showed that only 13 percent of managers expect a positive market in the future, which is the lowest figure since April 2020 (and that was clearly wrong). The reasons cited are China's growth problems, the crisis-stricken Chinese real estate giant Evergrande, the development of the delta variant, declining profit growth and, of course, rising inflation. However, they are still overweight equities which is perhaps not so strange when you have to pay to lend your capital to countries. As interest rates rose at the end of the month, the German 10-year interest rate followed with a giant step from - 0.25 percent to - 0.17 percent… The picture below is an overall risk indicator, and we are around zero (neutral).
The news flow in September began with record high inflation figures in Europe at +3.0 which exceeded market expectations. The corresponding figure in July was + 2.2 percent. It was the fastest growth rate since November 2011 and several countries recorded up to five percent in inflation rate. The pressure on the ECB to reduce its support measures is increasing. On Friday, October 1, new inflation figures came in for September, which showed a further acceleration in the inflation rate by +3.4 per cent.
The rate of change can be mostly attributed to rising energy prices that are starting to create real problems in the world's economies as well as agricultural shifts. The picture below shows that food prices are at record high levels over the past 60 years. The biggest losers are the poorest part of the population.
In the slightly longer term it is forecasted that it is not excessive demand that will drive inflation, but rather a limited supply, and then both in terms of products and labour. At the end of September, long queues were reported at petrol stations across the UK when fuel ran out and there were not enough truck drivers to refuel. Prime Minister Boris Johnson urges his citizens to refuel sensibly and at a normal rate. You wanted Brexit, so there you go. In sheer desperation, Johnson has now issued 5,000 temporary short-term visas for temporary drivers. Good luck.
M25 spring 2022?
Below are European gas prices which have risen in a seemingly uncontrolled fashion and recorded the highest September prices ever. A silent prayer for the mild winter. We guess that this development will soon be a major topic in the media, and it will undoubtedly create various problems and somewhat reduce next year's expected growth. It feels reassuring that Per Bolund (Swedish Green Party MP) claims that there is no electricity shortage in Sweden because then the costs for ordinary people would be unbearably high during the winter (which of course they will be). Rising gas and electricity prices have led European politicians to start discussing billion-dollar subsidies (in euros) to households and manufacturers who will experience sharply rising electricity bills over the winter.
Source: Bloomberg
Henrik Svensson, site manager at the oil-fired power plant in Karlshamn (south Sweden), does not agree with Per Bolund that we have a surplus of electricity in the country. For large parts of September, the power plant ran at full capacity and burned 240k liters of oil per hour. Henrik Svensson believes that it is electricity shortages and high electricity prices that are behind the high production. He also says that there is a lack of planned power production in southern Sweden and that it will take many years before the electricity grid is strengthened and new electricity production is in place. Sweden today burns more oil than we have done in 10 years. A gigantic energy policy and climate policy failure signed by the Green Party.
Source: Steget efter
Winning candidate for this year's Christmas presents below.
The change in the US 10-year interest rate created considerable pressure on, primarily, growth stocks at the end of the month. The performance dispersion for different sectors was very large in September with oil shares as a clear winner. This was also felt in the last days of September.
Source: Bloomberg
Below is the development for the US 10-year interest rate. The turbulence in the stock market was caused by the change in interest rate level breaking through on the upside, as can be seen in the chart.
There have been countless attempts to explain the turbulence in recent weeks. The recent and significant amount of options being exercised, Evergrande, interventions by the Chinese government, Fed tapering, Bank of England expected to raise interest rates, delta variant, inflation, bottlenecks in production, difficulties in finding staff, rising energy prices and declining growth rates. We think it is enough to look at the picture below. Rising interest rates hit hard at growth companies' valuations.
Goodbye Mutti and thank you for an extraordinary effort for Europe!
Source: Nyhetsbyrån TT
She was politically in a class of her own during the euro crisis ten years ago and Sweden also has her to thank for a lot. Despite a somewhat weaker performance in recent years, German citizens have experienced significantly better economic development than many others.
On September 29, the covid-19 restrictions in Sweden were finally removed and we can now, in principle, start living a normal life again. The number of bookings for winter holidays skyrocketed to the great joy of the tourist and transport industry. In recent months, tourism activity in the Mediterranean has been "extraordinary" and much better than forecasted before the summer. Luxury travel is also reaching new heights. Private jet passengers to Mallorca increased by +70 percent in July compared to July 2019 with an average of 83 private jets per day landing in Palma. If you want to rent a yacht, you are being referred to next year as basically everything has already been fully booked.
We now belong to a minority group. Passively managed capital exceeds actively managed capital for the first time ever. This will give us more opportunities as mispricing increases.
In addition to being one of the world's best stock markets this year, Sweden also has the most listed companies in the entire EU. Bloomberg drew attention to the fact that there are now around 1,000 listed companies on the various trading platforms in Stockholm. More than 80 percent are smaller companies, and the list is filled with new listings every day until Christmas! For us, it is interesting as we are constantly looking for new potential core holdings. In recent weeks, we have identified one which we write about under Long Positions.
We end this section with a picture that well reflects today's political level.
Source: Kluddniklas
Long positions
Truecaller
During September, we did a lot of work on the Swedish company Truecaller which will go public on October 8th. Truecaller is one of the most interesting companies we’ve seen in recent years. Truecaller has developed a phone application that can, among other things, identify unwanted calls from, for example, telemarketers. The app is one of the top ten most downloaded applications globally, and in some of the main markets such as India, Nigeria and Indonesia, it is one of the three most downloaded apps. As a Swedish company with headquarters in Stockholm, the firm has chosen to list on the Swedish stock exchange, which we are very happy about.
Truecaller was founded in 2009 by Alan Mamedi and Nami Zarringhalam. They met at the Royal Technical University in Stockholm, and they continue to be active in the company as the CEO and Chief Strategic Officer (CSO), respectively. When they released the first version of the app, they received 10,000 downloads within one week. By 2013 they had reached over 10 million users globally and in Q2 2021 they had reached 278 million monthly users. Throughout their journey, Truecaller has attracted several well-known investors such as Sequoia Capital (early investors in Apple, Whatsapp, and Zoom among others), Atomica (Skype-founder Niklas Zennström’s investment company), and Kleiner Perkins (early investors in Google, Amazon, and Spotify among others).
Until recently, revenue streams have mainly consisted of income from in-app advertising. In addition to this, there is a premium version where paying users can get additional functionalities. That business accounted for around 20 percent of revenues in 2020. During the fall of 2020, Truecaller launched a corresponding offering that targets corporates. This part of the business allows B2B customers to be listed as verified callers when they call private people. It can for example be a security company that calls about an alarm or a courier company that needs to get in contact with a receiving customer. It is a common problem that these types of companies get rejected when the call-receiver doesn’t recognize the number.
Truecaller declares that their product benefits from network effects. i.e., the product gets better the more people who use it (think Facebook). This can be relatively easy to appreciate since phone number identification inherently evolves from reporting of unwanted calls by the users, i.e., when enough people have reported an unwanted call Truecaller flags for this in the app). Over time, Truecaller has built a database containing 5.7 billion unique phone-identities. Network effects doesn’t just build a better product over time, they also increase the entry-barriers for potential competition.
The majority of Truecaller’s income comes from developing countries. The company explains that the problems related to spam emails, harassment, unwanted calls, and messages are more common there than in the western world. India is Truecaller’s largest market where these types of problems are significant. One positive aspect of the geographical exposure is that it allows for a nice structural tailwind: the population growth in developed markets is much higher than in the west (driven by an increasing average age) and the smartphone penetration is growing fast.
Historically, 97 percent of all app downloads have been organic. However, management has begun to experiment with user acquisitions by the way of advertisements through, for example, Facebook. The returns on user acquisition looks extremely attractive. In some markets, such as India, Truecaller could achieve a return on investment of up to 20x on every spent dollar. In more mature markets, such as the USA, the same multiple amounts to 4x, still very attractive. Indonesia, which is a relatively new market to the company, has a multiple of 0.8x. This means any user acquisition spend in Indonesia is unprofitable at this point. However, management is confident that the return profile will wander above the 1x as more users join and the network effects take place. In summary, the investment opportunities are plentiful and attractive – and unique.
In summary, several things speak for significant growth in the future. The investment in paid user acquisition, a sharpened premium-offer, the newly launched B2B product and continued growth of the advertising business. In addition to this, acquisitions may likely follow.
Growth has been prioritized over profitability and it is only recently that the company began to report profits. In 2019 sales grew by 57 percent. In 2020 the corresponding figure was 64 percent, and during the first half of 2021 the company’s sales grew with as much as 151 percent in comparison to the same period last year (which was partly affected by the pandemic). During the first half of this year, the company’s operating margin was 32 percent. As you can imagine, Truecaller is very capital-efficient. Working capital is very low which gives a nice cash conversion and a very high return on capital employed – all attributes that are required to create a very successful and valuable company over time.
Truecaller targets a revenue growth of at least 45 percent between 2021-2024e. After 2024 the EBITDA-margin should be at least 35 percent. The sum of the year-on-year growth and the EBITDA-margin should amount to at least 70 percent (a variant of the rule of 40 that tries to balance growth and profitability). We don’t think it will be difficult to reach these targets and the analyst estimates we have looked at are cautious, especially regarding profitability. In our preliminary prognosis for 2023, our EBITDA-estimate is around 16 percent ahead of the analyst estimates that we’ve studied. This is based on that Truecaller can continue to grow sales much faster than hiring new people while the gross margin improves slightly in coming years.
The gross margin is an interesting aspect of the equity story. Truecaller’s gross margin amounts to approximately 70 percent. Most of the cost of sales consists of platform fees to Apple and Google. Since Apple and Google practically control the distribution channels for apps together, a duopoly has occurred and prices for app-developers such as Truecaller have remained high around 25-30 percent of sales. This situation is now heavily criticized from all parts of the world since the situation is not considered competitive, for example
look at this analysis about an American court ruling concerning a twist between Epic Games and Apple. We believe Google and Apple’s fees will decrease over time – which would be a positive event for Truecaller. Furthermore, Truecaller’s new business deal bypasses Goggle and Apple, which gives a gross margin of close to 100 percent. This will strengthen the profitability even more.
There are of course risks associated with the dependence on Google/Apple (which is the case for every company in the application business); the geographical exposure and one should never write off the threat of competition even if it seems far away at this stage. However, we do believe the benefits outweighs the negatives. Truecaller has excellent financial characteristics, operational founders with large shareholdings who will remain active in the business and some of the world’s most well-known investors behind it. We therefore look forward to being included as an anchor investor ahead of the stock exchange listing on October 8th. We are even more excited to follow the company’s successes in current and new markets in the coming years.
CVS Group
One of the happiest days of the month was when our veterinarian company CVS Group released their interim numbers. Once again, the company beat analysts’ expectations which have been raised several times over the course of the year. In the first two months of the new financial year (which begins in July), the company has grown by 17 percent. This can be compared with the growth expectations for the full year which, before the report release, were 7 percent. Once again, analysts have thus far been “forced” to upgrade their assumptions. In a sour September stock market, the share fell 3 percent.
It becomes clear that the positive effect of the pandemic on pet ownership is more tenacious than ever. Pets live for many years, and we believe many underestimated the importance of the large number of new customers during the pandemic. Below is a graph of Google searches for veterinarians in the UK as well as data from the Swedish Board of Agriculture regarding the number of newly registered dogs. We speculate that the UK has similar trends as Sweden. The data points are also positive for our other pet company Swedencare. Pet companies are obviously still hot; right now there’s a bidding war going on over the German pet company Zooplus, where EQT is currently in the lead with the highest bid. We also note that there have been several venture capital-led acquisitions of veterinary companies at higher multiples than CVS is valued at.
Source: Jordbruksverket, Coeli
Source: Google Trends, Coeli
Lindab
Since our first investments in Lindab in the autumn of 2019, the thesis has always been that the building systems business segment did not fit into the business and in September, management finally found a buyer for the company. The transaction entails a write-down of goodwill corresponding to SEK 430 million, but it is cash flow neutral. Lindab took the opportunity to update its financial targets; the company now wants to grow by 10 percent per year (of which approximately two thirds are through acquisitions) and reach an operating margin of at least 10 percent (previously 10 percent over a business cycle). The share responded positively to the message.
We noted broad insider purchases in Lindab during the month, also from CEO Ola Ringdahl himself, which we think bodes well for the report in October. Despite this the share price decreased 8 percent in September.
Victoria
We have written several times about the British flooring company Victoria, which in September had a weak share price development of 17 percent. By all accounts, the company is doing well – during the month it was reported that sales rose 70 percent compared to 2020, and 50 percent compared to 2019. If you only partially extrapolate these figures for the rest of the year, it is obvious that analysts’ expectations are too low. We believe that this month’s decline is related to flows: growth companies and small and mid-cap companies were some of the most affected sectors in September – Victoria was hit from both sides. We have increased our position in recent days.
The Pebble Group
One of the month’s (few) joys was Pebble Group. As we previously wrote, the company is active in the market for gift advertising, i.e. gifts that companies give to customers, employees, and other stakeholders for marketing purposes. In September the company came out with its half-year figures that were better than expected. Pebble’s software division, Facilisgroup, is growing better than our expectations. This is also the part we believe the market is valuing too low. The stock rose 10 percent in September.
Knaus Tabbert
During the last trading day in September, our German motorhome manufacturer Knaus Tabbert announced that the forecasts for 2021 must be lowered due to component shortages. We are not particularly surprised that this has happened given what we have seen from other vehicle manufacturers. If the company can remedy these supplier problems, management believes that 2022 will be unaffected at best, as Knaus still has a bursting order book, increased production capacity and more suppliers from January next year. The share fell 7 percent in September.
Short positions
The short portfolio contributed with a negative result during the month. Our short-term negative positions in the German DAX had the largest negative contribution. Some stock specific short positions that contributed positively to the result were Swedish Dometic, German Henkel and Norwegian NEL.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 76 and 74 percent, respectively.
Summary
September's negative return of x percent also meant the end of the fund's, so far, longest period of positive return (10 months). We are obviously disappointed with that, but we have been in the game long enough to understand that equities sometimes must fall to be able to refuel and continue their upward trajectory. In general, September was the weakest month for many equities since the crisis started 1.5 years ago. September, otherwise, started strong for us and was a continuation of an unusually good performance at the end of August. Our companies presented many good news (except for Knaus Tabbert on the last day of the month) but small-caps and especially those categorized as growth shares, had a very weak performance during September. The main reason for this was, as previously mentioned, the change in the US long-term interest rate and general "risk off".
The picture below shows the development since March last year compared with the corresponding time intervals in the financial crisis in 2009 and onwards. Both periods have shown an unusually strong recovery and the current trend is even stronger than when the financial crisis raged 12 years ago.
Source: Goldman Sachs
Since the crisis started 1.5 years ago, we have had three different phases. The first and shortest, "despair", showed a decline in prices of 33 percent. The second phase, "hope", ended at the beginning of this year and showed a very strong return of 79 percent despite declining earnings. The last, “growth”, where we are now, has shown +11 percent in share prices with sharply rising growth for companies' earnings, but at lower valuations.
Source: Goldman Sachs
The recovery for American companies (below) has been extremely strong and compared to 2019, the 2021 profits will be approximately 36 percent higher. Very impressive.
Source: Goldman Sachs
It is very gratifying that Europe, for once, is keeping up with the United States and showing strong profit growth. Compare this with the non-existent profit growth between 2007–2019 (!)
Despite rising equity prices, valuations have fallen and Europe is now trading around 16x the profit 12 months ahead. It's not very strenuous (we think). For an average commercial property, you can get a return of maybe 3 percent before net financial costs. After financing, this corresponds to at least P/E 50x. And paying to lend to different countries does not feel like an exciting alternative either.
Source: Goldman Sachs
The valuation of global shares in relation to global GDP looks more strained. A major reason for this is the central banks' aggressive policy.
The valuation of the major leading technology companies is at an average level seen from the last five years.
Source: Goldman Sachs
The image below is striking. It shows that Swedish property prices, which have risen by almost 200 percent over the past 15 years, have had the same development as the money supply. In theory, price per m2 and krona is unchanged for the past 15 years. Is there anyone who still doubts that the world's central banks are responsible for the largest wealth creation in human history? It is important to be on the wagon because when it is gone you’ve missed it. And what central banks cannot push, the price of bitcoin for example, rises even more as central banks cannot make more of it. The opportunities for central banks to reverse the band are few. In the long run, this means that the next 10 years will, overall, be a good period for, for example, stock picking. All forms of uniqueness (growth) will be highly valued to compensate for the fact that the value of money decreases at a rapid pace.
If there is anyone who is still not convinced, take a look at the picture below. The market capitalization of the S&P500 divided by the Fed's balance sheet….
Source: Bloomberg
Onwards and upwards. The wealth of American households is accelerating away from the change in GDP.
Thank you Fed and all the world central banks!
Citigroup's surprise index has weighed down and analysts' profit estimates are also starting to soften. Not a good combination and it has undoubtedly contributed to the weak development in the stock markets recently.
It took a full 219 days for the S&P500 to have a decline of 5 percent. We will see how high the next bar will be.
Timing is everything. A fascinating graph that shows the importance of having reasonable timing in decisions.
Source: Goldman Sachs
Despite a difficult month behind us, it feels reasonable to expect a stronger market during the last quarter of the year. Our view is that we are still in a rising market, although we are likely to experience some turbulence for a few more weeks. "Bear markets" are constantly declining with sharp rallies while "bull markets" continue to rise with some strong drawdowns. We therefore believe that we are still in a rising market.
Some statistics to cheer you up. The S&P500 managed to rise by 0.2 percent in the third quarter (Europe -1.9 percent) which means six consecutive positive quarters. This has only happened eight times before and only on one of the (eight) occasions has the following quarter yielded a negative return. Two quarters later, it has in all cases yielded a positive return. In addition, for the past 20 years, October has been the fourth best month, thus much better than its reputation. Having pointed that out, October takes first place in terms of most frequent daily movements that exceed one percent.
The Stockholm Stock Exchange, which is an excellent reference point, had risen by 30 percent at its highest about a month ago, but is currently at 20 percent. Even more important is that measured in USD, OMX has "only" risen by 13 percent, which is in line with the US stock markets. This is hardly excessive given the profit growth among the companies. The risk premium in the market is high.
Investors are reasonably careless, and we are approaching the turn of the year. Global growth is well above average and interest rates are extremely low. Given how cruel the market has been to many investors this year, with sector rotations and a high concentration of companies driving performance, it almost feels obvious that the broad mass of investors will continue to reduce risk in their portfolios and then be short equities at year-end when the market rises. We'll see, but that's our main scenario right now.
We are now closing the books for the third quarter, and we look forward to the end of the year and above all the entrance for Truecaller on the Stockholm Stock Exchange on October 8!
Thank you for this month and we'll hear from you later.
Mikael & Team
Malmö on 5 October
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Coeli Nordic Corporate Bond Fund
| Performance in Share Class Currency | 1 Mth | YTD | 3 yrs | Since incep |
| Coeli Nordic Corporate Bond Fund - R SEK | 1.30% | -0.93% | 3.38% | 14.52% |
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Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund
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Alexander Wahlman
Senior Analyst
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Fund Overview
| Inception Date | 2017-12-20 |
| Investment management fee (share class I SEK) | 1.00% p.a + 20% Performance fee (OMRX T-Bill Index) |
| Performance Fee. Yes | 20% |
| Risk category | 5 of 7 |
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Top Holdings (%)
| LANSBK 1.25% 18-17.09.25 | 4.1% |
| NORDEA HYP 1.0% 19-17.09.25 | 4.1% |
| SWEDBK 1.0% 19-18.06.25 | 4.1% |
| WHITE MOUNT FRN 17-22.09.47 | 3.9% |
| B2 HOLDING FRN 19-28.05.24 | 2.9% |
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IMPORTANT INFORMATION. This is a marketing communication.
Before making any final investment decisions, please refer to the prospectus of Coeli SICAV II, its Annual Report, and the KIID of the relevant Sub-Fund. Relevant information documents are available in English at coeli.com. A summary of investor rights will be available at https://coeli.com/regulatory-information-coeli-asset-management-ab/.
Past performance is not a guarantee of future returns. The price of the investment may go up or down and an investor may not get back the amount originally invested.
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