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Note that the information below describes the share class (I SEK), which is a share class reserved for institutional investors. Investments in other share classes generally have other conditions regarding, among other things, fees, which affects the share class' return. The information below regarding returns therefore differs from the returns in other share classes.
Before making any final investment decisions, please read the prospectus, its Annual Report, and the KID of the relevant Sub-Fund here
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This material is marketing communication
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Monthly Newsletter Coeli European – August 2023
AUGUST PERFORMANCE
The fund's value decreased by 4.4% in August (share class I SEK). The Stoxx600 (broad European index) decreased during the same period by 2.8% and HedgeNordic's NHX Equities decreased provisionally by 0.3%. For 2023, the fund has decreased by 5.8%. Adjusted for the spin-off of Rejuveron, the fund's value has increased by 2%. The Stoxx600 and NHX Equities have risen by 7.8% and 2.9% respectively during the year.
EQUITY MARKETS / MACRO ENVIRONMENT
At the start of August, the rating agency, Fitch, downgraded the US credit rating causing turbulence in the financial markets. After three days, the broad European index had fallen by three percent, and it looked similar in most geographic markets. In contrast to July, there was no quick recovery, but the downward pressure continued with, in many cases, high volatility, something we also had a taste of and which we will return to.
By the end of the month, the broad European index had fallen 2.8%, compared with the S&P 500, which was down 1.6% (measured in local currencies). Small and mid-caps were under significant pressure and had fallen at most by a whopping 7.5%. The month's return for Carnegie's small company index ended at -4.4%.
After a flawless and strong reporting period for the fund in July, we now experienced what small deviations in relation to expectations can cost in the short term. Of our six reporting companies in August (Rugvista, Surgical Science, ISS Storskogen, Carel and Pets at Home), only Rugvista gave a positive return of 12% on the month (+35% year-to-date). Surgical Science, ISS and Storskogen were under significant pressure, and we elaborate on that in the portfolio company section of this letter. The fund's return ended despite significant negative returns from the above-mentioned companies at -4.4%, including the weakening of the Swedish krona in August (-3%!) which had a negative impact of approximately -1%.
The central banks’ continued hawkish communication contributed to driving up interest rates during the month. The image below shows the Swedish 10-year government debt interest rate, which rose from around 2.5% to a maximum of 2.85% during the month. A strong movement which in turn put pressure on share prices. The corresponding German interest rate level started the month at the same level as the Swedish one but ended the month at around 2.45%. Sweden is facing headwinds from many directions, and we will come back to that.
Source: Bloomberg
The diagram below shows the fixed income market expectations of how high the Fed will raise interest rates and when the interest rate cuts will begin. The blue curve shows how the expectations looked at the end of May and the orange shows how it looks today. A difference of almost one percentage point, which is huge in this context. Underlying this means that corporate profits and private consumption have been stronger than expected, but unfortunately it looks like it will be at the cost of higher interest rates and for a longer period. It does not favor risk appetite in the stock market, but on the other hand is largely discounted already. The development is completely in line with what the American central bank wants and desires.
Source: Kepler Cheuvreux
The stronger profit development has resulted in the following development in profit per share for the USA, Europe and Sweden. All geographies have higher expected profit levels compared to last spring.
Source: Kepler Cheuvreux
The annual central bank conference in Jackson Hole on August 24-26th had kept the financial world on edge for several weeks. It was surprisingly undramatic, and Fed chief Jerome Powell's message is that they are now more data-driven, in other words, they wait and monitor effects, unlike in the past where they raised the interest rate without blinking an eye. It feels highly reasonable after raising interest rates 525 basis points since March 2022.
Public confidence in central banks probably did not increase dramatically after Powell described the situation as: "We are navigating by the stars under cloudy skies". It was topped by ECB chief, Lagarde, who quoted a philosopher: "Life can only be understood backwards, but it must be lived forever". It has similarities to the oracle in Delphi 700 BC, who gave answers that no one understood. One difference was that she inhaled toxic volcanic fumes and thus achieved a slightly delirious state, the oracle that is.
It reinforces our view that the ratio of central banks' power to competence is skewed, harms and continues to disadvantage the wider economy. The effects of interest rate increases tend to take 9-12 months before you can see the effects in the real economy. If the same is true this time, then we have seen half of the effects of implemented interest rate increases. The ECB should also wait, but they will most likely raise the interest rate at least once more in September.
Below is the development of Eurozone inflation. Core inflation is falling slowly, and we hope and believe the pace will accelerate during the autumn.
Source: Bloomberg, Holger Zschaepitz
A rebound was on the cards at the end of the month and weak US labor market data fueled it further (reducing the risk of more interest rate cuts) and we experienced, in many places, the best stock market day since the beginning of June. Right now, bad news is good news for the stock market, but ideally not too bad.
Source: Bloomberg, Holger Zschaepitz
After a strong period of US macro data, the past month has started to show some signs of weakness. Below is the Citigroup Financial Surprise Index.
Source: Bloomberg
Germany, Europe's economic engine, is struggling with a China that is slipping precariously and with continued high inflation.
Source: The Economist
The picture below shows French, German and Italian industrial production which at best is at the same level as in 2007! Germany's flagship industries of car manufacturing and mechanical workshops are stagnating. We had Renault (founded in 1898) visiting the office a few days ago and the mood became somewhat strained when we noted that Renault's market value is a little over one percent of Tesla's. The flipside of the coin is that it is easy to find undervalued companies in Europe. In Renault's case, you get paid to own their profitable core business when you take out the financial business and their 43% stake in Nissan.
Source: Bloomberg
Despite these problems, European economic growth has turned slightly upwards in recent months driven by increased exports, increased investment and increased private consumption. Good!
American consumption is above the long-term trend line. A huge difference compared to here in Sweden.
However, there are several indications that the worst is behind us in Sweden and that real wages and consumption will soon start to rise. Here we go towards brighter times!
The image below shows Sweden's development this year compared to the Eurozone. Sweden has the same weak development in terms of industrial production, significantly lower investments, significantly weaker consumption, significantly higher inflation, and significantly weaker GDP development. Anyone still wondering why the Swedish krona is so weak when foreigners see the same picture, get tired and sell their Swedish assets? We ignore that we have now reached 100 bombings this year, as well as putting most of our political energy into curbing Koran burnings and flirting with Turkey and Hungary to join NATO. However, a certain conclusion of the image below is that Sweden fared significantly better than the eurozone during the Covid crisis. Sweden is also superior to the eurozone in terms of the state of government finances, but this is less important in a flow-driven currency trade.
In last month's newsletter, we told you about Trelleborg, which was asked by the Riksbank (Swedish Central Bank) to stagger its exchange activity over two weeks after a large corporate transaction, in order not to move the prices too much. As of the last July, foreigners had sold Swedish shares for approximately 400 billion, which is just under 3 billion per day. If this is true, which we have reason to believe, one might ask why we have a currency that cannot handle normal flows? To quote Annika Winsth, chief economist at Nordea: "The weak krona is not just a problem for the Riksbank, import companies and travelers abroad, but is also starting to become a societal risk."
Source: Coeli European, Consensus Economics
There is always someone who is worse off! The Russian ruble has lost about 50% of its value in one year, which is very gratifying. The screws are being tightened and the pressure on Putin increases every week. He also needs to get himself a new chef. As expected, Wagner boss Prigozhin had a tragic accident that is likely to spark a new high level of turbulence and internal conflicts within Russian domestic politics. Given Russia's dependence on the Wagner group in Ukraine and Africa, there may well be further setbacks for Putin and his yes-sayers. Setbacks they didn't foresee before the anticipated accident.
Albanian President Edi Rama jokes about the accident:
https://twitter.com/RasimReiz/status/1697564273071792428
Steno Research has produced the image below, which is a convergence between the Spanish real estate bubble that burst in 2008 and the current Chinese real estate market, which is struggling to say the least. We'll see if there are similarities going forward, but China is facing its biggest economic challenges ever.
As long as we don't end up here again. During August, the Vietnamese EV producer Vinfast (electric cars) was listed on the Nasdaq stock exchange via a SPAC. In 2022, it produced 7400 cars, and the market capitalization reached 190 billion dollars, making the founder, Pham Nhat Vouon, the second richest person in the world. He owns 99.69% of the company, so not the most liquid stock.
Source: Bloomberg
The oxygen must have run out in the meeting room when the Nobel Committee, after a "long principled discussion", invited the ambassadors of Russia, Belarus and Iran to this year's Nobel dinner. Sweden's leading brand is being dragged in the dirt by a bunch of extremely tone-deaf individuals with unimaginably bad judgment. Half an hour after the King said on Saturday morning that he was doubtful whether the royal couple would come, the Nobel Committee changed its mind. Well done, King!
Source: Steget Efter
Source: Business Ukraine mag, XPortfolio Companies
Surgical Science
After two consecutive successful reports, Surgical Sciences' Q2 report came in August. Sales were about five percent worse than expected, while operating profit was slightly better than expected. Even though sales were lower than the market expected, the mix was good: The highly profitable license revenues grew by a whopping 67% in the quarter. The fact that license revenues make up an increasingly large share of total sales is the most important thing for our investment thesis.
The cash flow was extremely strong and the company's net cash ended up at SEK 574 million, which corresponds to around 7% of the current market value.
Despite an apparently well received report, the share price fell a full 21% on the day of the report. Overall, we think it can be attributed to the CEO’s word. As part of a market analysis in the CEO's speech, it was mentioned that increased competition is expected in the future, and thus lower market shares as a result. This is nothing new to us – it would be strange if a business with Surgical Science's profitability and growth prospects was never exposed to competition. At the same time, we believe that the barriers to entry are high: the company's technology edge ought to be significant after many years of a one-sided focus on surgical simulation. In addition, the total market is not very large, which should reduce the appetite for larger players to start competing.
When we were in contact with the company, it was confirmed that there is no new player on the market that has changed the competitive landscape. Even when the company set its financial goals, i.e., to reach sales of 1.5 billion Swedish kronor with a margin of 40% in 2026, it took into account that it could possibly lose market share (from their dominant position today). The company also believes that the technological advance has never been greater.
Our conclusion is that if the price fell mostly on the company's competitive comments, it is due to unfortunate wording on the company's part (and possibly a misinterpretation on the part of the stock market).
By and large, our own estimates are unchanged after the report release. For the company to reach its sales target, we expect that from 2023 it will need to achieve around 17% annual growth per year at group level and we think it looks increasingly likely that the company will succeed in this. We feel more secure in the financial ambition today than 6 months ago. At the same time, the share price is unchanged since the beginning of the year, and we have therefore taken advantage of the situation and bought more shares at attractive levels.
ISS
The ISS mid-year report contained a lot for the market to digest, with both positives and negatives. The company's outlook for organic growth was raised, while guidance for profitability and free cash flow were unchanged. At the same time, the company chose to take a larger write-down in France, which has been an underperforming segment where management has not succeeded in turning the business around as hoped. The idea is now to sell the French business, which we believe is good in the long term. The stock fell 11% in August and is now valued lower than in many years with single-digit earnings multiples. This even though the company has done most things right in recent years.
Storskogen
We see our opportunistic (smaller) position in Storskogen as our clear mistake this reporting period. The company's cash flow remained strong, and, despite bad economic times, profitability was relatively good. On the other hand, organic growth for sales and operating profit was worse than expected. The stock fell sharply on the day of the report, a whopping 27%. We thought this was excessive (the negative estimate revisions were around 5–10%) but note that companies with the slightest underperformance this reporting period were heavily penalized.
Bonesupport
Bonesupport was one of the positions that cost the most in negative returns for the fund in August. It is one of the Stockholm Stock Exchange's best stocks this year, so a combination of profit taking, no news and low turnover caused the stock to fall by 16% in August. Several Swedish med-tech stocks had a similar development during the month. We had reduced our position slightly at higher levels and we have taken the opportunity to increase our holding during the weakness. Bonesupport trades at EV/S 8x on our 2025 estimates.
SLP
SLP made a positive contribution to the portfolio during August, outperforming the property index which was unchanged on the month. SLP is the real estate stock with Swedish holdings that performed best this year, with an increase of around 19%. For the whole year, the real estate index (SX35GI) has fallen 3.5%, which so far is not as bad as the headlines in the newspapers say. Otherwise, no news in SLP.
Corem
During August, Corem was once again the portfolio's best share with an increase of around 13%. Since the turn of the mid year, the share has risen by 58%. The likely explanation for the rise is, apart from a very weak first half of the year, news about property sales in CEO, Rutger Arnhult's, holding company M2. At the end of the first half of the year, M2 sold four properties for a property value of just over SEK 1 billion. The market has been (and probably still is to some extent) concerned about M2's debt, so these sales were welcomed by the market, and reduce the risk in Corem.
The sale of parts of the associated company Klövern to Nrep on July 3rd was also a very important deal for Corem with a strong liquidity effect of as much as 1.4 billion. After the sale, Corem owns 17% of Klövern. In August, both Rutger Arnhult and M2 bought shares in Corem for a total of SEK 14.3 million, a very good signal.
Another factor that speaks for the real estate sector going forward is that the bond market is showing some signs of awakening. When Castellum issued a two-year bond on August 31st, the spread was 215 points over Stibor. Significantly lower than 6-9 months ago. Fabege also issued a 200 million bond that same week at a price of 200 basis points above Stibor. Compare with the banks' credit spread of around 160 points - clearly positive signals from a market that has been completely closed for a long time.
Source: BloombergRugvista
After three strong reports, Rugvista came out with another strong report in August. For the fourth quarter in a row, expectations were beaten, and the share was rewarded with an increase of around 6%. Sales came in 5% above expectations and margin strengthened to 9.1%, driven by a strong gross margin and lower marketing costs compared to last year. Worth noting is that conversion has increased despite less marketing. Our interpretation of that is that the new website that was rolled out during the year is working well. There is probably more potential in the new website as it takes a few months for Google's algorithms to calibrate.
The company also mentioned that July started strongly with continued sales growth and organic growth. At the time of writing, the stock has risen by 32% this year, while the operating profit has been revised up 35% for 2023e. If the macroeconomic conditions do not deteriorate significantly from here, we think that the Rugvista share will continue to be undervalued.
Pets At Home
During the month, British Pets at Home also reported. The numbers came in roughly as expected. At group level, revenues grew by 8%, of which 7% in retail operations and 16% in veterinary operations. The stock fell 4% in August, in line with the market.
Carel Industries
The Italian ventilation company, Carel Industries, also reported its Q2 report in August. The company reported organic growth of a whopping 16% and at the same time beat EBIT expectations by 10%. During the year, we have built a medium-sized position in Carel, which we have followed for a long time, and hope to return to the subject in the future. The stock was largely unchanged in August.
Short positions
The short portfolio contributed positively during the month, where our short positions on the Swedish small company index worked best.
Exposure
The net exposure at the beginning and end of the month was 85% and 88% respectively.
Summary
We ended last month's newsletter with a view that the short-term outlook is moderate. That was correct, but the decline was stronger than expected. The reasons we mentioned last month were typical outflows from equity funds in August, that CTAs had a high equity exposure, and that a lot of short sales had been covered in July. There were also, as usual in August, low trading volumes, which combined with typical large outflows pressured share prices more than expected. And the smaller the company, the more constrained the liquidity, which also left a clear mark on the share prices of those companies. A small data point is that on Friday, September 1, it was the second lowest trading volume of the year.
The image below shows the Goldman Sachs sentiment indicator. A clear cut in the curve, but still in positive territory. The last days of the month were significantly more positive with one of the year's best stock market days included.
Source: Goldman Sachs
Despite some turbulence in recent weeks, the development of the volatility index for shares and interest rates respectively was relatively undramatic. It can also be deduced that the volatility in Europe has during the year been higher compared to the USA (top image of the two). Overall, the VIX index is at historically low levels.
Source: Kepler Cheuvreux
As usual, the demand for put options is at its lowest when the stock market delivers a positive return and vice versa. The relationship between issued call and put options plunged in July and picked up again in August and about a week ago showed a cautious positioning, which is positive for the future.
Illustrated another way, the dark blue line shows the performance of the S&P500 and the white line implied volatility for put options, which is a clear indication of demand for put options. At the beginning of the month when the stock market fell, demand increased sharply and in the last days of the month when the stock market rebounded the volatility of options fell sharply (and the prices) and we are now at the same level as in July again. Put options are like home insurance, you must have it in place before the house burns down or it can be expensive.
Source: Goldman Sachs, Bloomberg
Below shows the dividend yield on US stocks relative to the 30-year interest rate. Something in the equation is not right. Usually, the dividend yield on a bond is significantly higher than the 30-year interest rate, but now the reverse is true. If we are to return to a normal situation, either the dividend yield must rise (because of falling share prices) or the interest rate must begin to fall. Our view is that interest rates will start to fall.
Source: Bloomberg, Holger Holger Zschaepitz
Cash is king! The correlation between liquidity in the global financial system and the performance of the S&P500 is very high.
Source: Bloomberg, Holger Holger Zschaepitz
After the end of the reporting season, it can be stated that the AI hype has flourished on a broad front, at least when it comes to talking about it.
Source: Goldman Sachs
Companies in the Russell 3000 index seem to be more optimistic about the future. Only 11% of the companies mentioned the word recession in their quarterly statements. A completely normal level seen over many years.
Source: Goldman Sachs
The decline in August has pushed back valuations on the US stock markets from historically high levels.
The corresponding picture for Europe shows that we are down to historically low levels.
The UK, with its self-harming behavior with Brexit, has clearly been re-evaluated since midsummer 2016 and is valued at a whopping 50% discount to the USA. We have 23% exposure to the UK as there are many well-run companies there that deliver good value to us as owners.
Goldman Sachs forecast for Eurozone inflation.
Source: Goldman Sachs
The stock market is looking forward to interest rate cuts.
Source: Themarketear.com
We stand by our market view that the stock markets will be higher at the end of the year than today. September usually shows a negative return and may well offer the same this year, although we think we jumped on that wagon back in August. For those of you who like statistics, the first half of September is historically the second worst period of the year, only beaten by the second half of February.
There are some positive factors now compared to a month ago. We are at lower levels in general and the sharp decline in the first weeks of August has, according to calculations by Goldman Sachs, meant that large important CTA's now must start buying shares again after selling large amounts in August. That, together with large repurchases, will have a positive impact, everything else being equal. Compared to a month ago when there had been record volumes in terms of covering short positions, the market is now in a position where short positions have increased quite a bit in August.
Inflationary pressure is likely to continue to fall during the autumn, which should have a positive impact on central banks' actions (even if their actions are best left unpredicted). Recently published US labor market statistics have come in at levels that make the Fed's job easier, at least here and now.
Finally, we are one month closer to a seasonally historically strong period. Among our own holdings, we see a good or very good upside, which is the most important thing for the fund's performance in the long run.
Source: Sentimenttrader.com, Jay Kaeppel
As previously communicated, we now focus only on long positions, which means significantly more analysis capacity given to what we are most passionate about; finding more or less undiscovered companies that have the ability to develop well on their own, driven by their ability to create value, an attractive price at the time and a strong management.
In connection with the fund changing its strategy, the existing share class hedge for SEK/Euro will be closed. This means that the fund's share classes will not be hedged in the future and thus fluctuate with exchange rate changes in SEK/Euro. In the past, a currency change has not affected the NAV rate; for example, when the krona weakened in 2023, it has had no positive effect on the NAV rate. This is a natural change in connection with the fund's investment strategy going from a long/short equity fund to an actively managed long only equity fund. Considering that the Swedish krona usually strengthens when it is risk on and vice versa, these movements will probably counteract each other and, other things being equal, will reduce the volatility of the fund on a daily basis, which in that case is positive.
We thank you for your interest and wish you a wonderful September!
Mikael & Team
Malmö on September 5th, 2023
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Coeli Nordic Corporate Bond Fund
| Performance in Share Class Currency | 1 Mth | YTD | 3 yrs | Since incep |
| Coeli Nordic Corporate Bond Fund - R SEK | 1.30% | -0.93% | 3.38% | 14.52% |
| | | | |
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[cg_linear_graph id="31122"]
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Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund
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Alexander Wahlman
Senior Analyst
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Top Holdings (%)
| LANSBK 1.25% 18-17.09.25 | 4.1% |
| NORDEA HYP 1.0% 19-17.09.25 | 4.1% |
| SWEDBK 1.0% 19-18.06.25 | 4.1% |
| WHITE MOUNT FRN 17-22.09.47 | 3.9% |
| B2 HOLDING FRN 19-28.05.24 | 2.9% |
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Note that the information below describes the share class (I SEK), which is a share class reserved for institutional investors. Investments in other share classes generally have other conditions regarding, among other things, fees, which affects the share class' return. The information below regarding returns therefore differs from the returns in other share classes.
Return to Fund page
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Utveckling september
Fondens värde sjönk -5,1 procent i september (andelsklass I SEK). Stoxx600 (brett Europaindex) sjönk under samma period med -3,4 procent och HedgeNordics NHX Equities var preliminärt oförändrat. Motsvarande siffror för 2021 är en ökning om +21,6 procent för fonden, +14,0 procent för Stoxx600 och +6,4 procent för NHX Equities.
Equity markets / Macro environment
After seven consecutive months of positive performance the world’s stock markets were poised for some degree of turbulence. Volatility was especially high in some equities and on Monday, September 20, the highest nominal volume ever traded was reached in options on the S&P500 (!) The broad European index fell by 3.4 percent in September compared to the S&P500 which fell by 4.8 percent. The fund also had its first negative performance since October last year with a decline of 5,1 percent. More about that later.
Despite high levels for many stock indices, sentiment among investors has been relatively gloomy. Bank of America's monthly survey recently showed that only 13 percent of managers expect a positive market in the future, which is the lowest figure since April 2020 (and that was clearly wrong). The reasons cited are China's growth problems, the crisis-stricken Chinese real estate giant Evergrande, the development of the delta variant, declining profit growth and, of course, rising inflation. However, they are still overweight equities which is perhaps not so strange when you have to pay to lend your capital to countries. As interest rates rose at the end of the month, the German 10-year interest rate followed with a giant step from - 0.25 percent to - 0.17 percent… The picture below is an overall risk indicator, and we are around zero (neutral).
The news flow in September began with record high inflation figures in Europe at +3.0 which exceeded market expectations. The corresponding figure in July was + 2.2 percent. It was the fastest growth rate since November 2011 and several countries recorded up to five percent in inflation rate. The pressure on the ECB to reduce its support measures is increasing. On Friday, October 1, new inflation figures came in for September, which showed a further acceleration in the inflation rate by +3.4 per cent.
The rate of change can be mostly attributed to rising energy prices that are starting to create real problems in the world's economies as well as agricultural shifts. The picture below shows that food prices are at record high levels over the past 60 years. The biggest losers are the poorest part of the population.
In the slightly longer term it is forecasted that it is not excessive demand that will drive inflation, but rather a limited supply, and then both in terms of products and labour. At the end of September, long queues were reported at petrol stations across the UK when fuel ran out and there were not enough truck drivers to refuel. Prime Minister Boris Johnson urges his citizens to refuel sensibly and at a normal rate. You wanted Brexit, so there you go. In sheer desperation, Johnson has now issued 5,000 temporary short-term visas for temporary drivers. Good luck.
M25 spring 2022?
Below are European gas prices which have risen in a seemingly uncontrolled fashion and recorded the highest September prices ever. A silent prayer for the mild winter. We guess that this development will soon be a major topic in the media, and it will undoubtedly create various problems and somewhat reduce next year's expected growth. It feels reassuring that Per Bolund (Swedish Green Party MP) claims that there is no electricity shortage in Sweden because then the costs for ordinary people would be unbearably high during the winter (which of course they will be). Rising gas and electricity prices have led European politicians to start discussing billion-dollar subsidies (in euros) to households and manufacturers who will experience sharply rising electricity bills over the winter.
Source: Bloomberg
Henrik Svensson, site manager at the oil-fired power plant in Karlshamn (south Sweden), does not agree with Per Bolund that we have a surplus of electricity in the country. For large parts of September, the power plant ran at full capacity and burned 240k liters of oil per hour. Henrik Svensson believes that it is electricity shortages and high electricity prices that are behind the high production. He also says that there is a lack of planned power production in southern Sweden and that it will take many years before the electricity grid is strengthened and new electricity production is in place. Sweden today burns more oil than we have done in 10 years. A gigantic energy policy and climate policy failure signed by the Green Party.
Source: Steget efter
Winning candidate for this year's Christmas presents below.
The change in the US 10-year interest rate created considerable pressure on, primarily, growth stocks at the end of the month. The performance dispersion for different sectors was very large in September with oil shares as a clear winner. This was also felt in the last days of September.
Source: Bloomberg
Below is the development for the US 10-year interest rate. The turbulence in the stock market was caused by the change in interest rate level breaking through on the upside, as can be seen in the chart.
There have been countless attempts to explain the turbulence in recent weeks. The recent and significant amount of options being exercised, Evergrande, interventions by the Chinese government, Fed tapering, Bank of England expected to raise interest rates, delta variant, inflation, bottlenecks in production, difficulties in finding staff, rising energy prices and declining growth rates. We think it is enough to look at the picture below. Rising interest rates hit hard at growth companies' valuations.
Goodbye Mutti and thank you for an extraordinary effort for Europe!
Source: Nyhetsbyrån TT
She was politically in a class of her own during the euro crisis ten years ago and Sweden also has her to thank for a lot. Despite a somewhat weaker performance in recent years, German citizens have experienced significantly better economic development than many others.
On September 29, the covid-19 restrictions in Sweden were finally removed and we can now, in principle, start living a normal life again. The number of bookings for winter holidays skyrocketed to the great joy of the tourist and transport industry. In recent months, tourism activity in the Mediterranean has been "extraordinary" and much better than forecasted before the summer. Luxury travel is also reaching new heights. Private jet passengers to Mallorca increased by +70 percent in July compared to July 2019 with an average of 83 private jets per day landing in Palma. If you want to rent a yacht, you are being referred to next year as basically everything has already been fully booked.
We now belong to a minority group. Passively managed capital exceeds actively managed capital for the first time ever. This will give us more opportunities as mispricing increases.
In addition to being one of the world's best stock markets this year, Sweden also has the most listed companies in the entire EU. Bloomberg drew attention to the fact that there are now around 1,000 listed companies on the various trading platforms in Stockholm. More than 80 percent are smaller companies, and the list is filled with new listings every day until Christmas! For us, it is interesting as we are constantly looking for new potential core holdings. In recent weeks, we have identified one which we write about under Long Positions.
We end this section with a picture that well reflects today's political level.
Source: Kluddniklas
Long positions
Truecaller
During September, we did a lot of work on the Swedish company Truecaller which will go public on October 8th. Truecaller is one of the most interesting companies we’ve seen in recent years. Truecaller has developed a phone application that can, among other things, identify unwanted calls from, for example, telemarketers. The app is one of the top ten most downloaded applications globally, and in some of the main markets such as India, Nigeria and Indonesia, it is one of the three most downloaded apps. As a Swedish company with headquarters in Stockholm, the firm has chosen to list on the Swedish stock exchange, which we are very happy about.
Truecaller was founded in 2009 by Alan Mamedi and Nami Zarringhalam. They met at the Royal Technical University in Stockholm, and they continue to be active in the company as the CEO and Chief Strategic Officer (CSO), respectively. When they released the first version of the app, they received 10,000 downloads within one week. By 2013 they had reached over 10 million users globally and in Q2 2021 they had reached 278 million monthly users. Throughout their journey, Truecaller has attracted several well-known investors such as Sequoia Capital (early investors in Apple, Whatsapp, and Zoom among others), Atomica (Skype-founder Niklas Zennström’s investment company), and Kleiner Perkins (early investors in Google, Amazon, and Spotify among others).
Until recently, revenue streams have mainly consisted of income from in-app advertising. In addition to this, there is a premium version where paying users can get additional functionalities. That business accounted for around 20 percent of revenues in 2020. During the fall of 2020, Truecaller launched a corresponding offering that targets corporates. This part of the business allows B2B customers to be listed as verified callers when they call private people. It can for example be a security company that calls about an alarm or a courier company that needs to get in contact with a receiving customer. It is a common problem that these types of companies get rejected when the call-receiver doesn’t recognize the number.
Truecaller declares that their product benefits from network effects. i.e., the product gets better the more people who use it (think Facebook). This can be relatively easy to appreciate since phone number identification inherently evolves from reporting of unwanted calls by the users, i.e., when enough people have reported an unwanted call Truecaller flags for this in the app). Over time, Truecaller has built a database containing 5.7 billion unique phone-identities. Network effects doesn’t just build a better product over time, they also increase the entry-barriers for potential competition.
The majority of Truecaller’s income comes from developing countries. The company explains that the problems related to spam emails, harassment, unwanted calls, and messages are more common there than in the western world. India is Truecaller’s largest market where these types of problems are significant. One positive aspect of the geographical exposure is that it allows for a nice structural tailwind: the population growth in developed markets is much higher than in the west (driven by an increasing average age) and the smartphone penetration is growing fast.
Historically, 97 percent of all app downloads have been organic. However, management has begun to experiment with user acquisitions by the way of advertisements through, for example, Facebook. The returns on user acquisition looks extremely attractive. In some markets, such as India, Truecaller could achieve a return on investment of up to 20x on every spent dollar. In more mature markets, such as the USA, the same multiple amounts to 4x, still very attractive. Indonesia, which is a relatively new market to the company, has a multiple of 0.8x. This means any user acquisition spend in Indonesia is unprofitable at this point. However, management is confident that the return profile will wander above the 1x as more users join and the network effects take place. In summary, the investment opportunities are plentiful and attractive – and unique.
In summary, several things speak for significant growth in the future. The investment in paid user acquisition, a sharpened premium-offer, the newly launched B2B product and continued growth of the advertising business. In addition to this, acquisitions may likely follow.
Growth has been prioritized over profitability and it is only recently that the company began to report profits. In 2019 sales grew by 57 percent. In 2020 the corresponding figure was 64 percent, and during the first half of 2021 the company’s sales grew with as much as 151 percent in comparison to the same period last year (which was partly affected by the pandemic). During the first half of this year, the company’s operating margin was 32 percent. As you can imagine, Truecaller is very capital-efficient. Working capital is very low which gives a nice cash conversion and a very high return on capital employed – all attributes that are required to create a very successful and valuable company over time.
Truecaller targets a revenue growth of at least 45 percent between 2021-2024e. After 2024 the EBITDA-margin should be at least 35 percent. The sum of the year-on-year growth and the EBITDA-margin should amount to at least 70 percent (a variant of the rule of 40 that tries to balance growth and profitability). We don’t think it will be difficult to reach these targets and the analyst estimates we have looked at are cautious, especially regarding profitability. In our preliminary prognosis for 2023, our EBITDA-estimate is around 16 percent ahead of the analyst estimates that we’ve studied. This is based on that Truecaller can continue to grow sales much faster than hiring new people while the gross margin improves slightly in coming years.
The gross margin is an interesting aspect of the equity story. Truecaller’s gross margin amounts to approximately 70 percent. Most of the cost of sales consists of platform fees to Apple and Google. Since Apple and Google practically control the distribution channels for apps together, a duopoly has occurred and prices for app-developers such as Truecaller have remained high around 25-30 percent of sales. This situation is now heavily criticized from all parts of the world since the situation is not considered competitive, for example
look at this analysis about an American court ruling concerning a twist between Epic Games and Apple. We believe Google and Apple’s fees will decrease over time – which would be a positive event for Truecaller. Furthermore, Truecaller’s new business deal bypasses Goggle and Apple, which gives a gross margin of close to 100 percent. This will strengthen the profitability even more.
There are of course risks associated with the dependence on Google/Apple (which is the case for every company in the application business); the geographical exposure and one should never write off the threat of competition even if it seems far away at this stage. However, we do believe the benefits outweighs the negatives. Truecaller has excellent financial characteristics, operational founders with large shareholdings who will remain active in the business and some of the world’s most well-known investors behind it. We therefore look forward to being included as an anchor investor ahead of the stock exchange listing on October 8th. We are even more excited to follow the company’s successes in current and new markets in the coming years.
CVS Group
One of the happiest days of the month was when our veterinarian company CVS Group released their interim numbers. Once again, the company beat analysts’ expectations which have been raised several times over the course of the year. In the first two months of the new financial year (which begins in July), the company has grown by 17 percent. This can be compared with the growth expectations for the full year which, before the report release, were 7 percent. Once again, analysts have thus far been “forced” to upgrade their assumptions. In a sour September stock market, the share fell 3 percent.
It becomes clear that the positive effect of the pandemic on pet ownership is more tenacious than ever. Pets live for many years, and we believe many underestimated the importance of the large number of new customers during the pandemic. Below is a graph of Google searches for veterinarians in the UK as well as data from the Swedish Board of Agriculture regarding the number of newly registered dogs. We speculate that the UK has similar trends as Sweden. The data points are also positive for our other pet company Swedencare. Pet companies are obviously still hot; right now there’s a bidding war going on over the German pet company Zooplus, where EQT is currently in the lead with the highest bid. We also note that there have been several venture capital-led acquisitions of veterinary companies at higher multiples than CVS is valued at.
Source: Jordbruksverket, Coeli
Source: Google Trends, Coeli
Lindab
Since our first investments in Lindab in the autumn of 2019, the thesis has always been that the building systems business segment did not fit into the business and in September, management finally found a buyer for the company. The transaction entails a write-down of goodwill corresponding to SEK 430 million, but it is cash flow neutral. Lindab took the opportunity to update its financial targets; the company now wants to grow by 10 percent per year (of which approximately two thirds are through acquisitions) and reach an operating margin of at least 10 percent (previously 10 percent over a business cycle). The share responded positively to the message.
We noted broad insider purchases in Lindab during the month, also from CEO Ola Ringdahl himself, which we think bodes well for the report in October. Despite this the share price decreased 8 percent in September.
Victoria
We have written several times about the British flooring company Victoria, which in September had a weak share price development of 17 percent. By all accounts, the company is doing well – during the month it was reported that sales rose 70 percent compared to 2020, and 50 percent compared to 2019. If you only partially extrapolate these figures for the rest of the year, it is obvious that analysts’ expectations are too low. We believe that this month’s decline is related to flows: growth companies and small and mid-cap companies were some of the most affected sectors in September – Victoria was hit from both sides. We have increased our position in recent days.
The Pebble Group
One of the month’s (few) joys was Pebble Group. As we previously wrote, the company is active in the market for gift advertising, i.e. gifts that companies give to customers, employees, and other stakeholders for marketing purposes. In September the company came out with its half-year figures that were better than expected. Pebble’s software division, Facilisgroup, is growing better than our expectations. This is also the part we believe the market is valuing too low. The stock rose 10 percent in September.
Knaus Tabbert
During the last trading day in September, our German motorhome manufacturer Knaus Tabbert announced that the forecasts for 2021 must be lowered due to component shortages. We are not particularly surprised that this has happened given what we have seen from other vehicle manufacturers. If the company can remedy these supplier problems, management believes that 2022 will be unaffected at best, as Knaus still has a bursting order book, increased production capacity and more suppliers from January next year. The share fell 7 percent in September.
Short positions
The short portfolio contributed with a negative result during the month. Our short-term negative positions in the German DAX had the largest negative contribution. Some stock specific short positions that contributed positively to the result were Swedish Dometic, German Henkel and Norwegian NEL.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning and end of the month was 76 and 74 percent, respectively.
Summary
September's negative return of x percent also meant the end of the fund's, so far, longest period of positive return (10 months). We are obviously disappointed with that, but we have been in the game long enough to understand that equities sometimes must fall to be able to refuel and continue their upward trajectory. In general, September was the weakest month for many equities since the crisis started 1.5 years ago. September, otherwise, started strong for us and was a continuation of an unusually good performance at the end of August. Our companies presented many good news (except for Knaus Tabbert on the last day of the month) but small-caps and especially those categorized as growth shares, had a very weak performance during September. The main reason for this was, as previously mentioned, the change in the US long-term interest rate and general "risk off".
The picture below shows the development since March last year compared with the corresponding time intervals in the financial crisis in 2009 and onwards. Both periods have shown an unusually strong recovery and the current trend is even stronger than when the financial crisis raged 12 years ago.
Source: Goldman Sachs
Since the crisis started 1.5 years ago, we have had three different phases. The first and shortest, "despair", showed a decline in prices of 33 percent. The second phase, "hope", ended at the beginning of this year and showed a very strong return of 79 percent despite declining earnings. The last, “growth”, where we are now, has shown +11 percent in share prices with sharply rising growth for companies' earnings, but at lower valuations.
Source: Goldman Sachs
The recovery for American companies (below) has been extremely strong and compared to 2019, the 2021 profits will be approximately 36 percent higher. Very impressive.
Source: Goldman Sachs
It is very gratifying that Europe, for once, is keeping up with the United States and showing strong profit growth. Compare this with the non-existent profit growth between 2007–2019 (!)
Despite rising equity prices, valuations have fallen and Europe is now trading around 16x the profit 12 months ahead. It's not very strenuous (we think). For an average commercial property, you can get a return of maybe 3 percent before net financial costs. After financing, this corresponds to at least P/E 50x. And paying to lend to different countries does not feel like an exciting alternative either.
Source: Goldman Sachs
The valuation of global shares in relation to global GDP looks more strained. A major reason for this is the central banks' aggressive policy.
The valuation of the major leading technology companies is at an average level seen from the last five years.
Source: Goldman Sachs
The image below is striking. It shows that Swedish property prices, which have risen by almost 200 percent over the past 15 years, have had the same development as the money supply. In theory, price per m2 and krona is unchanged for the past 15 years. Is there anyone who still doubts that the world's central banks are responsible for the largest wealth creation in human history? It is important to be on the wagon because when it is gone you’ve missed it. And what central banks cannot push, the price of bitcoin for example, rises even more as central banks cannot make more of it. The opportunities for central banks to reverse the band are few. In the long run, this means that the next 10 years will, overall, be a good period for, for example, stock picking. All forms of uniqueness (growth) will be highly valued to compensate for the fact that the value of money decreases at a rapid pace.
If there is anyone who is still not convinced, take a look at the picture below. The market capitalization of the S&P500 divided by the Fed's balance sheet….
Source: Bloomberg
Onwards and upwards. The wealth of American households is accelerating away from the change in GDP.
Thank you Fed and all the world central banks!
Citigroup's surprise index has weighed down and analysts' profit estimates are also starting to soften. Not a good combination and it has undoubtedly contributed to the weak development in the stock markets recently.
It took a full 219 days for the S&P500 to have a decline of 5 percent. We will see how high the next bar will be.
Timing is everything. A fascinating graph that shows the importance of having reasonable timing in decisions.
Source: Goldman Sachs
Despite a difficult month behind us, it feels reasonable to expect a stronger market during the last quarter of the year. Our view is that we are still in a rising market, although we are likely to experience some turbulence for a few more weeks. "Bear markets" are constantly declining with sharp rallies while "bull markets" continue to rise with some strong drawdowns. We therefore believe that we are still in a rising market.
Some statistics to cheer you up. The S&P500 managed to rise by 0.2 percent in the third quarter (Europe -1.9 percent) which means six consecutive positive quarters. This has only happened eight times before and only on one of the (eight) occasions has the following quarter yielded a negative return. Two quarters later, it has in all cases yielded a positive return. In addition, for the past 20 years, October has been the fourth best month, thus much better than its reputation. Having pointed that out, October takes first place in terms of most frequent daily movements that exceed one percent.
The Stockholm Stock Exchange, which is an excellent reference point, had risen by 30 percent at its highest about a month ago, but is currently at 20 percent. Even more important is that measured in USD, OMX has "only" risen by 13 percent, which is in line with the US stock markets. This is hardly excessive given the profit growth among the companies. The risk premium in the market is high.
Investors are reasonably careless, and we are approaching the turn of the year. Global growth is well above average and interest rates are extremely low. Given how cruel the market has been to many investors this year, with sector rotations and a high concentration of companies driving performance, it almost feels obvious that the broad mass of investors will continue to reduce risk in their portfolios and then be short equities at year-end when the market rises. We'll see, but that's our main scenario right now.
We are now closing the books for the third quarter, and we look forward to the end of the year and above all the entrance for Truecaller on the Stockholm Stock Exchange on October 8!
Thank you for this month and we'll hear from you later.
Mikael & Team
Malmö on 5 October
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Coeli Nordic Corporate Bond Fund
| Performance in Share Class Currency | 1 Mth | YTD | 3 yrs | Since incep |
| Coeli Nordic Corporate Bond Fund - R SEK | 1.30% | -0.93% | 3.38% | 14.52% |
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Gustav Fransson
Portfolio Manager of Coeli Nordic Corporate Bond Fund
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Alexander Wahlman
Senior Analyst
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Fund Overview
| Inception Date | 2017-12-20 |
| Investment management fee (share class I SEK) | 1.00% p.a + 20% Performance fee (OMRX T-Bill Index) |
| Performance Fee. Yes | 20% |
| Risk category | 5 of 7 |
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Top Holdings (%)
| LANSBK 1.25% 18-17.09.25 | 4.1% |
| NORDEA HYP 1.0% 19-17.09.25 | 4.1% |
| SWEDBK 1.0% 19-18.06.25 | 4.1% |
| WHITE MOUNT FRN 17-22.09.47 | 3.9% |
| B2 HOLDING FRN 19-28.05.24 | 2.9% |
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IMPORTANT INFORMATION. This is a marketing communication.
Before making any final investment decisions, please refer to the prospectus of Coeli SICAV II, its Annual Report, and the KID of the relevant Sub-Fund. Relevant information documents are available in English at coeli.com. A summary of investor rights will be available at
https://coeli.com/regulatory-information-coeli-asset-management-ab/.
Past performance is not a guarantee of future returns. The price of the investment may go up or down and an investor may not get back the amount originally invested.
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