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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 – November 2023
NOVEMBER PERFORMANCE
The fund's value increased by 11.4% in November (share class I SEK), while the benchmark increased by 4.7%. Since the change of the fund's strategy at the beginning of September this year, the relative outperformance is +4.6%.
*Adjusted for spin-off of Rejuveron.** AEE: Absolute European Equity, CE: Coeli European, Benchmark: MSCI Europe SMID Cap Net Total Return SEK.Please Note: On the 4th of September 2023, the strategy of the fund officially changed from a European long biased equity long/short fund to a European active long only fund. Simultaneously, the name changed from Coeli Absolute European Equity to Coeli European. The track record highlighted in colour in the table above is that of Coeli Absolute European Equity.EQUITY MARKETS / MACRO ENVIRONMENT
We summarised last month's newsletter with a number of bullet points, each of which indicated that the stock market could be headed for a recovery. With the November books closed, we can confirm that all indicators kicked in with full force and produced a rarely seen November rally, enthusiastically cheered on by defined falling inflation and sharply falling interest rates. That, in combination with a very cautious positioning in the market, led to some panic when capital had to be quickly put to work. As by the book, it was small and medium-sized companies that showed the strongest development, as that asset class benefits the most from falling interest rates.
The fund's strong reporting season continued in full force in November with reports from Rugvista, Diploma, Surgical Science, Sacyr, Carel, Commerzbank and Wincanton. Our portfolio rose by a whopping 11.4% in November compared to our benchmark which rose by 4.7% (both measured in SEK). It is the second strongest monthly development since November 2020 (+11.5%), and probably the best on a relative basis. We are humbly grateful that our analysis and portfolio construction produced such a strong result, and not least, that we took risks when many others did not. During the month, we exited British company, Pets at Home.
The broad European stock market rose in November by 6.5%, the S&P500 by 8.9% and the Nasdaq by 10.7%, all in local currency. The OMX30 rose by 7.6% measured in SEK and by a whopping 11.4% measured in euros, and the Stockholm Stock Exchange was thus one of the strongest stock exchanges in the Western world in November. Increased risk appetite also affected the Swedish krona, which made a remarkable comeback in November, and we will return to that later in this letter.
Developments on the world's equity markets were positive from start, but the big catalyst for the month's development was the US inflation data that was released on the 14th of November. Instead of the expected 3.3% inflation rate, the outcome was 3.2%. With a taught string and record depressed investors, a small positive deviation led to very strong gains, above all, in the small and medium-sized companies segment. The Russell 2000 rose a whopping 5.4% that day, more than double of the S&P500. Such a sharp rise for the Russell 2000 in a single day has only happened on a handful of occasions in the past 25 years.
Below is five-day performance of the US 10-year bond yield. We experienced the second fastest decline since the Covid crash. High octane fuel for the stock market.
Source: Bloomberg, Goldman Sachs
Illustrated in a different way with the picture of the month! The Goldman Sachs financial condition index improved in November with greater force than what has been recorded in the last 40 years! Unbelievable and explains both the extreme level we came from and why the recoil was so strong. Actually, the picture explains the entire development of the month of November.
Source: Bloomberg, Goldman Sachs
The development of various interest rates and credit spreads in November.
Source: Kepler Cheuvreux
The rate cuts led to a huge shift in sentiment. The bull/bear change measured over five days was the largest since 2001 and 2008, see image below. A huge shift.
Source: Goldman Sachs
In terms of sectors, real estate was at the top, followed by technology and retail/consumer companies. The consumer is also starting to wake up with real wage increases next year, while interest rates will fall. Sweden lags behind in this development, but follows the same pattern.
Source: Bloomberg
For the second quarter in a row, German real wages are rising.
Source: Bloomberg
When FED minister, Christopher Waller, tweeted the following at the end of the month; the “higher for longer" theme died. Our view, for a long time, is that the central banks will cut interest rates significantly earlier than communicated, and we would not be surprised if the FED cuts the policy rate already in the first quarter of next year. The market's expectations are at mid-point of the year. The ECB will likely cut rates in early 2024.
Source: X
Where did all our excess returns come from in November? Below is a picture showing the price development of our various holdings since the report date (some from October) in relation to the development of our benchmark, as well as the Q3 results in relation to the market's expectations. A notable excess return from several holdings, which is the result of proprietary analysis at its best. Despite severe price pressure unrelated to the company's fundamental conditions we gradually increased in several holdings, which paid off when the rebound came.
Source: Coeli European
On the last day of the month we received inflation data for the euro zone, which is now trailing at 2.4% against the expected 2.7%. It is falling rapidly now, which is very pleasing, and we may well be below two percent before the end of the year. A utopia six months ago. The figure below shows that month-on-month European core inflation is now unchanged.
Source: Goldman Sachs
Risk on also applied to the Swedish krona, which in November strengthened by 3.5% against the euro and a full 6.5% against the US dollar. This despite the fact that the Riksbank (Swedish Central Bank) kept the policy rate unchanged (we applaud the Riksbank!). On the theme of risk on, we are happy to note that even Swedish small and medium-sized companies started to get into the spotlight again, after being considered pariahs for the past 23 months. Foreigners probably accounted for part of the purchases, which creates demand for Swedish kronor. Foreign ownership on the Stockholm Stock Exchange has decreased from 40% to 37%in two years. One percentage point corresponds to approximately 100 billion, which undoubtedly has a significant impact on the kronor exchange rate. On 1st of December, the krona strengthened by a further 1.2% against the euro.
The Carnegie small company index rose by 11.4% in November. Measured in USD, the rise (are you sitting down?) was a mind-boggling 18.9% and was thus, likely, the month's best asset class within the western world's stock markets. The Russell 2000 and MSCI SMID rose by 8.8 and 11.7%, respectively, measured in USD. This was of course also something that benefited the fund's development as we have approximately 35% exposure to Sweden. If you want exposure to technology and fast-growing companies, the Swedish stock exchange is superior to the rest of Europe. In addition, Swedish management and shareholder friendliness are of high quality.
Below is the development this year on the Stockholm Stock Exchange. The bigger the company, the better, but the recoil for smaller companies has, so far, been stronger.
Source: Carnegie
On the other hand, the Swedish political landscape leaves something to be desired (expressed politically correctly so that no one is offended). Sweden ends up at the absolute bottom in terms of GDP growth this year and probably next year as well. How did we end up here? Despite this, it does not prevent us from continuing to have an overexposure to Swedish companies that have a high exposure outside of Sweden.
As you know, things don’t always turn out as planned. The image below shows the development of China's GDP and the Shanghai Stock Exchange since 1993. The Chinese are probably also wondering what went wrong.
Source: Goldman Sachs
There were several cheerful events in the November darkness. President Xi flew over to San Francisco and met with President Joe Biden for the first time in a year. The meeting was considered a success, from a low level. After the Chinese delegation left, Biden held a press conference where he said Xi is a dictator. It's hard not to laugh when you see Foreign Minister, Anthony Blinken’s, facial expression.
https://twitter.com/jason_howerton/status/1725254297552933177
Source: X
The bottleneck problems that plagued the manufacturing industry and consumers for several years are now a thing of the past. The New York Fed index records a new lowest level since statistics began to be kept in 1997. Never has the stress in the systems been measured at a lower level than now. Very positive.
Source: SEB, New York Fed
The European engine is stuttering precariously, but there has been some recovery lately. In terms of energy supply, gas supplies are well covered compared to last year.
Source: Kepler Cheuvreux
The European economy as a whole has started surprisingly positively in relation to market expectations. Still negative territory, but rapidly moving in the right direction.
Source: Bloomberg, Macrobond, Kepler Cheuvreux
In the country “Different” the union has ended up in a big fight with Tesla as it had the audacity not to join the collective agreement. Admittedly, it is not a legal requirement to have a collective agreement, but mostly to justify their own existence (personal view), they have done everything possible to oppose Tesla who led the entire world's car industry toward the electrification of the car fleets. The union has even made sure that Tesla does not get their mail handed out. Absurd to say the least. Everyone who is on strike receives 130% of their salary in compensation. It doesn't feel right, the timing is lousy for Sweden and the responsibility for the outcome rests heavily on the trade union movement.
Elon Musk came under fire after a post on X that encouraged an anti-Semitic conspiracy theory. Afterwards, he apologized and said that anti-Semitism was not his intention. Elon Musk was clear to X customers who, because of this, threatened to stop advertising on X at the end of November. The point of the video is that the odds of him giving way to the Swedish trade union movement are not playable.
https://twitter.com/greg_price11/status/1729991837958414573
Källa: X
On November 29th, one of the biggest investors passed away. Charlie Munger turned 99 and we thank him for all the knowledge he has generously shared over the years. We take the liberty of including some personal favorite quotes:
”The big money is not in the buying and the selling, but in the waiting.”“It’s amazing how intelligent it is just to spend some time sitting. A lot of people are way too active.”“There is only one way to the top: hard work.”PORTFOLIO COMPANIES
Wincanton
In November, the British logistics company Wincanton released its half-yearly report for the fiscal year ending in March 2024. The figures as such were already known as the company previously released a trade update, and therefore the report release itself was not particularly dramatic. On the other hand, the management told us what they intended to do with the cash flow freed up by the fact that the company no longer has to pay off a large pension debt, which has swallowed around 35% of the company's free cash flow in recent years (we wrote about Wincanton and the pension debt in our monthly newsletter for September).
Wincanton plans to make a series of organic investments with short payback periods, some as short as three years. The investments will mainly be made in the automation and robotization of warehouse work, which is still largely carried out manually. In addition to this, Wincanton has launched a buyback program of shares, something we strongly desired and communicated. As far as we know, this has not happened in the company's history before, which says something about what management thinks of the company's low valuation. The stock rose 15% in November.
Diploma
Since August, we have built up a position in the British acquisition company Diploma. We have monitored the company for long, which in our opinion is one of the finer acquisition companies in Europe but we have always found the valuation to be difficult to justify. After a weaker price development in 2022 and a 2023 that developed sideways, we thought we were in a good position to buy the stock.
Diploma is a value-added distributor of products that on the surface are quite boring: it can be about cables, screws and nuts, reagents, cylinders and more. The beauty in this is the business model. Diploma's products tend to be cheap for the customer, but have a critical function in their workflow. Typically, the products are consumables (and not capital goods), which the customers use on an ongoing basis in their business - this dampens the cyclical sensitivity. The impression is that Diploma is in a good negotiating position in terms of price because it is often complicated/unjustified for customers to change suppliers.
The acquisition strategy is based on buying smaller distributors with high gross margins, which often indicate high service levels and good pricing power. Most of the acquisitions are of a minor nature and are bought at low multiples (around 5-7x EBIT), which gives a short payback period on invested capital. The acquired companies continue to be managed in a decentralized manner, while Diploma likes to take advantage of low-hanging opportunities for sales and profitability synergies.
Since 2007, the company's earnings per share have increased by approximately 15% per year. Diploma's full-year report covering the financial year ending in September was released during the month and was a continuation of the beaten path. Unlike many other companies, a strong and positive outlook for 2024 was also communicated. Feel free to study the numbers in the table below, impressive to say the least. The stock rose 18% in November.
Source: Diploma plcEuronext
Another new holding in the fund is Euronext, which owns and operates several European exchanges, including Paris, Amsterdam and Milan. Traditionally, Euronext's revenue has largely come from equity trading. It is a revenue stream that is undervalued in the market because it is volatile and unpredictable. Since 2018, however, the share of income from equity trading has fallen from 34% to today's approximately 18%. Revenues that are not directly related to volumes, such as data and clearing services, today make up almost 60% of total revenues.
The change in the revenue mix should, all things being equal, in our opinion, have led to a positive revaluation of the share. When we started buying shares in August, the reality was the opposite; Looking at the forward-looking P/E ratio, the stock was valued at around its lowest levels since its IPO in the mid-1990s. After a good Q3 report, the stock rose 16% during November. On our estimates, the stock still trades at a P/E ratio of 12-13x for 2024. We think that is too low for a company that is increasing the proportion of predictable revenues and that has a near-monopolistic position in certain markets.
Carel
This year we have gradually built up a position in Italian Carel, which produces and sells control solutions, humidity controllers and dehumidifiers. Like many of the Italian companies we look at, Carel is family-owned, located in northern Italy, and has a fine history of high organic growth with a good return on capital employed. The organic growth is supplemented by one or a few acquisitions per year. During November, the company released a report that beat expectations, and the stock rose 22% during the month.
Surgical Science
Surgical Science stock had fallen sharply ahead of its Q3 report. We saw a bit of a beach ball effect when the report was then released. EBIT expectations were beaten by around 9%, which was met with relief by the market. The report and a positive market contributed to the share rising 35% in November.
Rugvista
After six quarters of negative organic growth, Rugvista reported organic growth of 14% in its Q3 report. The company has been working for a long time on a new launch of its website, which is intended, among other things, to improve the conversion rate (the proportion of customers who visit the website and who also place an order). We are starting to see the results of this in the numbers now and expect further improvements on this point in the coming quarters.
We continue to like Rugvista as the fund's play on e-commerce. The products have unusually high gross margins for their sector (around 62-63%) and profits are valued low. Perhaps there could be a change in the valuation when the market takes note of the internal improvements Rugvista has made over the past year. With any luck, maybe lower inflation figures can start to give some courage to consumers too? Regardless of the economic climate, Rugvista has a lot of power steering. We also note from several quarters that the structural migration from brick-and-mortar to e-commerce may be on the way back after a gap year in 2022, which was affected by the reopening of society after the pandemic.
The stock rose 14% in November.
4imprint
The clear loser of the reporting period was 4imprint. Not because their reported numbers were worse than expected - on the contrary, they raised the 2023 profitability guidance by around 4% - but the management was cautious in their statements regarding the future. 4imprint's products often form part of the customers' marketing budgets, and when the macro economy begins to falter, it is often a rope that many companies tighten. Historically, there has been a climate where 4imprint has taken large market shares, which benefits the company in the long term. The share fell -15% in November.
Cargotec
We described last month's valuation of Finnish Cargotec as almost unbelievable. In November, the stock became one of the fund's best contributors. Not much has happened other than that MacGregor, Cargotec's business segment which is in the middle of a turn around, received two large orders during the month. Kalmar also got a new CEO as part of preparing the company for a separate listing. The stock rose 24% in November.
Bonesupport
Bonesupport was once again a strong contributor to the fund's results. At the end of the month, the company held a capital market day that showcased Bonesupport's future visions. One area that was touched on at the Capital Markets Day was the number of clinical studies done on Cerament G. Cerament is the product backed by the most clinical studies on the market in its niche. The company continues to add more studies on an ongoing basis and 2022 was no exception.
As we previously speculated, the company will apply for approval for the indication spinal fusion. This adds a potential market of an additional 750,000 procedures annually in the United States. This doubles the potential market from today's approximately 770,000 procedures. An interesting thing is that the company has already noted that their first product, Cerament BVF, is used in spine fusion already today by some doctors, despite the fact that the company does not have a marketing permission.
Bonesupport also upgraded its sales target for 2024. Sales have really strong momentum and we believe it will continue into 2025. Europe still has a huge healthcare debt in terms of defaulted surgeries after the pandemic. At the same time, the company enters the spinal fusion market. In addition, the penetration of existing markets with existing products continues. After 2026, one can probably expect growth from new geographies such as France and Japan but also Cerament G/V for spinal fusion in the USA.
Regarding profitability, the company said that it is possible to roughly double the sales of the existing organization, but that it will not be shy to invest more to capture opportunities when they arise. The incremental margin in Q3 was 42%, which we believe is closer to the long-term margin Bonesupport will have.
The company is in the process of building the platform we previously wrote about and expected. Given how Bonesupport has taken market shares historically, we believe that the company is moving towards a bright future in new indications. After all, bones heal in the same way regardless of where in the body the bone is.
Corem
Real estate had a strong month. The Swedish real estate index rose by almost 19% during November, driven by interest rates around the world coming down sharply. Apart from that, Corem sold properties in Copenhagen for SEK 3.9 billion, which were part of the letter of intent from October. This is clearly positive as the properties in Copenhagen are low-yielding and those where expensive financing can be covered after the sale. The stock rose 23% in November.
SLP
SLP also had a strong month. The major event during the month was that the company made a directed issue to a number of Swedish and international investors. The transaction was made at approximately 15% premium to the net asset value. On a single transaction, it can thus be said that SLP creates value by adding cash, which is valued 15% higher inside the company than outside. The money is to be used to buy properties in a state where there are likely to be some stressed sellers with strained balance sheets. We guess that SLP can basically pick and choose among items that stressed sellers want to get rid of. We are convinced that the capital will be put to use within a few months. Below is a picture showing how Swedish real estate companies' valuations have changed since Q2 2022. Note SLP's increase in value. Impressive in this climate.
Source:Pareto SecuritiesSUMMARY
After three record gloomy autumn months, we experienced a strong recoil in November. The rally started when the S&P500 hit a 100-day low, which was then followed by seven straight days of positive returns. It has only happened once before in the last 40 years and that was on March 20th, 2003 (a date that marked the end of the bear market at the time). Compared to the level from the end of July, the broad European index recovered 74% of the autumn's decline. The corresponding figures for MSCI SMID and S&P500 were 66 and 95%, respectively.
Simplistically, you can say that a rising interest rate lowered the stock market after the summer and that was also what caused the rise in November when it fell. Below is the development of the most important reference interest rate this year, the American 10-year old government bond, which also rapidly continued downwards on December 1st.
Source: Bloomberg
The European property sector has been under pressure for almost two years. Last year, the European real estate index fell by 40%, and as of November 30th, has risen by 2.9% this year. Since the lowest level in October, the index has risen by 24% and on December 1st by a further 2.3%. The country that has undoubtedly been the most affected among real estate investors has been Sweden. The corresponding figure for the Swedish real estate sector was –44% in 2022, as of November 30th unchanged this year, since the lowest level in October up by 25% and on December 1st up by 1%.
Performance for the sector was explosive in November, with Goldman Sachs' basket of shorted real estate stocks up 13% in a week, the biggest one-week gain since Q2 2020. What was even more interesting, we think, is that in the single strongest day for European real estate stocks the four stocks with the biggest increase were all Swedish! That says a lot about how badly the Swedish real estate sector has been shorted and underinvested. Our holding in Corem rose by 18% that day.
Source: Bloomberg, Goldman Sachs
The relative valuation of the real estate sector is still at low levels.
Source: Datastream, Kepler Cheuvreux
Will we see a breakout from previous trading patterns this time around? We think it is likely.
Source: Datastream, Kepler Cheuvreux
Our overall view of continued falling inflation and thus also interest rates will provide further fuel to a hard-hit real estate sector. Arguably, the sector should be among the winners in 2024.
Source: Bloomberg, Datastream, Kepler Cheuvreux
For the entire European stock market, the profit estimate looks like below. Profit expectations for the current year have gradually fallen. Profit growth for 2024e and 2025e is estimated at 7 and 9%.
Source: Datastream, Kepler Cheuvreux
The valuation difference between Europe and the US is still at record high levels. The difference per sector is illustrated below.
Source: Goldman Sachs
A telling picture that explains the difference between the big technology companies and other companies.
Source: Goldman Sachs
An image that shows in an exemplary way how far the FED has come in the fight against inflation. It shows inflation minus the FED's key interest rate and a lot of pain lies behind the development in the curve, but so far the American economy has fared much better than expected.
Source: Goldman Sachs, Bloomberg
We don't know much about Bitcoin and with a decline of 64% in 2022, it was hardly the uncorrelated asset that many thought. If the development within bitcoin says something about the general risk appetite (unclear to us), we note that the rise this year right now is around 140%. Five years of development below.
Source: Bloomberg
CTAs had a low exposure when the rally started a month ago. After massive purchases in recent weeks, around $235 billion, they now have a neutral exposure.
Source: Goldman Sachs
Below one of our favorite pictures. The absolute bottom level for smaller companies' share price development in relation to large companies has passed for this time (we think). Despite a strong development on a relative basis, there is a long way to go before the underperformance of the past two years has been recovered.
Source: Kepler Cheuvreux
We end this month's letter with the same picture as last time. It was a rare and great opportunity to buy shares last month and we're thankful we shamelessly took it. We believe that December will also provide a positive return, albeit not at the same levels as in November, and thus another equity year has gone down in the history books.
Source: Goldman Sachs
Despite major geopolitical challenges, the conditions ahead of 2024 look significantly better than they have been in the past two years. Now the economies will settle and the debate between whether there will be a hard or soft landing continues. Interest rates will fall back and as usual it will not be a smooth development, but we will experience both positive and negative surprises. Once the new conditions have been calibrated, we hope and believe that we will enter a more normal existence, where micro means more than macro. A development that benefits our business.
I would like to take this opportunity to thank my team for a very strong contribution during the year. Circumstances have been challenging at times, but the precision of the craftsmanship has been high. Of course, we also thank the people behind our companies. Even there, the circumstances have been challenging and you have all made a phenomenal contribution in your respective businesses!
Finally, we of course thank you, our investors, who are a prerequisite for us to be able to conduct our business.
Merry Christmas and a Happy New Year!
Mikael & Team
Malmö, December 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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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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