Portfolio Managers comments
Summer is here and the financial markets have shown that July can be an exciting month too. The delta variant of the coronavirus created some concern in mid-July when the spread increased in many countries, but at the same time the number of patients in intensive care units remains low in most countries and indicates that the vaccination programmes have an effect. However, US President Joe Biden has considered demanding vaccination for civil servants and obligatory face masks. In Britain, the much awaited “Freedom Day” was on July 19, when all restrictions were lifted within the country’s borders.
China accounted for most of the news flow during the month, with Chinese President Xi Jiping and his Communist Party cracking down on the technology, real estate and education sectors. In the technology sector, companies like Alibaba and Tencent were the focus, mainly because of the large amounts of data they have collected on the Chinese population. Chinese technology stocks listed in the US have declined by an average of -20% during the month of July. In the real estate sector, the highly leveraged and liquidity-strained housing developer Evergrande has been in the spotlight. The Chinese regulators have summoned the domestic banks as they are worried about spill over effects in case Evergrande were to go towards the brink of ruin. But it was in the private education sector that Beijing showed the most action. Private education companies in China are no longer allowed to make a profit, use foreign teachers, raise capital from abroad, acquire competitors or have classes on weekends. This resulted in large price falls in the mentioned sectors, but mainly in the education sector.
The ECB announced at its July meeting that it would aim for 2% inflation instead of the previous target of just below 2%. It also communicated that it would allow inflation to exceed the target for a limited period of time, but does not go as far as the Fed with an average target of 2%, where the Fed accepts longer periods of higher inflation.
During Fed’s meeting at the end of July, interest rates were kept at 0.00-0.25%. There was no change in their asset purchases and they still believe that inflationary pressures are temporary. Statistics for GDP development for the second quarter remained strong. In the US, it came in at 6.5% year-on-year, which was lower than the consensus expectations of 8.5%. Swedish GDP increased by 0.9% during the second quarter after a weak start. In the euro area, second-quarter GDP increased by 2.0%, compared to expectations of 1.5%.
The credit market has had a relatively quiet period and the credit spreads traded sideways during the month. The reporting season for the second quarter is in full swing and most of the companies that reported have reported good reports in relation to the expectations. Activity in the primary market has been low and many companies are in so-called “quiet periods” before their quarterly reports. Simplicity participated in issues in the IT company Crayon Group, the logistics and data center company Bulk Industrier and the British e-commerce company Very Group. All funds had a positive development during the month. Simplicity Liquidity increased by 0.05% while Simplicity Corporate Bonds, Simplicity Global Corporate Bond and Simplicity High Yield increased by 0.38%, 0.48% and 0.49% respectively.
Performance YTD: 0.48%
Yield net of fees: 0.30-0.40%
Duration: 0.16 years
Maturity profile: 1.18 years
Performance YTD: 2.71 %
Yield net of fees: 1.50-1.60%
Duration: 1.10 years
Maturity profile: 3.17 years
Simplicity Global Corporate Bond
Performance YTD: 3,44%
Yield net of fees: 1.80-1.90%
Duration: 1.62 years
Maturity profile: 3.45 years
Simplicity High Yield
Performance YTD: 4.87%
Yield net of fees: 2.90-3.00%
Duration: 1.62 years
Maturity profile: 3.45 years
The equity funds performed very strongly in July in terms of both absolute returns and relative to the markets. The companies’ quarterly reports were again good, with several companies reporting better than expectations. The real estate companies did particularly well, with reports showing continued improvement in rental markets. For example, the real estate group Platzer, which is a holding in Simplicity Norden, Simplicity Sverige, Simplicity Småbolag Sverige and Simplicity Fastigheter, rose by 24% after the report showed positive net lettings for the office segment. In addition, Magnolia Bostad rose after a takeover bid with a premium of 32%. Investment companies and industrial conglomerates also contributed positively to the returns in Simplicity Norden and the two Sweden funds after major gains for Bure Equity, Svolder, Lifco and Indutrade.
Simplicity Småbolag Global was negatively affected by the declines in Chinese equities,but compensated for this through report-driven gains for the fund’s Nordic consumer companies Thule (SV), Tokmanni (FI) and Europris (NO).
Over the past reporting period, Simplicity’s equity funds have been rewarded for their strategy of buying quality companies, as they have been better able to cope with increased costs from inflation on input materials. This has been evident in the reports from Thule, Indutrade, Hexagon, Lindab and Bufab, among others.
Stock of the month
Lifco is an industrial group with niche companies active in dental products, demolition robots, tools, plant materials and several other areas. The company is fantastically stable in terms of profitability with a return on equity of around 20% over the last 7 years. After a paus in growth in 2020, the company has started to grow with double digits again this year. In July, the company beat expectations by far, resulting in higher target prices from analysts and a return of 26% during the month. The company has been an active acquisition machine for the past year, and Lifco’s CEO sees room for more acquisitions if the opportunity arises. Lifco is a holding in all equity funds except Simplicity Fastigheter.
Global developments in brief
The spread of infection increased again in some parts of the world, not least in the US, causing volatility in stock markets to increase as reintroduced restrictions may delay the economic recovery. However, continued falling interest rates in the US served as a medicine for market concerns. While U.S. inflation has surprised on the upside in recent months, it has still been in line with what the Fed expected, according to Central Bank Governor Powell. At the end of the month, Powell also signaled that the economy is improving gradually but that an interest rate hike is not on the table at the moment. In China, shares fell sharply after the state intervened against education companies, whose role in the future Chinese society is being questioned for various reasons. Education companies do not make up a major part of the stock market or the economy, but the risk that the state will act against additional sectors scares investors who also valued down companies in real estate, health care and technology greatly.
All equity funds showed positive developments during the month, with Simplicity Fastigheter performing the most positive and was up 11.2%. Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige rose by 7.2%, 9.5% and 10.1%, respectively, while Simplicity Småbolag Global rose by 2.2%.Tillbaka till Nyheter