3 January

Monthly Report December 2022

Fixed Income

Portfolio Managers comments

The news flow in December was dominated by the same themes that have been in focus during the greater part of the year, such as inflation, interest rates and the state of the economy.

In China, authorities eased their strict COVID-19 restrictions, which was received positively by investors as it is expected to lead to increased economic activity. However, after reports of a rapid increase in the number of cases, optimism turned to concern about the consequences of more infections in China. Bank of Japan took the market by surprise when they announced that they will allow the interest rate on the ten-year government bond to fluctuate more than previously. The announcement indicates that Japan is finding it increasingly difficult to maintain low interest rates in an environment where global rates are rising. Japanese interest rates rose sharply after the news, which also caused some concern in the international bond markets. In the US, the inflation rate continued to fall for the fifth month in a row, increasing hopes of fewer rate cuts from the Fed in the future. Swedish consumer prices, measured as KPI, increased slightly less than expected in November, but the levels are still high and it is likely that the Riksbank will raise rates at one or more occasions. The National Institute of Economic Research, NIER, published a forecast painting a gloomy picture of the Swedish economy characterized by continued high inflation, rising interest rates, and recession until 2025. The report also highlights the fact that Swedish households are more sensitive to higher interest rates than households in other countries due to higher leverage and shorter interest rate duration on their loans, which is expected to contribute to the recovery taking longer.

The European Central Bank (ECB) raised its benchmark interest rates by 0.50 percentage points, which was a tapering after 75 point increases at the two previous meetings. However, during the press conference following the interest rate decision, ECB President Christine Lagarde, signaled that more rate hikes will be required to reach a level that is sufficient to curb inflation. The statement was considerably more hawkish than what the markets had expected and caused interest rates to rise across the board. The Fed also slowed the pace of its rate hikes, but at the same time adjusted its forecast for where the terminal rate will be at the end of the hiking cycle. Comments in conjunction with the meeting indicated that the Fed is worried about inflationary impulses from a strong labor market, which means that labor market figures will be even more in focus in the coming months.

In the credit market, volatility rose again due to rising interest rates and increased uncertainty about the economic development. Swedish real estate-company, Balder, carried out a directed new issue of SEK 1.8 billion to AMF. The proceeds from the issue will be used to redeem an outstanding hybrid bond and the announcement caused the prices of the company’s bonds to rise. A number of other real estate companies, including Corem, Sagax and Castellum, announced divestments during the month. Most transactions were reported at levels equivalent to the values at which the properties are held in the companies’ books. Although there may be some room for interpretation on this, it is positive that transactions are being carried out as it means that the companies can reduce their debt levels. After a number of media statements from Castellum’s new major shareholder, Roger Akelius, Castellum’s CEO, Rutger Arnhult, announced that he is resigning from his position as CEO of the company to focus on his private investments. The announcement was not surprising and the reactions were limited. Moody´s cut its rating on Swedish compounder Storskogen from Ba1 to Ba3 and at the same time announced that the company remains on review for further downgrades. S&P also cut its credit rating on the company, but only by one notch. The prices of the company’s bonds fell on the news. In the primary market, activity was slow ahead of year-end. Simplicity participated in the credit management company Intrum’s issue, where the company chose to issue a new Euro bond with a maturity of five years and three months at an interest rate of just over 10%.

All funds performed well during the month. Simplicity Likviditet rose by 0.34% and therefore generated a positive return of 0.24% after management fees for 2022. Simplicity Företagsobligationer rose by 0.43% while Simplicity Global Corporate Bond and Simplicity High Yield rose by 0.18% and 0.71%, respectively. The yield in all funds remains at a high historical levels.


Simplicity Likviditet

Performance YTD:  0,24 %
Yield net of fees: 4.00-4.10%
Duration: 0.21 years
Maturity profile: 0.93 years


Simplicity Företagsobligationer

Performance YTD: -6.39 %
Yield net of fees: 8.00-8.10%
Duration: 0.96 years
Maturity profile: 2.97 years


Simplicity Global Corporate Bond

Performance YTD: -9.28%
Yield net of fees: 9.10-9.20%
Duration: 2.37 years
Maturity profile: 3.02 years


Simplicity High Yield

Performance YTD: -6.25%
Yield net of fees: 11.10-11.20%
Duration: 1.22 years
Maturity profile: 2.75 years


Equity Funds

Fund management comments

A challenging stock market year ended with another volatile month, in which stock markets were torn between fears of downturn in the economy and hopes of a soft landing with more careful central banks. 

The US Federal Reserve and the European ECB once again assured that tightening will continue as long as inflation is too high, thereby dashing hopes for more cautious monetary policy going forward.  The bottom line is that the central banks simply won’t be able to help when the economy turns sour next year. They are too busy fighting inflation, and in the unlikely event that they change their minds, it will be because the economy is in a very bad shape. The market situation has thus changed significantly as bad news is no longer good news. 

Suddenly, companies need to stand on their own two feet and deliver profitability, not just growth and cool product launches.  Greater focus on the economy during the month led to more cyclical stocks lagging along with growth and lottery ticket companies, something that benefited our funds from a relative perspective.  Our home market funds Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige developed stably and with positive development for the former.  The healthcare companies Novo Nordisk, Orion, Coloplast rose in Simplicity Norden as well as AstraZeneca, which is also in Simplicity Sverige’s portfolio. Stable consumer companies were generally also doing well in the funds, including AAK and Essity, which received raised recommendations during the month, motivated by the fact that margins are starting to recover. Ventilation company Munters, holding in the home market funds as well as in Simplicity Green Impact, continued its price climb and rose by as much as 11% during the month after order bookings and raised its growth target from 5% to 10% per year.  Collector, a holding in Simplicity Småbolag Sverige, had a similar development during the month and rose by 37% after insider purchases.  The real estate sector is once again developing in the right direction as several real estate companies continued to increase their liquid funds. Castellum, Sagax and Corem, among others, sold properties and SBB also decided to spin-off Amasten, now Neobo. 

Globally, European stocks performed best while U.S. stocks fell the most.  Simplicity Green Impact benefited from gains for consulting companies TietoEvry and SPIE.  In Simplicity Småbolag Global, Sydbank rose after increased earnings guidance as well as new additions Melexis, Ipsos and Rai Way.  

Stock of the month 

Commercial Metals Company (CMC) is an American metal recycler with operations in the United States and Europe.  Through about 50 recycling plants of scrap metal, the company produces raw materials for its steel mills for the manufacture of rebar, steel wire and other steel products. Thanks to its energy-efficient electric arc furnaces, a type of electric furnace for metal smelting, the company can produce steel with 63% less greenhouse gas emissions than the industry average. When you also add that all raw materials are recycled, it is not difficult to understand why the company makes the cut as a holding in our dark green fund Simplicity Green Impact. However, the stock is not only a dark green gem but also a quality company with a low valuation. The company has low leverage and high profitability with return on equity that has been above 10% over the past 4 years. As the prices of rebar are expected to fall in the coming years, the company has also received a low valuation of just 5.5 times last year’s profit and 7.8 times next year’s profit. A bargain for a company with strong growth and a market position that is right in time.  The share is also a holding in Simplicity Småbolag Global.  

Global developments in brief 

Central banks remained hawkish during the month as the Fed raised its key interest rate by 75 basis points, the ECB by 50 basis points and the tone continued in the same way as earlier in the year. Even Japan’s central bank made changes, though not in the policy rate but in the tolerance range for the rate on the 10-year government bond that widened to 50 basis points. The change is seen as a first step towards moving away from its very expansionary monetary policy.  In China, the very tough pandemic restrictions have eased and 1.4 billion Chinese can now travel and move freely without showing negative covid tests.  The country is thus in for a big test as the vaccination rate is low and the Chinese New Year is approaching.  

Performance of the funds 

Both Simplicity Fastigheter and Simplicity Norden rose by 2.7% and 0.9%, respectively.  Simplicity Sverige and Simplicity Småbolag Sverige fell by 1.3% and 1.0% respectively, while Simplicity Småbolag Global and Simplicity Green Impact fell by 3.1% and 5.7%, respectively.  

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