Fixed Income
Portfolio Managers comments
February became a very turbulent month, largely affected by the tragic course of events in Ukraine, which escalated with the Russian invasion on February 24. The world responded to the action with dismay and the western countries reacted immediately by assisting Ukraine with both humanitarian aid and military equipment. In addition, a large number of very extensive sanctions were imposed on Russia, including restrictions on Russian banks’ access to the Swift payment system, a ban of Russian aircraft from European airspace and the freezing of the Russian central bank´s and individual citizens’ assets held in western banks. Many companies chose to stop their deliveries to Russia and the oil company BP, announced that they intend to sell their holding in the Russian energy company, Rosneft. As expected, the market reacted very strongly to the war and energy prices rose at the same time as stock markets and other risk assets fell sharply. In the FX-markets there was a flight to safety as traditional safe haven currencies as the US dollar and the Swiss franc rose, while smaller currencies such as the Swedish krona weakened.
During the month, a number of different data points showed that inflation was high in several economies around the world. Although energy prices still accounted for a large part of the rise, it is clear that prices of other goods and services have also risen more than previously expected. This puts pressure on central banks to take action and markets are currently discounting policy rate hikes in both the US and Europe. The minutes from the Fed board meeting in January confirmed the picture that there will be an interest rate hike in March, but a number of restrained comments from some Fed-members reduced the probability of a 50-point increase somewhat. The ECB left its key policy rate unchanged, but at the press conference following the announcement, the ECB chairman, Christine Lagarde, did not want to repeat the message from December that a rate hike in 2022 is unlikely. This caused European interest rates to rise sharply.
In Sweden, the Riksbank left the repo rate unchanged and announced that they expect the first rate hike to take place in the second half of 2024. The reason behind this is that underlying inflationary pressure is lower in Sweden than in other economies. However, most analysts expect the Riksbank to hike rates earlier than that. Although there are good reasons for many central banks to raise their policy rates, the difficult geopolitical situation may lead central banks to choose to proceed more cautiously.
The credit market was negatively affected by the weaker risk sentiment, which led to rising credit spreads and falling bond prices. The largest declines were seen in bonds issued by companies with large Russian exposure. None of Simplicity’s funds have any Russian holdings and most of the companies in the portfolio have a limited presence in the Russian market. However, the deteriorating risk appetite affected subordinated bonds issued by banks and other financial companies, which contributed negatively to the performance in our funds. The liquidity in these bonds is higher, which is one of the reasons why they are more volatile than the rest of the market, in strong as well as weak markets.
The companies continue to generate strong results, which was confirmed by the many reports published in February. Primary market activity was limited as many companies were in so called ”quiet periods” ahead of their reports and thus restricted from issuing new bonds. At the end of the month, the activity decreased even further due to the great uncertainty in the market.
All funds had a weak performance in February and Simplicity Likviditet decreased by 0.27% while Simplicity Företagsobligationer, Simplicity Global Corporate Bond and Simplicity High Yield fell by 2.02%, 2.57% and 2.13% respectively. The secondary market activity was high as many investors chose to reduce risk by selling corporate bonds. Yields rose markedly in all our funds as a result of the higher credit spreads.
Simplicity Likviditet
Performance YTD: -0.25%
Yield net of fees: 0.50-0.60%
Duration: 0.19 years
Maturity profile: 1.18 years
Simplicity Företagsobligationer
Performance YTD: -2.10 %
Yield net of fees: 2.80-2.90%
Duration: 1.01 years
Maturity profile: 3.35 years
Simplicity Global Corporate Bond
Performance YTD: -3.16%
Yield net of fees: 3.40-3.50%
Duration: 1.80 years
Maturity profile: 3.41 years
Simplicity High Yield
Performance YTD: -2.10%
Yield net of fees: 5.40-5.50%
Duration: 1.46 years
Maturity profile: 3.40 years
Equity Funds
Management comments
Equity funds declined with the markets heavily affected by the war in Ukraine as well as high inflation figures in the US, Europe and Sweden. At the sector level, industrial and consumer discretionary companies were most affected, while the financial sector got valuations cut after the financial sanctions were imposed on Russia and credit risk increased for companies with exposure to the East. Simplicity’s funds, however, performed relatively well, largely thanks to holdings in stable consumer companies such as AAK, Axfood, Salmar, North West Co and Sheng Siong Group. Concurrently, growth stocks, a type of company that the funds have low weights in relative to indexes, have been punished harshly in cases where the companies’ quarterly reports have not shown sufficient organic growth.
Holmen and Boliden, both large holdings in Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige, defied the fall and rose after increased target prices and strong reporting release from the latter.
Swedish real estate shares declined after a well-known analysis firm published a short selling report on SBB (Samhällsbyggnadsbolaget i Norden). The report, which contains several erroneous claims, points to inflated property valuations in SBB and caused several Swedish real estate shares to fall. Simplicity Fastigheter was also dragged down in the case.
Stock of the month
JB Hi-Fi Ltd is Australia’s largest consumer electronics and home entertainment chain. Through online shops and physical stores at over 300 locations, they sell computers, TVs, appliances, headphones, and so on to the value of SEK 61 billion. The group, which in addition to JB Hi-Fi also includes online retailer The Good Guys, has a major cost focus to be a price leader. The company’s shares rose 15% in February after the latest half-year report showed continued high sales figures. Online shopping in particular is increasing, a segment with higher margins than physical stores, which can help keep the company’s high profitability when inflation is expected to raise the prices of consumer electronics in the future. The company is a dividend machine and with the current valuation, the expected dividend yield is 5.5%. JB Hi-Fi weighs 1.5% in Simplicity Småbolag Global.
Global developments in brief
During the month, several countries eased their pandemic restrictions as part of the declining spread of infection. At the same time, the world’s central banks remained hawkish in statements about inflation developments and inflation figures remained high. However, the Riksbank maintained that any interest rate increases are far in the future. However, both monetary policy and easing of restrictions pale in comparison to Russia’s invasion of Ukraine, where a war is now underway. In response, NATO has mobilized its defense of allied countries, but made clear that it will not provide direct military support to Ukraine. However, the West has imposed restrictions on Russia, mainly focused on technology exports and the financial system through restrictions on Russian banks and the Russian central bank. Russia’s position as an oil exporter has clearly weakened the sanctions imposed as Germany, among others, has been cautious about stricter restrictions due to effects on energy supplies. However, the sanctions, which were initially tame, have gradually been increased.
Most of the equity funds fell during the gloomy February geopolitical downturn, but Simplicity Småbolag Global held off with an increase of +1.0%. Simplicity Norden, Simplicity Småbolag Sverige and Simplicity Fastigheter fell by -4.4%, -6.3% and -6.8% respectively, while Simplicity Sverige ended at -7.0%.
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