15 December

Monthly Report November 2021

Fixed Income

Portfolio Managers comments

During the month, the volatility increased in financial markets as a result of concerns about the new mutation of the Corona virus, Omikron. The news about the new virus variant led to falling prices in most risk assets such as equities, credits and commodities. At the same time, prices of “safe-haven assets” such as government bonds, US dollars and gold rose. A number of countries took immediate action, such as stopping flights from certain parts of the world and imposing entry restrictions. This came after some European countries such as Austria, Germany and Norway already had imposed stricter restrictions as a result of an increased domestic spread of infection. It is still too early to draw any far-reaching conclusions about the severity of the new virus strain, but new shutdowns will adversely affect the recovery in the service sector and disrupt logistics chains. This may lead to lower growth and the timing is also unfortunate as we approach year end and many investors have begun to close their books, which impairs liquidity in the market.

At the climate summit in Glasgow, the countries managed to reach an agreement regarding a final document, “the Glasgow Climate Pact”, which states how the use of fossil fuels and thus carbon dioxide emissions will be reduced. The reactions after the document was published was mixed as some parties were disappointed about the outcome as neither China nor India accepted wording about completely stop using coal. Others were more positive and pointed to the fact that an important framework agreement have been reached and that new negotiations await.

At its executive meeting, the US Federal Reserve announced that it will reduce its asset purchases by $ 15 billion a month and that the plan is to phase out net purchases in 2022. However, in a speech to the US Congress at the end of the month, the Fed chief, Jerome Powell, opened up for an earlier tightening of monetary policy as he sees a risk that the current, high inflation may prove to be persistent. The Fed members have not given any signals about when they foresee an interest rate hike, but a majority of market participants believe it may come as early as next summer.

In Sweden, the Riksbank kept the repo rate unchanged and signaled that they expect the first hike in 2024. The question is whether this is really their true objective or whether they act proactively to get the market accustomed to the idea of ​​an interest rate hike that may come earlier than 2024? As for their asset purchases, they are expected to match maturities during next year leaving the size of the total portfolio unchanged, whereafter a gradual scaling down of the balance sheet will start in 2023.

In the credit market, volatility continued to be high and credit spreads continued to widen. This should primarily be seen as a reaction to increased uncertainty about the pandemic, revaluation of risk and profit-taking before year end. The fundamental development is still strong in the vast majority of companies, which was confirmed by most of the reports published during the month. In the primary market, activity remained high, although a more cautious attitude could be sensed from investors and some issues were pulled back as companies did not manage to close them at the credit spread levels they had expected. Simplicity participated in issues in the consulting company AFRY, the floor manufacturer Kährs and the online bank Nordnet.

The higher uncertainty and the volatile markets led to a weaker development for all funds in November. Simplicity Likviditet, Simplicity Företagsobligationer and Simplicity Global Corporate Bond fell by 0.07%, 0.15% and 0.47%, respectively, while Simplicity High Yield broke the pattern and rose by 0.04%. The former three funds were negatively affected by falling prices in bank and insurance bonds, by weak price development in the cosmetics company Oriflame, which released a worse-than-expected report, and by the telecom company Telecom Italia, whose bonds fell after the private equity company KKR made a bid for the company. The funds benefited from a strong development in Ford and AIG, who redeemed a number of bonds early.

Simplicity Likviditet

Performance YTD:  0.55%
Yield net of fees: 0.20-0.30%
Duration: 0.19 years
Maturity profile: 1.29 years

Simplicity Företagsobligationer

Performance YTD: 3.08 %
Yield net of fees: 1.90-2.00%
Duration: 1.13 years
Maturity profile: 3.42 years

Simplicity Global Corporate Bond

Performance YTD: 3.59%
Yield net of fees: 2.30-2.40%
Duration: 1.99 years
Maturity profile: 3.59 years

Simplicity High Yield

Performance YTD: 6.33%
Yield net of fees: 3.50-3.60%
Duration: 1.59 years
Maturity profile: 3.52 years

 

Equity Funds

Fund developments 

Despite high volatility at the end of the month, all equity funds rose in November. Simplicity Fastigheter were at the top and showed really high monthly returns of 9.4% amid continued optimism for the sector and good quarterly reports. KMC Properties, one of the fund’s largest holdings, increased earnings during the quarter and built on the portfolio of industrial and logistics properties after new acquisitions. The stock rose 20%. Real estate shares’ strong performance also contributed very positively to returns in Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige, all of which are overweight in the sector. For Simplicity Sverige, Pfizer was also a successful investment as the stock was included in the portfolio at the beginning of the month, after which the stock rose by as much as 32% after positive results in the development of a covid-drug and new recommendations for a third vaccination dose. In both Simplicity Norden and Simplicity Småbolag Sverige, Axfood was the funds’ largest contributor with an increase of 16% after continued high profitability was reported for the company. For Simplicity Småbolag Global, it was once again the IT-companies that performed best. Perficient, a consultant within digitalization and AI, continued its upward trend after strong reporting and raised forecasts late last month, while semiconductor companies Nova and Fabrinet beat expectations in their November earnings reports. 

Stock of the month

Elisa is Finland’s market-leading telecom company. By offering subscriptions with different speed differences instead of different data limits, they have managed to grow past Telia, which was previously the largest provider in the country. The company also has a strong position in the Baltics, especially in Estonia, where it has about a third of the market. The quarterly report released during the month was stable in line with expectations with sales growth of 6% and an operating margin of 24.4%, while the forecast for the full year was slightly raised. Elisa has long been a holding in Simplicity Norden where it now has a weight of 2.1%. 

Global developments in brief 

At the end of the month, a new virus variant was discovered, named omicron. The variant is reported to have a high number of mutations, which could mean that current vaccines does not provide  effective protection against the infection. Concurrently, there were reports of mild symptoms among the infected when compared to previous variants. At the end of the month, markets and political leaders closely monitored the development of the virus to determine whether restrictions need to be imposed. It is clear that politicians are more reluctant than before to impose lockdowns, which could cause disruptions in the economy which is already struggling with high inflation, component shortages and other bottlenecks. 

All equity funds had positive performance during the volatile month, with Simplicity Fastigheter topping the list with an increase of +9.4%. Simplicity Småbolag Sverige, Simplicity Sverige and Simplicity Norden went up by + 4.0%, +2.5% and +2.6% respectively, while Simplicity Småbolag Global ended at +4.6%. 

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