Fixed Income
Portfolio Managers comments
The news flow during October was dominated by the same topics that were in focus in September, ie rising inflation, rising interest rates, US politics and the problems in the Chinese real estate sector. The trend with increasing inflationary pressure continues, however, a large part of the higher inflation can be explained by rising energy prices, and this effect is expected to decline as comparison figures change. Long-term bond yields continued to rise during the month and traded at the highest levels since last spring. However, the markets were less concerned about this as opposed to during spring, when rising interest rates led to falling stock prices. In the US, the politicians came closer to reaching an agreement about the infrastructure- and well fare packages which were both parts of the reform agenda that President Biden promised to implement after having been elected. However the president has had to make some compromises as several important parts of the package have been removed and there is still a lack of funding for some of the major investments. In China, the problems for the debt-burdened real estate developer Evergrande continued. During the month, the company failed to close a deal in which they tried to sell assets for approximately USD 2.6 billion. This caused the price of the company’s shares, which had been halted from trading on the stock exchange for almost two weeks, to fall. However, Evergrande was able to make an interest payment on a bond, which meant that the company avoided ending up in default which could have had consequences for the company’s other liabilities. The problems in the Chinese real estate market do not seem to be limited to Evergrande, as it was reported that a number of other companies such as Fantasia Holdings and Modern Land failed to repay bonds at maturity.
In the US, the Fed released its Beige Book, which is an important source of information ahead of the upcoming Fed-meeting. The report showed, among other things, a certain slowdown in growth due to continued logistics disturbances and a labor shortages, which has led to cost- and wage increases. However, most companies seem to have been able to pass on their increased costs to their customers. In summary, the report confirmed the forecast that the Fed will announce a tapering of its asset purchases at the Fed-meeting on November 3. This was also emphasized by Fed Chairman Jerome Powell, who during a speech declared that he thinks it is time to reduce purchases, but too early to raise interest rates. The European Central Bank (ECB) left its key interest rate unchanged and reiterated that it intends to continue buying bonds at a slightly lower rate than before. The head of the ECB, Christine Lagarde, also said that she expects the current higher inflationary pressures to ease in 2022 and that the interest rate hikes currently being prized-in by the market are not in line with the ECB’s forecasts.
In the credit market, the higher volatility remained and credit spreads rose slightly in both the Investment Grade- and High Yield segments. However, the market recovered somewhat towards the end of the month as the majority of the reports published beat market expectations. Heimstaden AB and Heimstaden Bostad issued new bonds as part of the financing of the large acquisition of properties from Akelius. The pump service company Lakers Group’s bonds rose after the company was sold to the investment company Vestum Group. The medtech company Elekta received its first official credit rating, when they got a BBB rating from S&P, which caused the price of the company’s bonds to rise. The real estate company Balder announced that they will place a mandatory bid for the Norwegian company Entra, which led S&P to lower its credit outlook for Balder to negative. However, the company announced that they are fully committed to maintain its BBB rating and that it wishes Entra to maintain as a listed company. Balder’s main owner Erik Selin was also involved in another major deal when he bought 25% of the shares in Hedin Bil for SEK 3.6 billion through a rights issue. Nordax Bank announced that they will proceed with the offer for Bank Norwegian and as part of the financing of the transaction, both the holding company Cidron Romanov and Nordax issued new bonds. We participated in both issues, which contributed positively to the performance in Simplicity Företagsobligationer and Simplicity High Yield. The primary market activity was high and in addition to Nordax, we participated in new issues in Vestum Group, Allmänna Brand and Infront, among others.
The funds had a mixed performance during the month, with Simplicity Företagsobligationer and Simplicity Likviditet falling by 0.07% and 0.03%, respectively. Simplicity Global Corporate bond decreased by 0.26% while Simplicity High Yield increased by 0.33%.
Simplicity Likviditet
Performance YTD: 0.63%
Yield net of fees: 0.20-0.30%
Duration: 0.19 years
Maturity profile: 1.32 years
Simplicity Företagsobligationer
Performance YTD: 3.23 %
Yield net of fees: 1.70-1.80%
Duration: 1.19 years
Maturity profile: 3.38 years
Simplicity Global Corporate Bond
Performance YTD: 3.59%
Yield net of fees: 2.10-2.20%
Duration: 1.98 years
Maturity profile: 3.55 years
Simplicity High Yield
Performance YTD: 6.33%
Yield net of fees: 3.50-3.60%
Duration: 1.55 years
Maturity profile: 3.49 years
Equity Funds
Fund developments
The funds had a fantastic development during the month. Simplicity Fastigheter advanced strongest with a return of as much as 10.7%, driven by positive reports from several real estate companies which also caused the sentiment for the sector to strengthen after a heavy month of September. The fund’s largest holding, Corem, rose after a solid report, while the new holding Odd Molly, now Logistea, soared amid further steps taken in its transition to become a pure real estate company. The real estate companies were also important for the development in the home market funds Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige, all of which are overweight the sector. Arjo, also a large holding in the funds, contributed strongly to the development after the medical technology company reported better-than-expected results while maintaining high growth. The same was true of Lindab, whose report impressed analysts and helped the stock rise by 26.2%. Thule continued to perform strongly, boosting sales despite tough comparative figures and the stock rose 13.1% in October. Both Thule and Lindab were among the top holdings in Simplicity Småbolag Global, whose return for the month of -0.3% was in line with the global development for small cap stocks.
Stock of the month
The Stockholm stock exchange’s evident first goalie in the world cup of hockey, Nordic Waterproofing, is a specialist in stopping all forms of leaks. In the arsenal includes different types of waterproofing for buildings and other infrastructure, such as roofing felt and rubber membranes for sealing roofs, façade panels and products for green roofs with vegetation. The Scania company’s valuation rose ahead of the 2/11 report release and the share increased by as much as 24.1% in October. The company has a market-leading position in the Nordic region and is growing both organically and through acquisitions. Given the company’s growth, fine cash flows and profitability, the stock is, despite the advance, reasonably valued with an expected P/E ratio of 19 and P/B-ratio of 4.7. The share is a holding in Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige with a weight of 0.2%, 1.2% and 2.3% respectively.
Global developments in brief
During the month, much of the market’s focus was on the reporting season to see how companies managed to address problems such as component shortages, bottlenecks and possible cost increases from more expensive inputs, transportation and electricity. However, as previously this year, the reports were very strong and a high proportion of the results came in above expectations both in Sweden and abroad. Many companies agree that the above-mentioned problems remain but that demand is still strong. This is not least eminent in Sweden, where GDP growth in the third quarter was measured at 1.8% from the previous quarter, which was clearly higher than expected. With an intact strong economy and residual cost pressures (in addition to the above examples also from staff shortages and high inflation expectations), interest rates also increased in both the US and Europe. At the end of the month, however, the European Central Bank, the ECB, stood by previous communication that no interest rate hikes will take place in 2022.
Almost all equity funds attracted positive developments during the strong reporting month, with Simplicity Fastigheter topped the table with an increase of as much as +10.7%. Simplicity Småbolag Sverige, Simplicity Sverige and Simplicity Norden advanced by +6.5%, +5.0% and +3.8%, respectively. Simplicity Småbolag Global ended the month 0.3% lower.
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