Equity funds
Global developments in brief
Shares fell broadly during the month, which included earnings reports, increased virus spread, GDP figures and interesting political developments in the United States. At the end of the month, the markets were reminded that the pandemic is not over as several countries again imposed restrictions to prevent the spread of infection. The fact that GDP growth was higher than expected in both China and the US faded quickly in comparison with the potential effects of further shutdowns of the world economies. At the same time, a decision on additional support packages in the United States was delayed as Trump postponed the decision until after the election on November 3. Strange statements and behaviors as well as weak debates on Trump’s part led to a clear favoritism for Biden who at the time of writing with an 89% probability moves into the White House next year according to forecaster FiveThirtyEight.
Management comments October 2020
All equity funds declined with the market during an eventful month on many fronts. In addition to the increased focus on virus spread and political setbacks for Trump, a very interesting earnings report season was largely delivered in October. Despite strong reports overall, the companies had unusual difficulty getting praise from the market, which often sent shares lower despite exceeded expectations. For example, on the Stockholm Stock Exchange the companies’ results were above analysts’ expectations in 90 cases out of 142 according to Bloomberg’s statistics, and yet the reporting companies developed on average worse than the market on the day of the report. Examples include Stora Enso, Nolato and Avanza, all of which fell despite beaten expectations. The latter released a record-breaking quarterly report with revenue 14% above expectations and earnings 20% above expectations. Still, the stock fell 4% on the day of the report. The reason for the unusually picky market is contested, but reasonably, high valuations despite several uncertainties, should have something to do with it.
However, several of our holdings managed to release reports that were liked by the market. Examples include Volvo, Thule, Epiroc , Ericsson, Arjo, Axfood, Epiroc, AAK, Probi, Europris (NO), Generac (US), Deckers (US) and Holmen, which, despite the tough market conditions rose after releasing reports. Arjo, a large holding with us throughout the year, reported a profit as much as 52% above expectations and the strong report was followed by several raised analyst recommendations for the healthcare company. The share was also one of the top contributors in Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige.
Despite Amazon’s entry into the Swedish market, several of the funds’ e-retailers also performed strongly. Simplicity Sverige benefited from holdings Boozt and Dustin while Simplicity Småbolag Sverige also profited from BHG. Ørsted also developed steadily during the month with both a strong report, expansion to the United States and initiated cooperation with Yara to develop fossil-free ammonia production.
Stock of the month
Deckers Outdoor (US) soared by 15% during the month and was thus the top contributor in Simplicity Småbolag Global. The shoe manufacturer has been one of the fund’s largest holdings since its inception in February 2018 and has since generated a return of almost 200%. The company’s cash cow is the cozy suede boots UGG whose sales make up about 70% of the company’s total. The second biggest brand is the fast-growing running shoes Hoka (“Fly high above the earth” in the language maori) which have increasingly also begun to pop up on Swedish store shelves. We particularly like the company for its performance, partly because of sales growth and improved margins, but also because it is a very profitable company with strong cash flows and a reasonable valuation which has seemingly been almost unaffected by the pandemic. The holding now has a weight of 2% in the fund.
Simplicity Norden
Month: -5.4 %
YTD: -7.9 %
Simplicity Sverige
Month: -6.4 %
YTD: -5.0 %
Simplicity Småbolag Sverige
Month: -6.2 %
YTD: -0.3 %
Simplicity Småbolag Global
Month: -4.1 %
YTD: -19.9 %
All figures are presented in currency SEK.
Fixed Income Funds
Portfolio Managers comments
After an optimistic start with a positive performance in equity- and credit markets, uncertainty gradually increased during the month as an accelerating increase in the number of new Covid 19-infections led to new restrictions in a number of European countries and regions. In the United States, the politicians failed to reach an agreement on a new stimulus package, and the US presidential election looks set to be a tight run where there is an imminent risk that it will be difficult to name a winner on election night. The Brexit negotiations between the UK and the EU continued and although some progress was made, the counterparties did not manage to reach a final agreement. At the same time as a lot of dark clouds emerged on the horizon, the International Monetary Fund, the IMF, published a new economic outlook in which it raised the global growth forecasts for 2020 and 2021. However, it should be emphasized that the upward revision for 2020 means that the IMF now thinks that the fall in GDP will be less severe than previously expected. The trend of falling equity markets continued during the month and the majority of the major indices ended the month in negative territory.
The minutes from the Fed meeting in September did not offer any major surprises, as most of what was stated in the protocol had already been mentioned in the statement after the interest rate meeting and in a number of speeches by various Fed members. However, the Fed’s next interest rate meeting, which will take place on November 4th to 5th, will be very interesting as the monetary policy will probably have to be adapted to the different conditions that will follow the US presidential election. There is also a substantial possibility that no new president has been named, which will further increase the complexity for the Fed. In Europe, the ECB left both its key interest rates and the level of its asset purchases unchanged, while announcing that they will launch a new policy in December following the completion of their new macro forecasts. The message from the ECB led to falling interest rates as markets draw the conclusion that the monetary stimulus will increase. In Sweden, the Riksbank continued with its purchases of corporate bonds, and as of October 23, total purchases amounted to SEK 860 million.
The credit markets followed the same route as the stock market and began the month with declining credit spreads and rising bond prices. However, the sentiment gradually weakened as pessimism increased. The Q3 reporting season is in full swing and even though the companies has obviously been affected by the Corona pandemic, many companies show good resilience and a large proportion of the companies have also managed to beat the Street´s expectations. Although the strong company reports have not been enough to satisfy the stock market, they have provided some support to the credit markets. The airline SAS managed to complete its comprehensive recapitalization plan, which means that the immediate bankruptcy risk for the company has now been averted. As a result of the transaction, the Swedish and Danish states increased their holdings in the company considerably, but the previous bondholders also hold a significant ownership in SAS after a large part of the bonds were converted into shares. The activity in the primary market has been relatively slow and although this can to some extent be explained by a certain seasonal effect as many companies have been in silent periods ahead of their upcoming Q3 reports, it is obvious that investors have become somewhat more cautious. Despite a weak close, all funds except Simplicity Likviditet managed to generate a positive return during the month. Simplicty Företagsobligationer rose 0.14%, Simplicity Global Corporate Bond 0.56% and Simplicity High Yield increased 0.37% while Simplicity Liquidity declined 0.03%.
Simplicity Likviditet
Performance YTD: 0.33%
Yield net of fees: 0.50-0.60%
Duration: 0.17 years
Maturity profile: 1.17 years
Simplicity Företagsobligationer
Performance YTD: -1.67%
Yield net of fees: 2.50-2.60%
Duration: 1.07 years
Maturity profile: 3.02 years
Simplicity Global Corporate Bond
Performance YTD: -2.90%
Yield net of fees: 3.70-3.80%
Duration: 2.53 years
Maturity profile: 3.53 years
Simplicity High Yield
Performance YTD: 1.82%
Yield net of fees: 3.70-3.80%
Duration: 1.21 years
Maturity profile: 3.27 years
All figures are presented in currency SEK.
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