Portfolio Manager comment Coeli Global Select August 2023

The return for Coeli Global Select was -0.04 in August, which was 1.25 percentage points better than our benchmark index. As we have mentioned in previous newsletters, the performance so far this year has been fantastic and now totals 23.02%.  What pleases us most to see is the solid contribution to returns from sectors such as construction and automotive. So it hasn’t only been tech firms driving the great returns – showing the breadth of our portfolio.

The best performers during August were Sterling Infrastructure, Mastercard, and Adobe. The two with the weakest development were Fortnox and Beijer Ref. Fortnox and Beijer Ref have been impacted by the generally souring sentiment towards the Swedish economy, both domestically and among foreign investors.

This month, we shine the spotlight on Sterling Infrastructure, a Texas-based construction company whose share price has shot up more than 140%, making it by far the fund’s best contributor. Among other things, Sterling makes cement foundations for all factories now being built, especially in the southern states of the US. We keep in regular contact with management and have visited its Houston headquarters on a number of occasions. It is thrilling for us as investors to be part of Sterling’s journey from an unknown Texan construction company to a firm now expanding across the US and making efforts to become better recognized and more sustainable. We are undertaking an analysis trip to Silicon Valley in early September to meet many exciting software and semiconductor companies.

Key market events and trends (what has influenced performance most?)

The light is growing at the end of the tunnel following all the interest rate hikes, and the question now is whether the central banks have finished these and plan instead to start pondering cuts. The US economy remains formidable, however, which suggests interest rate cuts may lie some way off, but we believe the worst of the boom is probably over. In the world’s largest economy, many Chinese real estate companies are struggling with financing issues and an inability to sell enough new apartments. What is interesting here is that the western stock markets are almost wholly unaffected by the Chinese real estate and construction firms’ difficulties. However, the real estate sector’s problems are a global phenomenon. At the time of writing, we are in San Francisco, where we can see many office spaces that would typically be rented out sitting empty.

Portfolio changes

During August, we made two changes to the Special Situations part of our portfolio—shorter-term investments, usually of six to 18 months. We sold Nordea and bought Italian automotive company Stellantis. The particularly appealing valuation was what attracted us to Stellantis. Adjusting for the large cash chest in the company, the share trades at less than 3x estimated profits for 2024. Stellantis holds many well-known brands, such as Alfa Romeo, Chrysler, Fiat, Jeep, Maserati, and Peugeot. During H1 2023, its revenues expanded by 12% and it generated an EBIT margin of 14.4%, making it particularly profitable among automotive companies. Its valuation is held back partly by questions around the anticipated labor strike in the US and partly by the general economic climate in Europe. We consider its valuation appealing enough in spite of this. It’s not often one can buy a growing, profitable company at these valuation levels.

The fund’s positioning—our market expectations

We have an extremely interesting global fund of stable Champions and low-valued Special Situations stocks with an estimated profit growth exceeding 17% between 2023 and 2024. Aggregated growth in revenues in our companies over the same period is estimated at more than 11%. We see this as alluring in a world where many countries are fighting to expand their GDP to avoid a recession.