Portfolio Manager comment Coeli Global Select May 2023

During May, the performance of Coeli Global Select was 5.07%, beating the benchmark index by 2.49 percentage points. Adding this to the total takes year-to-date returns to 17.33%, surpassing the index by 8.91 pp.

There are many shares in the fund that have contributed to this stellar performance, in many cases with somewhat of a ketchup effect from last year, when our fine companies generally continued to grow their profits decently but share prices fell for many owing to the large interest rate hikes and uncertainty over the war in Ukraine. This year, share prices will thus return to their long-term trends as profits continue to increase.

The strongest performers during May specifically were tech companies—AMD and Adobe—but also construction-related—Sterling Infrastructure and Martin Marietta. One strength of our fund is its ability to earn money in many different industries. The worst performers were Sonova, Balder, and L’Oréal. Sonova has proven more cyclical than we had expected, and there is clearly a strong correlation between the consumer confidence in US and how much the average American wants to spend on high-end hearing aids. This has led to a weaker earnings trend from Sonova than we anticipated, but the worst is hopefully behind us now.

At the time of writing, Coeli Global’s research team is attending two equity conferences in the US. We are in Chicago and New York to attend these conferences and meet many of our holdings, as well as to seek out exciting new companies for our funds.

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

We believe we are closing in on the peak in interest rate hikes in the US. At the time of writing, the Fed’s policy rate sits at 5.25%. The policy rate has increased significantly over a short period and, looking back at 2022-23, we are likely to describe this as an exceptional period of rapidly rising inflation and high interest rates as a consequence. We believe the Fed’s monetary policy is taking hold and inflation is now dropping relatively quickly. Energy prices are also on their way down, helping to dampen inflation. In fact, there is now deflation in energy prices y/y, and in Germany, gas prices are now lower than they were before Russia launched its war of aggression on Ukraine. Bear in mind inflation was partly triggered by a hike in energy prices over a short period in 2022.

During reporting season, we have seen signs from our companies that supply chains are loosening up again, which is a key piece of the puzzle for companies to operate more effectively. When supply chains work, there is no need for companies to tie up capital in inventories, which allows cash flows to be funneled into investments and for other purposes. A company can thus reduce the share of debt financing of investments, which is positive when interest rates are high.

Portfolio changes

During the month, we made a swap in the semiconductor industry, selling Technoprobe and buying Cadence System. Cadence is one of the two leading companies in semiconductor system design, and its earnings stem more from the company’s research and development than from consumer purchasing behavior, which renders Cadence far less cyclical than our other semiconductor holdings. The company is consequently a good complement to the other semiconductor shares. We still own Technoprobe in our small cap fund, as the company offers leading technology, high growth, and low debt.

The fund’s positioning—our market expectations

We consider the global economy to be structurally much stronger than expected and to have navigated the interest rate hikes better than many anticipated. There is no doubt, however, that interest rate cuts would make life easier for many consumers and for several industries, including European construction and real estate. The timing of such cuts is uncertain (H2 2023? H1 2024?), but there is no doubt they will help consumers in general and the stock market in particular. We are now preparing for several company meetings to ensure readiness for this next phase.