Portfolio Manager comment Coeli Global Select september 2022

Overall, September was a poor month for the stock markets because of concerns about high inflation and how this will impact consumers’ purchasing power. The 4% rise in 10-year US interest rates, the key parameter, created unease that dragged the equity markets down. Working as an asset manager in this environment is like swimming against counter-currents in rapids. One stroke forwards with companies’ profit development and two backwards with the currents as market interest rates rise. Regardless, we do see signs of some inflation components slowing down, which suggests some better times ahead. Soon, a new reporting season will kick off, and we hope for a repeat of the second quarter season, with robust reports that can lift the market.

During September, Coeli Global Select’s performance was -9,10%, falling 1,97 percentage points short of our benchmark.

The strongest performers during the month were United Health, Beijer Ref, and Renault. Beijer Ref’s solid development stemmed, among other factors, from two acquisitions in Australia that pleased the market. The stocks with the weakest performance in September were Adobe, Truecaller, and S&P Global. The announcement of Adobe’s acquisition of Figma caused cold feet in the market, the high price tag in particular not being appreciated. Truecaller is in the midst of tough times, with a handful of hedge funds seemingly wanting to discredit the company by issuing ”short-seller reports”. In our view, Truecaller’s management is trustworthy in its communication and the company has a solid business model that generates appealing profits.

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

The US Fed raised interest rates once more, by 0.75%, a move the stock markets greeted with a relatively strong negative reaction. At the press conference, Jerome Powell stated his determination to reduce inflation to 2%. We believe the Fed is using its strong interest rate increases of the summer to cool down a pretty heated US economy. As capital becomes pricier (higher interest rates), demand for goods, services, and labour diminishes. The US currently has too low unemployment and Powell believes this needs to rise to avoid excessive wage inflation. And through interest rate increases, he also wants to slow the hike in property prices. Sweden’s Riksbank does not want to do worse and lifted interest rates by 1% to reduce inflation in the long term to its 2% target.

During September, we witnessed an incredibly strong US dollar, surpassing SEK 11.30 – its highest level since 2001. And regardless of how strange this sounds, the lack of dollars in the world just makes it more expensive. As a result of the Fed’s tightening of monetary policy to reduce inflation, the number of US dollars has come down.

Beyond higher interest rates, escalating energy costs and other price increases are also hitting consumer discretionary stocks. Unfortunately, all too large a share of disposable income is now required to pay electricity bills rather than being spent on consumption.

Portfolio changes

During September, we made some changes to our Special Situations stocks. We sold truck manufacturer Traton (around 40% of which is Scania) after the acquisition of the US’s Navistar. The reason is that Scania was no longer as profitable as before and that Traton has failed in making MAN profitable.

We instead added Titan Machinery and Societe Generale to our portfolio. We believe Titan Machinery, a reseller of agricultural machinery in the US, holds great earnings potential through the growing demand for crops from countries other than Russia. We expect Societe Generale, a French bank with a particularly low valuation, to be able to grow its profits thanks to the rising interest rates. Both have a P/E a good deal below 10x.

The fund’s positioning – our market expectations

Following the month’s decline, we consider Coeli Global Select to offer a more appealing valuation. It has a P/E of around 19x next year’s profits and aggregated profit growth in the portfolio surpasses 20%. The fund’s PEG ratio (relationship between valuation and profit growth) is thus below 1. This is low given the excellent quality of our companies. Remember, the best stock transactions are made in the worst of times.

News

We have started a new global small cap fund, called Coeli Global Small Cap Select. For the first time, we will present all the fund’s holdings. All you need to do is sign up for our newsletter, where we will provide a link to access a list of the Small Cap Select’s holdings.

Click here to sign up for the newsletter. Those who sign up prior to August this year will, unfortunately, need to do so again to receive news related to Coeli Global Small Cap Select.