Portfolio Manager comment Coeli Global Small Cap Select November 2023

The development of Coeli Global Small Cap Select was 15% during November, surpassing our benchmark index by 8.8 percentage points. The reason for the solid performance by the small cap fund was that the stock market had discounted the likelihood that the central banks had finished their interest rate hikes. The spark behind this rocket-propelled rise was that the latest US inflation figure proved lower than expected. Sometimes it doesn’t take much to revitalize the market.

The best performers during the month were Napco Securities, VITEC Software, and Elmos Semiconductor. Those with the weakest performance in November were Staar Surgical, Text, and Sterling Infrastructure.

This month, we spotlight cybersecurity company Qualys, which reported good figures and demonstrated the fantastic leverage in its business. Its turnover has increased by almost 13% y/y, with net profits up by 68%. As the company is debt-free, it also earns money by holding its cash in an account with a good interest rate. Its report surprised the market on release, and the share price was up almost 10% on the day, hitting a new all-time high.

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

During the month, switching into “risky assets” accelerated, as the central banks seem to be finished with their interest rate hikes to combat inflation. The latest figures for US inflation came in at 3.2%, which leaves the Fed more comfortable in giving its interest rate weapon a break. As the market had expected a higher inflation figure, this kick-started the relief rally we saw in November. It wasn’t only the US with declining inflation; the same was seen in Europe. The most recent inflation number in the EMU was 2.4%, with lower food and energy prices as the main contributors.

In our fund newsletters in the fall, we described how the high interest rates on bank accounts and bonds were offering real alternatives to the equity market, prompting capital flows to go in the “wrong direction.” During November, it was clear that the tide was turning, with investors once again willing to buy equities on a large scale.

The derivatives market for interest rate futures has begun to price in (discount) cuts in short-term interest rates next year. We cross our fingers that this proves correct, as we can all agree that high interest rates are unnecessary in the long run and can be seen as additional tax on consumption and investments. We also note that the VIX index, commonly referred to as the “fear index,” is down at the same levels we saw in 2019 before the pandemic. The VIX index shows equity market volatility expectations for the S&P 500 for the coming 30 days. Simply put, a low value indicates low expected volatility, while a high value suggests expectations for high volatility.

Portfolio changes

During the month, we bought two new companies and sold four holdings. We sold off Staar Surgical and Novanta from the US, Sweden’s Note, and the Brazilian Magazine Luiza. We added Germany’s Aixtron and United States Lime & Materials from the US (both Champion) to the fund. Aixtron operates in the field of semiconductors and is a leader in its niche, with a 55% market share. The company produces machinery that can manufacture silicon carbide (SiC) semiconductors. The advantage of SiC is that the semiconductors can withstand higher voltage and temperatures. The other addition was United States Lime & Materials, which mines and produces limestone products for window glass production, water treatment, and flue gas treatment, among others. Among extraction companies, local monopolies often emerge, which it takes advantage of in Texas, Oklahoma, and Arkansas, for example.

The fund’s positioning—our market expectations

The performance of the global small cap fund for the month illustrated the power this asset class can wield. But despite this robust increase, the valuation remains low versus large caps. As fund managers, we can always influence which companies we invest in. However, we cannot influence when the market will start to share our view and reward these quality companies with rising share prices. Monthly savings can be a great way to eliminate the distraction of trying to time the market and predict when it will rise. When the market gets a taste for something – small caps, for example – it can go fast.

The P/E for next year’s profits from Coeli Global Small Cap Select is 18.2x, and we believe profits will grow by almost 16.5% during 2024. We believe we have an attractive portfolio that can create good returns for our unitholders.

We thank you for trusting us to manage your money.