Fixed Income
10-year anniversary and a new fund launch!
We would like to take this opportunity to highlight that our fund, Simplicity Företagsobligationer, celebrated its 10th anniversary on March 30, and thank all of our customers for the trust you have shown us over the years. We also want to inform about an upcoming product launch, as we will start our first dark green fund, Simplicity Green Impact in May. The fund is a global equity fund that invests in companies that contribute to sustainable development and are at the forefront in terms of climate change, environmental impact and resource efficiency. Sustainable companies have shown very good growth in recent years, and a strengthened focus on the climate and the environment creates several interesting investment opportunities, which should lead to continued strong growth in this area. The investment process in the fund will be based on our long experience in portfolio management and as in our other funds, the objective for Simplicity Green Impact will be to generate a high risk-adjusted return. More information about the fund will be available on our website shortly.
Portfolio Managers comments – March 2022
The news flow was dominated by reports of the war in Ukraine, which has been going on for more than a month. In addition to the great suffering that afflicts both soldiers and the Ukrainian civilian population, the conflict also causes consequences for the world economy. The Russian economy is being more isolated from the rest of the world economy every day as extensive sanctions from the West are imposed and a large number of Western companies operating in Russia have chosen to close down their operations there. Russia has responded by threatening to nationalize companies that do not maintain their operations, but few analysts believe that this will have any major effects. Russia’s strong bargaining chip has always been the supply of oil and gas, on which Europe in particular has been dependent. However, more and more European politicians are now arguing for a ban of imports of oil-and gas from Russia. The war is also affecting the possibility for Ukraine and Russia to trade with the rest of the world. This has led to surging prices for oil, coal and gas, but it is also expected to lead to rising food prices. All in all, this contributes to the increasing inflation, which was high already before the war broke out.
March began with pessimism and falling stock prices but the market made a turn-around and bounced back during the second half of the month. The rise can be explained by the fact that the Russian invasion has not developed according to plan at all and that the two countries have shown some willingness to negotiate with each other. Inflationary pressures continue to be high around the world and the inflation data presented in March continued to surprise on the upside. In the US, the inflation rate is now at its highest level since the early 1980s, which was one of the reasons behind the decision by the Fed to raise the Fed Fund´s rate at its meeting during the month. However, the Fed only raised the interest rate by 0.25 percentage points in light of the geopolitical situation, but most analysts agree that this hike will be followed by more. Fed Chairman Jerome Powell also indicated that he does not rule out that a 50 basis point hike may be needed at some point. Another event that attracted a lot of attention was the inversion of the US yield curve. This occurs when long-term bond yields are traded at a lower levels than short-term bond yields, which has historically been a strong indication of an impending recession within two years.
The Swedish inflation is also high, and a number of members of the Riksbank’s direction are discussing the need for an interest rate hike in the near future. This is already discounted by the market, which expects the Riksbank to hike before summer. The National Institute of Economic Research’s barometer survey showed that the confidence level among Swedish households are at the same level as it was during the financial crisis of 2008, while their one-year inflation expectations are as high as 10%! However, the survey showed that the confidence within the corporate sector is better and not as pessimistic as among households.
The credit market development followed roughly the same pattern as the stock market and a weak start to the month was followed by a strong recovery. The Nordic market was less volatile than the international market, which to some extent can be explained by lower liquidity. Many Nordic companies also issue floating rate bonds which are less affected by changes in interest rates. The primary market activity was low due to the uncertain geopolitical situation, but as conditions improved, the activity increased and a number of companies chose issue new bonds. We participated in new issues in the real estate companies Cibus and Vonovia, the Dutch bank Rabobank and truck manufacturer Scania. However, since the credit spreads have widened significantly, many companies have chosen to wait for better conditions.
The recent sell off in the market has to some extent been driven by outflows and much of the capital that has been redeemed from corporate bond funds will most likely return when the volatility has subsided. Given that new issue volumes have been low, inflows can lead to rising prices due to a lack of supply.
Despite a strong close, all funds had a negative performance in March. Simplicity Likviditet lost 0.01% and Simplicity Företagsobligationer 0.07% while Simplicity Global Corporate Bond and Simplicity High Yield fell 0.17% and 0.10% respectively.
Yields in all funds have risen significantly due to rising credit spreads and a higher level of short-term interbank rates, which are reference rates for floating-rate bonds.
Simplicity Likviditet
Performance YTD: -0.26%
Yield net of fees: 0.80-0.90%
Duration: 0.21 years
Maturity profile: 1.18 years
Simplicity Företagsobligationer
Performance YTD: -2.17 %
Yield net of fees: 4.20-4.30%
Duration: 0.95 years
Maturity profile: 3.37 years
Simplicity Global Corporate Bond
Performance YTD: -3.33%
Yield net of fees: 4.60-4.70%
Duration: 2.03 years
Maturity profile: 3.20 years
Simplicity High Yield
Performance YTD: -2.20%
Yield net of fees: 6.00-6.10%
Duration: 1.18 years
Maturity profile: 3.32 years
Equity Funds
Management comments
All equity funds rose during the month marked by the war in Ukraine, rising inflation and rising interest rates. The home market funds, Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige, outperformed their benchmark indices by between 3 and 4 percentage points each after successful stock selections. The funds’ stable consumer companies such as Axfood, Cloetta and Austevoll Seafood rose more than the market. Axfood rose by as much as 25% after several buy recommendations as the company is well positioned for increased inflation. Materials companies also rose sharply in the wake of rising commodity prices, including SSAB, which went up by as much as 22%. In addition, many of the paper producers are active in energy production, which makes them less affected by the rising energy prices that have caused some companies to pause their production. In the funds, SCA and Holmen rose by 18% and 15% respectively. Nibe also advanced by 24% on the same theme, as their products contribute to reduced energy consumption.
The development of real estate shares was also positive as the majority of Swedish real estate companies rose during the month. Catena, focused on logistics properties, went up by 16% and, via a directed share issue during the month, raised just over SEK 2 billion to be used for new real estate investments. The large holdings Sagax and Castellum also rose more than the market. Simplicity Småbolag Global also had a good month with higher returns than its benchmark index. Intertape Polymer, a producer of packaging materials, received a takeover offer with a premium of 65%. The acquisition was one of three in Simplicity’s equity funds, where GHP Specialty Care rose sharply in Simplicity Småbolag Sverige after bids from Capio and Sbanken rose in Simplicity Norden after DNB’s bid was finally approved by the Norwegian Competition Authority.
Stock of the month
SalMar is one of the world’s largest producers of salmon with the main part of the business based in Norway and with investments in Iceland and in the UK. The company is a leader in the area of sustainability and develops, among other things, offshore fish farming far from the coast where the water quality is often better and the risk of parasitic attacks is lower than in coastal farms. The price of salmon has risen recently, as the removal of pandemic restrictions has led to increased demand while production growth is low. The increased prices are expected to benefit salmon farmers such as SalMar and the stock rose by 7% during the month following increased recommendations from analysts. During the month Simplicity Norden increased its holdings in salmon farmers MOWI and Austevoll Seafood together with SalMar, which is also the fund’s largest salmon farmer with a weight of 1.3% of the fund.
Global developments in brief
The war in Ukraine remained the focus of stock markets during the month. The West expanded its sanctions against Russia and many private companies chose to leave the country. Despite the invasion, stock markets rose. The advance can be explained by the fact that the parties indicated openness to negotiations and that an escalation that could include a NATO member for the moment seems more unlikely, while the effects of the war also have become more apparent. Above all, it is now clear that the invasion is further adding to inflation expectations. Commodity prices, not least the price of oil, have risen sharply, which means higher costs for companies that are most likely due to compensate with increased prices. The changed situation has even led Riksbank governor Ingves to lean towards earlier interest rate increases. As expected, the US Fed raised its key interest rate by 0.25 percentage points and signalled that more hikes are to be expected. Fed members’ forecasts now point to a policy rate around 2.75% by the end of next year.
In the market, interest rates with both short and long maturities have risen. However, yields with a maturity of 2-3 years rose more than 10-year rates, and in the US the curve inverted on several occasions during the month, which has historically been an accurate indicator of an impending recession. Normally, however, an inverted curve signals that monetary policy may need to support the economy in order to boost weakened growth. This time, inflation is expected to be high in the near term in order to normalise in the longer term. Large swings were also seen in China, where increased spread of infection led to increased restrictions again. This led to high volatility on the Hong Kong Stock Exchange.
All equity funds had positive developments during the strong month where Simplicity Småbolag Sverige topped with an increase of as much as +6.6%. Simplicity Norden and Simplicity Sverige advanced by +4.8%, respectively +5.6%. Simplicity Småbolag Global ended at +1.5% and Simplicity Fastigheter rose by +3.8%.
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