Catella employs different management processes and strategies depending on the product. One common denominator for all our active management, however, is its foundation on our selection of mainly Nordic company-specific risks. We have a fundamental approach and conduct our analysis process from a sector perspective.
The basis for all active management is an assumption that the market price may change beyond the underlying fundamental value. In other words, we believe that the market can theoretically be inefficient at any given time. Our goal is to build our portfolios using a number of shares that we consider to have an asymmetrical sample space, in both absolute and relative terms, which means that the potential for gains exceeds the risk of downturn, or vice versa for short sold stocks and underweights.
We work with fundamental company analysis, primarily in the Nordic countries, and our analysis is both quantitative and qualitative. We make our own assessments of a company’s earnings growth and financial strength, and we then set these in relation to the overall expectation of the market. Our analysis aims at creating an understanding of what drives price trends, risks and opportunities. The weighting of an investment in our portfolios depends on an overall assessment of potential, confidence, risk and its impact on the portfolio’s risk composition. We spend a relatively large part of our time meeting with corporate executives, external analysts and other portfolio managers in order to gain a better understanding of individual companies, sectors and the market as a whole.
Our assessment is that the range of outcomes in the financial market is large and that the accuracy of forecasts is low. Handling decisions in an uncertain environment makes a degree of modesty a critical factor in generating good returns in relation to the associated risks. Furthermore experience, focus and cooperation, within the management team and with other parts of Catella Fonder, are crucial for our success.
Fixed income management
The management of the fixed income funds is shaped by a global assessment in which the economy and politics together form the foundation of fiscal and monetary policy. Monetary policy in particular is important for the return on interest-bearing assets. Corporate bond management is closely related to equity management since the company-specific risk drives the returns. The fact that the upside from bond investments in the form of returns is limited, with the best outcome being the return of the amount borrowed, makes active risk management a central component of the portfolio management. We try to spread the risks between sectors and companies as far as possible, and we try to avoid concentrated risks in sectors or individual companies. In essence, there are three risk premiums that generate returns in the portfolios: credit risk, interest rate risk and liquidity risk. Our aim is to balance the portfolios and not to rely too much on any of these risk premiums. The composition over time is governed by market conditions, pricing and confidence. The individual company selection is paramount, and we conduct fundamental analysis of the individual companies, with a focus on their ability to make repayments. The asymmetrical sample space is also critical to fixed income management.
Active risk management is an important component in the design of our portfolios. Catella has a risk management department that is independent of the portfolio management, and which regularly monitors the management in terms of risk and returns. It also highlights the risks in the portfolios and therefore challenges their design by the managers. This is a valuable resource and improves the exchange between risk and return in the portfolios.
Sustainability is a vital part of the decision-making process for investing in equities and fixed income, from the perspective of the client, the products and wider society. We believe that greater focus on sustainability contributes to the management process by highlighting both the risks and the opportunities in the operations of the portfolio companies. An example of a sustainability issue crucial to an investment’s long-term potential would be a company that operates a profit-making business today at the expense of future losses, such as costs for managing future environmental debt, brand risk or aggressive accounting. Operations that have costs and investments that weigh down earnings today, but that will lead to profits in the future, make interesting investments if identified early on. These might include more efficient use of natural resources in the future, new and more resource-efficient technologies, new applications or conservative accounting. Our sustainability analysis is conducted as an integral part of our company research. The equity portfolios are screened using external data support in order to obtain an independent assessment of how sustainable our investments are.