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5 February 2018, Sweden | Mutual Funds | News

Strong start to the year for Catella Nordic Long Short Equity

The start of 2018 has been strong for Catella Nordic Long Short Equity, following good company selection for both longs and shorts. The long holdings (positions for a rising stock market) include PGS, Storebrand and Xspray. The main shorts for the fund (positions for a falling stock market) have been Christian Hansen and Royal Unibrew.

The fund has had a holding in insurance company Storebrand since we took over the management in early 2015, and the share price has performed very well. Our base case scenario imagines rising interest rates this year, driven by solid synchronised global growth and signals of rising inflation. Rising interest rates will benefit Storebrand and therefore its capacity to pay dividends. In late 2017 the company announced an acquisition of Skagen Fonder, and we believe its strong financial position means it will be able to make more buyups. Despite the strong performance, Storebrand's stock remains attractively valued with a P/E of 12x the 2018 earnings forecast. The company's focus on sustainable investments is of course something we believe will drive future growth, and at the beginning of the year Storebrand was named the 38th most sustainable company in the world by the Corporate Knights Global 100 List of Most Sustainable Companies.

Number five on the same sustainability list was Finnish industrial group Outotec, which sells equipment and services, primarily to the global mining industry. Outotec's products deliver more efficient mining operations by reducing the consumption of energy and water, and by cutting emissions. Like Storebrand, this company has been a holding for a long time and has performed very well. In its financial statement for the fourth quarter, Outotec demonstrated order intake far in excess of market expectations. At the time of writing around one-third of Nordic companies have published their results for the fourth quarter, and we are beginning to see cost-side inflation in many manufacturing industries, such as higher raw material costs. It is therefore of the utmost importance for us to identify which companies within each value chain are strong enough to pass on these costs and preferably overcompensate. This is our definition of a quality company. We believe that cost inflation means most companies will accelerate their investments, increase the amount of automation and focus on streamlining. Our holdings in Outotec, ABB and also Troax are examples of companies that will benefit from the efficiency trend.

Our short positions are similar in their character. These are companies with high valuations and excessive earnings expectations. One such example is Danish medical technology company Coloplast, where we believe analysts' expectations are too high. Weaker organic growth and intensified competition make it difficult to justify a P/E of 27x for the 2018 earnings forecast. In addition to purely short positions, we have added to our option hedging since we believe that the price of options has been very attractive. Once this hedging becomes necessary the prices will of course no longer be attractive or, as my colleague Ola Mårtensson often says, "It's too late to buy insurance when your house is burning down".

Our outlook for the global economy is good, but this is already reflected in the valuations of many companies. The biggest danger aside from geopolitical risks is the fact that inflation could rise by more than expected, which would result in greater tightening by central banks. This would clearly be negative for the stock market, but would not prevent us from making money in the Catella Nordic Long Short Equity fund since we also adopt positions for a falling market.

CATELLA NORDIC LONG SHORT EQUITY

Sweden

Martin Nilsson

Fund manager
Direct: +46 8 614 25 64

Risk information

Investments in fund units are associated with risk. Past performance is no guarantee of future returns. The money invested in a fund can increase and decrease in value and it is not certain that you will get back the full amount invested. No consideration is given to inflation. The Catella Balanserad, Catella Credit Opportunity and Catella Hedgefond funds are special funds under the Swedish Alternative Investment Fund Managers Act (SFS 2013:561) (AIFM). Catella Sverige Aktiv Hållbarhet and Catella Småbolagsfond may use derivatives, and the value of the funds may vary significantly over time. The value of Catella Sverige Hållbart Beta may vary significantly over time. Catella Avkastningsfond may use derivatives and may have a larger proportion of the fund invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other investment funds, in accordance with Chapter 5, Article 8 of the Swedish Investment Funds Act (SFS 2004:46). Catella Nordic Long Short Equity and Catella Nordic Corporate Bond Flex may use derivatives and may have a greater proportion of the funds invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other investment funds. For more details, complete prospectuses, key investor information, and annual and half-yearly reports, please refer to our website at catella.se/fonder or phone +46 8 614 25 00.
Last changed: 5 February 2018

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