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Greater share of equities

Unusually weak performance in both the equity and credit markets in December led to hopes of a positive annual return for the fund being dashed. The return in December was -2.85 percent, meaning that the return for 2018 ended at -3.52 percent. The long-term investor can take comfort from the fact that the average annual return over the past ten years amounts to a good 11.14 percent.

The downturn is reasonably explained by increased concern that the economy is now weakening, while central banks are tightening. Both Europe and China showed signs of weakness earlier, but the positive effects of the large tax cuts in the US are now also beginning to ebb. Unfortunately, the central banks have little room for manoeuvre when it comes to stimulus since interest rates are so low to begin with, and also public debt is high in a historical perspective. However, planned interest rate increases could be put on ice.

In December, we gradually increased the equity portion of the fund to approximately 55 percent. The reason for this is that, in the wake of share price falls, dividend yields on stocks have risen relative to bond yields, although credit spreads have also risen. Among other actions, we have switched some bank bonds for shares in Handelsbanken and Sampo. The yield on the Handelsbanken share is approximately 7 percent, which appears attractive compared to the interest rate of around 4 percent that the fund received on the bank bonds used to finance the purchases. The acquisition of Sampo stock gives the fund exposure to Nordea and the Nordic insurance market with a high dividend yield of almost 8 percent. Bank bonds in Nordea, DNB and Handelsbanken were ejected.

Purchases of shares in Autoliv, Epiroc and SKF supplemented the fund’s holdings in these stocks. Our assessment is simply that the price declines in these shares have been excessive. The financing was provided by sales of bonds issued by Color Group and Sagax, and by a reduction of the equity position in Telia.