Pulp and paper stocks have fallen so the fund is expanding in Holmen

The fund reduced its share of equities in August to reduce risk. This proved timely as equities have underperformed since then. There are many explanations, but the overarching reasons are the US Fed announcement that bond support purchases will be phased out soon, high energy prices, uncertainty about Chinese growth given real estate company Evergrande’s finances, and difficulties in the US in finding political support for announced investments and reforms and, not least, a higher government debt ceiling.

Interest rates have risen, which has meant that the value of government bonds has fallen. Since the fund invests in corporate bonds, it has instead received a positive contribution from the interest component, although some weakness has been discernible in that market recently. After large price increases, many now have high valuations.

The cash generated from equity sales has now partly been used in September, for two old favourites and a new holding. Pulp and paper stocks have fallen quite a lot in a short time, and the fund has therefore increased its position in Holmen. Forest product companies with their own forest assets still offer long-term opportunities. Higher energy prices are a bad thing, but these companies also have power assets that should be upwardly valued if the higher prices persist. Holmen, for example, is just over 55 percent self-sufficient.

Investment companies generally find it difficult to put up resistance when markets decline. This is because they often have various amounts of debt, which means leverage. In Investor’s case, the market decline coincided with a bid for SOBI. If the bid is completed, Investor will be debt free, but its debt target is 5-10 percent. This means large scope for new portfolio investments. With an estimated discount of almost 20 percent, the Investor share appears attractive and the fund took the opportunity to expand its holding.

The new holding is Karnov, a leading provider of business-critical information in law, tax, auditing, the environment, health and safety. Its clients include lawyers, accountants and tax advisers. Its brands include Norstedts Juridik and Notisum. The company operates in the Swedish and Danish markets. Its growth is low, at 2 percent annually, but very stable. The company sees opportunities to add new geographical markets in the longer term. Profitability is high, and almost 80 percent of sales are recurring revenue in the form of subscriptions. The business ties up very little capital and the company’s financial position provides scope for continued acquisitions.

In the fixed income component, it should be mentioned that the fund’s largest holding, Heimstaden Bostad, is buying apartments in Berlin, Hamburg, Stockholm, Malmö and Copenhagen from Akelius at a total acquisition cost of SEK 92.5 billion. The portfolio generates SEK 2.8 billion in rental income, but only half of the stock has undergone upgrades and there is reason to believe the other half will be upgraded by Heimstaden, which provides an opportunity to increase revenues in the future. In addition, there is potential to extract operational and financing synergies. The purchase is being financed through both a new issue of shares and new borrowing.

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