Clearer trends helping Nordic equity managers, says Delphi’s Øyvind Fjell

Performance of the Delphi Nordic equity fund so far in 2013 is predominantly down to clearer trends in the region, according to manager Øyvind Fjell.

At the beginning of 2013, you argued that the Nordic stock market had a bigger upside than downside. Do you still think so?

Yes, I do. Although there is always a danger of corrections when the market moves quickly, the stock market still appears to be more attractive than its alternatives. Looking at the market as a whole, the upturn has to a large extent been driven by the willingness of investors to put a higher price on future growth. However, I would like to see the companies’ underlying earnings momentum reflect this to a greater extent than has been the case so far.

How did you position the Delphi Nordic portfolio at the beginning of 2013?

Basically, I always try to put together a balanced portfolio. That means a mix of large and small companies, cyclical and less cyclical companies, spread over the various industries and countries. Our starting point is that a share must be able to show at least a three-month rising trend before we invest in it. That makes it more likely that the upturn is based on fundamental factors. At the end of last year and in the first two months of this year, we saw a tendency towards reversal in the market, and the companies that had done worst were suddenly at the top of the lists of returns. During this period, I waited a bit in order to be sure which trends were of a more long-term nature. Over the past few months, I’ve increased the fund’s exposure to those companies that have managed to maintain their long-term trends provided I have also found the company’s fundamental outlook to be attractive.

How is the portfolio positioned now?

I’ve escalated the company-specific risk slightly by increasing the weight of the shares I like best. In general, I think we still have relatively mediocre macro developments ahead of us, and not all companies will do well. Nevertheless, the outlook is better now than it was six months ago. This alone allows us to take slightly more cyclical risk. At the same time, the upturn so far this year has to an exceptional extent been driven by more solid and defensive companies, especially in the large-cap segment. Based on this train of thought, the portfolio will no doubt move slightly more towards the mid-cap segment when we make changes – something it actually has done for a while. Pandora is a good example of a new portfolio company that is both cyclical and of relatively modest size (DKK26bn).

I still don’t like companies that have high expectations regarding next year’s earnings and exposure to overheated sectors and countries. Most of these companies are in the manufacturing sector and many are exposed to the mining sector. The willingness to invest in this sector will continue to decline in future as a result of falling commodities prices.

On the macro side, China seems to be an uncertainty factor, but in the long term I think it is positive if the growth ambitions are slightly reduced in favour of higher quality growth. The US, on its part, seems to be doing better than expected and this is providing good support to the markets. Probably no one is surprised by the fact that Europe is still struggling. Japan, which has been talked about a lot this year, may be the joker in the future. The outcome remains to be seen, but I think we can safely say that the range of possible outcomes has increased in Japan.

Can you point out any portfolio companies that have been especially important this year?

During the past few months, the trends in the Nordic stock market have become more selective. That fits in well with Delphi’s way of managing money. Three portfolio companies in particular have made an extra contribution: Denmark’s Pandora and Genmab and Norway’s Norwegian. The upturn in these is to a large extent anchored in company-specific factors. Pandora’s and Norwegian’s earnings are growing faster than first assumed, while Genmab’s pharmaceutical portfolio is now priced more in accordance with the value of the underlying assets.

The fund has increased its percentage of Danish shares from 15 to 25 so far this year. Why?

We choose companies before countries. So the percentage will naturally vary over time. At the same time, it is sometimes extra favourable to have Denmark in a Nordic portfolio because Danish companies often have several characteristics that differentiate them from companies in the rest of the Nordic region. Among other things, Denmark has many companies with a lot of expertise in pharmaceuticals and the interface between pharmaceuticals and manufacturing. This year, we have primarily increased the weight of biotechnology company Genmab and of Pandora, a consumer-cyclical jewellery maker. We have also increased our exposure by including Christian Hansen, a Danish supplier of ingredients to the dairy industry. This is a global market leader in its niche, and is growing a lot, based among other things on the increased consumption of yoghurt worldwide. Apart from this, we have shares in Novo Nordisk, the world’s leading manufacturer of insulin for the diabetes market, and Coloplast, a leading niche supplier of medical equipment for the health care sector.

If we look a little further ahead in time, we also have dawning faith in the Danish domestic economy. Denmark is the country in the Nordic region that was hardest hit by the financial crisis. Housing prices have fallen by more than 30 per cent since their peak, with the implications this has had for the banking sector. The housing market now seems to be bottoming out and this will be positive for our shareholding in Danske Bank. This bank is traded at a large discount compared to the rest of the Nordic banking sector, partially driven by fear of more losses in its lending portfolio.

Have you made any major sector changes to the fund?

There have been few changes on the sector side, but our investments in the health care sector have fallen slightly in that we have slightly reduced our exposure to Novo Nordisk and Coloplast. At the overall level, I also don’t think we will increase our exposure to the financial sector beyond today’s level of around 20 per cent, which is a record-high percentage since I started managing the fund.

What factors do you consider to be the potentially biggest brakes in the future?

We’re in a phase in which many players are positive to the stock exchanges. We don’t think this is unreasonable, but at the same time it is often a little worrying when ‘very many people’ believe the same thing. When enough players change their minds, it is often difficult to get out, with corrections as a result. The stock market is not particularly cheap when measured against this year’s earnings, but appears to be relatively reasonably priced when measured against next year’s estimates. As always, the uncertainty lies in how good the estimates are. I think in general that the estimates are still a bit too high, and this indicates continued selective trends.

Finally, will the Nordic companies continue to produce good returns in the future?

Historically, an area’s return has been driven by the area’s ability to increase its productivity. This often takes place through sensible investments in infrastructure and the use of new technology. The Nordic area still has good conditions for further growth. However, we can’t lean back and become smug – we must use our highly educated workforce to the full while also supplying competitive products and solutions.


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