10 year anniversary and the highest return!
Lannebo Sverige Plus turns 10 years and the fund has the highest return in the category Swedish Funds over the same period *. What is the managers process and why does it work?
Active management is the foundation of our work – a responsibility that we carry with us around the clock, say managers Martin Wallin and Robin Nestor.
The fund is managed on the basis of a philosophy of long-term horizon, risk awareness and independence. The manager duo has a disciplined process based on their own analysis, frequent company visits and continuous evaluation.
Lannebo Sverige Plus has the same base portfolio as Lannebo Sverige – concentrated on approximately 30 companies with well-defined business activities. Lannebo Sverige Plus has additional tools that provide the managers the opportunity to create excess returns; the managers can engage in the short sell of shares and can invest up to 10 per cent of the fund’s assets in markets outside the Nordic region.
The returns over the ten years shows that the process and tools have worked well in all types of market conditions.
The managers explain their process in four steps:
1 Value-driven methodology
“The starting point is a normalized approach to the valuation of companies. Through significant knowledge of a company’s history and our own assessment of the future, we try to determine the long-term value of a company. When the value clearly differs from the market price, we buy or sell if the possibility of a positive return corresponds to the risk. This strategy provides the opportunity to take a step back and question the market valuation – has the price for profits increased too much? Or, has there been too much downward price pressure?”
“Today, more and more capital is mechanically controlled and through index management, which in some cases overrides valuation analysis. That being said, it allows us as active managers to invest and create good returns over time”, says Martin Wallin.
“One example is Electrolux, which we consider to have a well-defined business. The company has a clear history and we know what drives and affects the company’s development. We assess the balance sheet to be strong and we believe earnings will be normalized – the holding is now one of the largest in the fund.”
2 Work closely with a small number of companies
Investments are based on a company analysis and value-based equity analysis. Lannebo Sverige Plus is concentrated to approximately 30 companies where Martin and Robin have both positive and negative perceptions of the shares. By focusing on a smaller number of companies, they give themselves the opportunity to increase and deepen their knowledge about each individual company, ensuring accurate investment decisions over time.
Knowledge can be gained through extensive reading, but it is also very useful to meet with company management and visit their operations. Through Lannebo, the fund managers have established a network that, in combination with being large and long-term owners of portfolio companies, enables the fund managers to gain access to company management. Company visits are standard practice for the manager duo.
“We meet regularly with the companies we follow. Without such meetings and knowledge gathering opportunities, we would not be able to make a qualified assessment and work as we do, “says Martin Wallin, who continues by describing their latest meeting with Stora Enso’s CEO on the topic of consolidation in the industry in general and sustainability in particular.
3 Dare to have an opinion that differs from the market
It is not enough to be good at forecasting a company’s profits. Part of the work is to also understand what the rest of the market thinks and how they have positioned themselves.
“Although we mainly focus on our own assessments, we spend time evaluating what the rest of the market thinks. It is important to understand the expectations of the market and therefore we have established close relationships with several talented external analysts”, says Robin Nestor.
The fund is rarely overweight to companies with the most market focus and greatest interest. This is connected to the normalized approach to valuation. When the interest for a company is greatest, it typically coincides with when management is most positive, which gives great confidence in the future and a high valuation of profits. “In these situations it is difficult to make a good investment when the risks exceed the return potential. Therefore, it is important to make investments at the right price in order to achieve a positive return on a long-term basis, where the difference between long-term values and current market prices is the greatest”, says Martin and Robin.
4 Lots of patience
The managers take large positions in a smaller number of companies. Therefore, in the short term, the fund is likely to deviate from its benchmark index, both on the up- and down-side. Share prices move because of a variety of reasons and often for reasons that are not related to a company’s operational performance. The managers believe that good knowledge of the portfolio companies allows for patience and to not be affected by the market’s short-term disturbances.
“We should not let ourselves be affected by excessive noise in the market. Therefore, we consider it important that we understand the investments we make. When something goes wrong in a holding, we are more likely to understand why and then make a more rational decision”, says Robin Nestor.
Maintaining a longer term perspective and having patience in the investment strategy is the foundation for a good return over time; but this also requires the participants to be long-term – in other words the fund manager, the unit holder as well as the company.
“We are aware of the responsibility of managing the funds and of the trust we have received from unit holders. While perseverance and some stubbornness are important, one must also be humble and accept when you are wrong. Historically, we have made more correct than wrong decisions, and our major holdings have contributed to performance; and on behalf of our unitholders we will continue our efforts to be successful”, says Martin Wallin.
* Refers to the period since Lannebo Sverige Plus was launched, December 11, 2008 to December 11, 2018 in the category Swedish Funds at Morningstar, which has existed at least as long as Lannebo Sverige Plus. The return is 86% over a five-year period from December 11, 2013 to December 11, 20182018. Returns are net of fees and without consideration for inflation. The benchmark index, SIXPRX, returned 274% and 59% for the same periods, 10- and 5- years.