Interview: ”Cyclical companies have outperformed lately”

The new fund Lannebo Europe Small Cap has been up and running for almost two months. What has happened in the portfolio and what is the fund managers’ view of the equity market? Read the interview with Carsten Dehn and Ulrik Ellesgaard.


Carsten Dehn and Ulrik Ellesgaard, fund managers of Lannebo Europe Small Cap.

Lannebo Europe Small Cap has underperformed towards index in November. Why?

The main reason is that cyclical companies have been in the lead of the market growth the last month. Our investment focus is on quality companies that we strongly believe in with a long term perspective, rather than cyclical companies, Carsten Dehn explains.

In addition, there are a few portfolio companies that have affected the performance negatively. Being active fund managers, we are meticulous in avoiding “mines”. Just as we have a strict investment process, we also have a strict selling discipline. We always aim at investing long term, but if we stop to fully believe in the company, we sell immediately, says Ulrik Ellesgaard.


Have you sold any holdings in November?

Yes, the German property asset manager Patrizia, has been a negative contributor in November. The guidance for 2017 was a disappointment and even though we assess that the guidance is conservative, we believe that the forecast in the market needs to be downgraded. The company could see lower inflow from clients due to an increase in the interest rate which will hit both the recurring management fee and the performance related fees. We have therefore decided to sell our entire position.

Another negative contributor in November was Inwido, the leading manufacturer of windows and doors in the Nordic market. In the quarterly result, the management communicated that the organic growth was negative mainly related to Sweden. But we assess the organic growth to turn positive next year and we believe that the negative share price reaction has been overdone. We have therefore maintained our position.


Which portfolio companies have performed the best?

Alimak, the hoist, elevator and platform producer, has been a positive contributor in November. Order momentum has turned positive in the quarter combined with strong service business. The acquisition of FAG will improve the service business further and enhance EPS by around 20%. We have added to our position in November.

Rotork from UK has also been a positive contributor. The company is a market leader within productions of actuators and flow control with a high exposure to the Oil & Gas industry. Even though that market conditions has been difficult, the company has been able to maintain very high margins. The order momentum starts to point in the right direction.


Any new companies in the portfolio?

Three new companies have been bought in the portfolio in November. We have met with them and believe strongly in them for the long term.

Volution Group is based in UK and is a supplier of ventilation products in the UK and northern Europe. The repair & maintenance market in UK has been difficult lately but Volution has been able to grow the business within new-build and by value added acquisitions outside UK. Five years ago Volution had nearly no international exposure while it now derives 32% of its revenues from outside the UK. This tendency is expected to continue.

Skandiabanken is a Norwegian online retail bank which is mainly exposed to mortgage loans but offers a wide range of other services within retail banking. The bank is expected to gain significant market share in the coming quarters as the competitors has announced rate hikes and Skandiabanken has decided not to follow in the short term. The loan losses are low and the return on equity is above its peers. We see strong growth opportunities for the bank within mortgage and cross selling of other banking services.

SpareBank 1 Nord-Norge is an independent financial services group within the SpareBank 1 Alliance. SpareBank 1 Nord-Norge is located in Northern Norway,

serving primarily retail clients and small or medium size businesses. The bank has a cautious risk profile and a very low exposure to the Oil & Gas industry. The balance sheet is strong and with focus on cost reduction, we believe the return on equity will increase in the coming years.


What do you think of the months to come? What would you say to investors in your fund?

The risk appetite among investors are expected stay on a high level in the next coming months which should be beneficial for European Small Cap equities. However the cyclical rally we have witnessed lately will be less dominating and we therefore believe that quality companies again will outperform the market. Lannebo Europe Small Cap will benefit from this scenario.

It is important to say that we invest in companies that we believe in with a long term horizon. Investors in Lannebo Europe Small Cap should have a five year investment horizon, Carsten Dehn concludes.

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