CB European Quality Fund Quarterly update 31 December 2014 Morningstar Sweden and Dagens Industri: Best portfolio manager in 3-year 5-year 10-year the European equity category 2012 Fund performance* and AUM NAV, 31 December 2014 (EUR) EUR SEK Sicav A 87.33 Q4 2014 +4.5% +8.3% Sicav I 112.35 +5.1% YTD 2014 -1.5% Acc. 205.34 +7.7% Fund inception 1995 (annualised) +7.5% Distr. 86.40 426.3. AUM (million) 45.1. *Sicav A
The strategy and the team CB European Quality Fund About CB European Quality Fund The team An equity fund with a focus on European quality Carl Bernadotte Portfolio manager & owner companies, launched in 1995 >25 years’ experience Concentrated portfolio (20-33 holdings) Born 1955 Long-term perspective Marcus Grimfors Benchmark: MSCI Europe Net Portfolio manager Objective: Lower standard deviation than benchmark 6 years’ experience Objective: Outperform benchmark over 12 months Born 1981 About CB Fonder Alexander Jansson Portfolio manager & CEO Company founded in 1994 6 years’ experience Family owned, acting under the supervision of the Swedish Born 1983 Financial Supervisory Authority Erik Allenius Somnell Guidelines: active, ethical and long-term Business development An ethical framework is applied in the portfolio management 3 years’ experience The team is based in Stockholm, Sweden; all fund Born 1984 administration is performed in Luxembourg 2
Performance: The fund and index CB European Quality Fund The fund performed poorly during Q1-Q3 2014, but managed to outperform MSCI Europe Net during the fourth quarter (for three consecutive months) – which was a trend reversal of the weak performance since the summer of 2012. The fund returned +4.5% in the fourth quarter – outperforming the index by 4.7 percentage points – and returned -1.5% for the full year 2014, in EUR. The fund and the benchmark index, 2014 (EUR) The fund and the benchmark index, Q4 2014 (EUR) +4.5% +6.8% -0.1% -1.5% +4.7% -8.3% Source: MSCI, CB Fonder 3
Performance: The fund and index CB European Quality Fund The fund (EQF) and the benchmark index, 10 years (EUR) The fund has – due to the Kay ratios (10 years) EQF Index strong risk-on rally in the Standard deviation, % 12.05 14.47 market between the summer of 2012-summer of 2014 – Sharpe (0%) +0.43 +0.40 underperformed against the Max drawdown, % -45.78 -54.10 benchmark, but still has a Beta against MSCI Europe +0.67 positive alpha due to the low Alpha against MSCI Europe, % p.a. +1.25 beta (0,67). The fund’s risk- Consistency with MSCI Europe, % 49.17 adjusted return, Sharpe, is higher than that for the Tracking error, % 8.63 index. Information ratio -0.07 Source: MSCI, CB Fonder 4
Analysis: Implications of a falling oil price CB European Quality Fund The oil price fell 42% during Q4, in USD, which did not only effect energy related companies and sectors, but impacted the market as a whole. During the fourth quarter, CB European Quality Fund outperformed MSCI Europe Net with 4.7 percentage points. See graph below. The fund is more or less uncorrelated to the oil price since there is, and has never been, any exposure to oil and gas companies. The exposure to the sector Materials – which is strongly correlated with the Energy sector – has been low and we had no exposure at all at the end of the quarter. We are overweight Consumer Discretionary and Consumer Staples; a lower oil price means higher disposable incomes, which should benefit these sectors, ceteris paribus. See current and historical exposure on page 10 and 19 respectively. The oil price and the fund relative to MSCI Europe Net, Q4 2014 Source: MSCI, CB Fonder 5
Analysis: Implications of a falling oil price CB European Quality Fund Growth, growth and…growth Sales growth, the portfolio and index There are as many theories about what is behind the oil price drop as there are analysts; irrespective of which theory you subscribe to, you have to take demand into consideration. Global growth is weak in general and in Europe in particular; that affects the oil demand, hence the oil price. A falling oil price increases the probability of deflation – a plausible scenario even before the oil price drop. EPS growth, the portfolio and index Against this background – where we have a potential deflationary scenario in front of us – it is vital that our companies deliver stable growth, otherwise they fall out of the portfolio. The graphs to the right show sales and EPS growth for today’s portfolio and ditto for index; in both cases, our companies have consistently higher growth than index – and indeed more stable growth. Going forward, we believe that stable growth will be rewarded – and that the market, the index, will not deliver that. Source: MSCI, CB Fonder 6
Analysis: Volatility as a leading indicator CB European Quality Fund VIX (volatility index, red line to left inverted axis) is close to historical lows. Five years ago, VIX reached record high levels. Historically, the fund’s strategy (green line) have performed better relative to index after periods of low-level volatility. The red horizontal line in the graph below shows when the fund has outperformed the MSCI Europe Net index on a five year horizon; when the green line is above, the fund has outperformed, and vice versa. The fund has mostly outperformed on a five year horizon, but an investment in the fund around the financial crises has underperformed (partly explained by risk-on rally the year after the crises). Historically, an investment in the fund when VIX < 20 has performed well; the fund has outperformed in 48 out of 54 observations, the average outperformance on a five year horizon being 8.3%. VIX and the fund’s 5 -year rolling outperformance against MSCI Europe Net Source: MSCI, Bloomberg, CB Fonder 7
The portfolio: Contributors and detractors CB European Quality Fund Top 3 quarterly contributors and detractors, Q4 2014 (EUR) Company Contr./Detr. % Avg. weight* % Performance % Dignity +0.65 2.2 +27.9 Fresenius SE +0.65 6.6 +10.1 Shire +0.58 -14.9 2.7 Linde -0.17 1.3 +1.4 Capita -0.28 2.6 -6.9 Novo Nordisk -0.34 4.2 -7.7 • Dignity – the second-largest provider of funeral services in the UK – had a strong run after reassuring third quarter results, showing evidence that the historical growth rate of the company is sustainable going forward; during the period 2007-2013 the company delivered an EPS growth CAGR of 16% - and the company believes that it can maintain double-digit EPS growth in the medium term. The stock gained 27.9% during the quarter, in EUR. • The German group Fresenius – among other things the largest private hospital operator in Germany and a core holding in the fund – benefitted, as was the case in Q3, from a strongly appreciating USD vis-à-vis EUR. The group has a very attractive (and defensive) growth profile: estimated EPS growth of 17% and 14% for 2015 and 2016 respectively. The stock gained 10.1% during the quarter, in EUR. . • Shire – the market leader within, for instance, ADHD treatments – received a takeover bid from the American healthcare company AbbVie during the third quarter, which was dropped during the fourth quarter due to changed tax rules regarding tax inversion. We sold the stock during the third quarter and bought it back during the fourth quarter – after AbbVie had withdrawn the bid. The stock gained 22.5% during the remainder of the quarter, in EUR. • Linde – the world leading supplier of industrial, process and specialty gases – was negatively affected by the falling oil price, which affected more or less all companies within the Energy and Materials sectors negatively; both sectors that we at the end of the quarter had no exposure against. Linde gained 1.4% during the quarter, in EUR. • Capita – UK leader in business process management and outsourcing solutions – took a hit during the quarter due to a lost contract (the contract was lost to another of our holdings, the French company Sodexo). The share lost 6.9% during the quarter, in EUR. • Novo Nordisk – the Danish-based world leader in insulin and diabetes care – was the top contributor to the fund performance during the third quarter, but was in the fourth quarter the top detractor. In our opinion there is nothing new under the sun; the company is very well positioned in a steadily growing market: estimated sales and EPS growth is 11% and 16% respectively, characteristics hardly matched by any company as large as Novo. The share lost 7.7% during the quarter, in EUR. *Average value during Q4 2014. 8
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