Stockholm (HedgeNordic) – Norwegian Pareto Asset Management experienced a setback for its both funds in June, albeit in line with macroeconomic expectations. Pareto’s Nordic Alpha plc fund dropped -3.15%, while its Nordic Omega plc fund dropped -3.06%. These figures were by comparison to a -3.0% fall in the OSEFX index, a fall of -3.4% in the MSCI N* index and a slim dip of 0.15% in the NHX Nordic Hedge Index Composite.
Nordic Alpha fund, incepted in September 2003 and with 747m (NOK) in AUM, had a net equity exposure of 63% and gross exposure at 80% by the end of June, following an outperformance of the Nordic equity market for the month and since the beginning of the year. Its best contributors for the month were holdings in Valmet, Gränges, and Kesko, while holdings in Nordic Semiconductor, Storebrand and Nordea detracted from the fund’s perfomance. Following solid gains, the fund opted to reduce its holdings in Valmet and Nordic Semiconductor and to sell its position in Milicom. It took positions in private health care company Attendo and junior-school operators Academedia, which both have good growth prospects and tie up minimal capital.
Nordic Omega fund, incepted in December 2005 and with 303m (NOK) in AUM, actually rose 1% over the first two quarters of the year, despite its 3.06% decline in June. It had a net equity exposure of 79% and gross exposure at 101% at month’s end. Its best contributors for June were its long holdings in Valmet, Kesko and Atea, while holdings in Nordic Semiconductor, Autoliv and Bank Norwegian were among its detractors. Nordic Omega also took positions in Attendo and Academedia, and bought into TF Bank, an online niche bank with 1.1m customers in the Nordics, Baltics and Poland, at its IPO on the Swedish stock exchange. The fund reduced its holdings in Autoliv following a lengthy period of outperformance, and sold its position in Milicom.
Both funds now find themselves with a substantial cash position to take advantage of buying opportunities in individual stocks.
In his June commentary, Yngve Torvanger Jordal, both funds’ analyst and portfolio manager with Christian Nygaard, says Nordic equities declined 8.9% (NOK) in the first half of 2016 due to fears of rising interest rates in the U.S. and weak growth in China. As such fears were gradually allayed over the course of the year, Brexit delivered another blow to investor confidence and led to a decline of 3.4% in the Nordic region by the end of June. Mr Jordal suggests that Nordic markets trading at lower Price/Book multiples than the average for the past 20 years reflects analyst estimates of risk of further declines in earnings, but recommends taking these with a grain of salt, as low interest rates have not lifted stock markets to the heights such estimates have suggested. Conversely, expansionary monetary policies have kept yields artificially low. Mr Jordal believes investors will increasingly seek returns through exposure to the funds’ stocks due to the persistence of such policies.
Nordic Alpha’s positions are currently priced 13.8 x 2016 earnings and 1.8 x book value, with a return on equity of 17%, free cash flow of 6% and a current yield of 3.3%. Nordic Omega’s positions are currently priced 14 x 2017 earnings and 1.7 x book value, with a return on equity of 18%, free cash flow of 6% and a current yield of 3.5%.
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