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Cash Flow Never Lies

Report: Systematic Strategies

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Stockholm (HedgeNordic) – Upon approaching his own retirement age, Jan Petter Sissener recognized the importance of designing an investment solution that could deliver consistent returns across different market conditions. Acknowledging the shared needs of his clients, Sissener took the initiative in 2012 to establish Sissener Canopus, a directional long/short equity fund with downside protection.

“Our clients were not concerned about beating the index. They were looking for absolute returns and were willing to sacrifice some upside for downside protection,” JP Sissener recalls the early days of Sissener Canopus. “I myself reached a stage in life where I no longer had the luxury of time to recover from financial losses,” adds Sissener, who launched the long/short equity fund as he was approaching the age of 60.

Flexible Mandate

The fund operates with a flexible mandate and can be net long, market neutral, or net short depending on Sissener’s and his team’s market outlook. “We use a top-down approach to determine the overall exposure at a given point, which we combine with a bottom-up valuation approach to select our long and short positions,” explains JP Sissener. “From a top-down macro perspective, we spend a lot of time analyzing the market consensus on where we are headed,” he elaborates. “Consensus is not always right, and taking a contrarian view can pay off, although it can be painful at times.” This emphasizes the importance of having an accurate view of the current market conditions.

“We use a top-down approach to determine the overall exposure at a given point, which we combine with a bottom-up valuation approach to select our long and short positions.”

In the long run, maintaining exposure to equities has proven to be a rewarding investment strategy. “The world and companies are creating value every day, so investing in the stock market and individual stocks is a winners’ game,” argues JP Sissener. However, investing in equities carries risks, including the potential for capital loss during market downturns. An active manager needs the necessary tools to respond to these events to avoid drawdowns.

When markets face events that could impact financial markets, such as a pandemic, an inflation shock, or a war, “liquidating the portfolio or parts of the portfolio to reduce exposure might take you days or weeks,” according to JP Sissener. In the early days of the pandemic, Sissener Canopus swiftly decreased its net long exposure from 70 percent in February to negative exposure in March. “We have the toolbox to reduce net exposure straight away,” says JP Sissener.

“We have the toolbox to reduce net exposure straight away.”

Sissener Canopus has maintained an average net market exposure of about 60 percent since launching in April 2012, with the exposure adjusted using index hedges based on the team’s market outlook. The fund also maintains a small portfolio of short positions on single companies, capitalizing on an additional source of alpha. “Shorting individual companies is very difficult in itself, particularly when aiming to reduce overall risk,” explains JP Sissener. “We only short with the intention of generating an absolute positive return on the short position. You want to avoid systematic risk when reducing the net exposure, and systematic risk is better managed using index hedges.”

2022 – the Year of Short Selling

As a directional long/short equity fund, Sissener Canopus primarily derives its returns from long positions, while variable hedges and single stock shorts play a complementary role. For Sissener Canopus, 2022 proved to be the best year for short selling, accounting for a good portion of the fund’s 8.2 percent return in the difficult market conditions of 2022. The reported 8.2 percent return is also isolated from the depreciation of the Norwegian krona. Sissener Canopus has implemented currency hedging across different share classes, aiming to minimize the potential adverse effects of currency volatility on investment performance.

“We had some really successful shorts last year, such as our short position in SBB.”

The short-selling book alone contributed 7.9 percent gross to the fund’s return in 2022, followed by a 5.5 percent contribution from the portfolio of index hedges, which more than offset the 2.9 percent negative contribution from the long portfolio. “We had some really successful shorts last year, such as our short position in SBB,” recalls Philippe Sissener, JP Sissener’s son, who is responsible for managing Sissener’s corporate bond fund launched in 2019. Sissener shorted struggling real estate group SBB at around 60 SEK a share and covered around SEK 5.50 apiece. “We still believed SSB was going to go bankrupt, but didn’t want to risk a short squeeze,” says JP Sissener.

The Swedish real estate sector was the best source of short-selling ideas for the team at Sissener Canopus in 2022. The credit team at Sissener, primarily responsible for analyzing the bonds for Sissener Corporate Bond Fund, arrived at the conclusion that Swedish real estate companies would struggle to service their debt amid rising interest rates and lower rental yields on buildings. There is great synergy between the credit and equity teams at Sissener. “We are one team and one goal,” emphasizes JP Sissener. “We have people with equity and credit backgrounds working together as one team on both fronts,” elaborates Philippe Sissener.

Cash Flow Never Lies

At the heart of the Norwegian asset manager’s investment philosophy is the fundamental belief that “cash flows never lie.” This guiding principle shapes their investment approach across both Sissener Canopus and Sissener Corporate Bond Fund. “Our approach is highly focused on cash flow generation,” says JP Sissener. “Cash flow statements cannot be manipulated and our philosophy of ‘cash flow never lies’ very often leads us to overlook stocks that don’t have any earnings or generate cash flows.”

“Cash flow statements cannot be manipulated and our philosophy of ‘cash flow never lies’ very often leads us to overlook stocks that don’t have any earnings or generate cash flows.”

This principle has also influenced the asset manager’s sector exposure, resulting in increased exposure in sectors such as energy, finance, and technology. “Energy stocks are very cash flow generative,” says JP Sissener. For example, shares in French multinational energy and petroleum company Total at a free cash flow yield of 16 percent, providing great downside protection, according to the founder of Sissener. “Even at lower share prices, these stocks would continue to generate high returns for shareholders.”

In contrast to some investors who may hesitate to invest in energy stocks due to environmental, social, and governance (ESG) considerations, JP Sissener views investing in oil-related companies as an integral part of an ESG-compliant and conscientious agenda. “Some investors strongly believe that this industry is not ESG compliant, but we think it is,” says JP Sissener. “Firstly, major oil companies will be first to invest more into green energy. Secondly, from a security standpoint, we will be dependent on oil and gas much longer than European politicians believe, so we need to avoid dependence on Russia, Saudi Arabia, Iran, and other others.”

“Equity markets may appear cheap if you assume that earnings will remain stable at current levels…”

Within the fund’s portfolio, approximately half of the 40 percent exposure to the energy sector is derived from investments in oil and gas companies. The remaining portion of the energy exposure is diversified across various segments, including investments in electricity and hydropower producers, uranium miners, sub-suppliers to the wind and solar sector, as well as sub-suppliers to the oil industry who are actively expanding their presence in the offshore wind sector. By investing across these different segments, Sissener Canopus aims to capture opportunities arising from the broader energy landscape, encompassing both traditional and renewable sources.

With a current net exposure of 46 percent, the team at Sissener Canopus maintains a cautious stance on financial markets, anticipating a decline in earnings across the board. “Equity markets may appear cheap if you assume that earnings will remain stable at current levels. We are waiting for earnings to fall,” states JP Sissener. For Sissener Canopus to adopt a more bullish stance and increase its net exposure, JP Sissener needs “to see that we are wrong in our expectations of earnings going down.”

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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