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A Blend of High-Quality Stocks and Tactical Flexibility

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Stockholm (HedgeNordic) – Andreas Brock joined Coeli Asset Management in 2014 to launch a fund investing in 25-35 high-quality businesses, which he described as “the kind of stocks you want in your children’s portfolios for the long term.” Building on the success of the first fund, Brock alongside co-portfolio manager Henrik Milton unveiled another long-only fund in mid-2022 targeting smaller companies. Simultaneously, they introduced a long/short equity fund designed to invest in the best ideas from both long-only funds while maintaining the flexibility to adjust net market exposure using various instruments.

“Coeli Global Opportunities is the ‘best ideas’ product based on the two long-only funds,” says Chris Wright (pictured), Assistant Portfolio Manager and Analyst at Coeli Global. “There is significant overlap between Global Opportunities and the other two funds,” he elaborates. As a Swedish special fund, Coeli Global Opportunities has the flexibility to maintain a more concentrated portfolio and adjust equity market exposure using index futures, options, and other instruments. “The fund is essentially a more focused vehicle with the same ideas but has slightly more flexibility in certain areas.”

“Coeli Global Opportunities is the ‘best ideas’ product based on the two long-only funds.”

2/3 Champions and 1/3 Special Situations

Since joining Coeli Asset Management, Brock has championed an investment philosophy centered around global champions – high-quality companies with promising prospects – at attractive valuations. Brock and Milton typically allocate two-thirds to “Champions” and up to one-third to “Special Situation” investments, which often involve companies undergoing positive change.

“The ‘Champions’ segment of the portfolio almost exclusively consists of businesses that lead their respective industries,” explains Wright. “These Champions are often leaders in either large markets or niches, enjoying strong pricing power, solid balance sheets, and ability to grow due to secular trends rather than relying on the health of the broader economy,” he emphasizes. While characteristics may vary between small and large-cap companies, “these Champions represent the L’Oreals of the world, the Microsofts of the world, and Martin Mariettas of the world,” according to Wright. “We are mostly looking for companies that have the ability to control their own destiny.”

“These Champions represent the L’Oreals of the world, the Microsofts of the world, and Martin Mariettas of the world. We are mostly looking for companies that have the ability to control their own destiny.”

The ‘special situations’ segment of the portfolio covers a wide variety of situations. “Some of these special situations arise when investors ‘throw the baby out with the bathwater,’ when certain companies are unfairly penalized and experience significant declines despite no correlation with broader industry developments,” notes Wright. One such instance occurred during the Credit Suisse banking crisis in early 2023, when Nordea’s share price suffered despite no direct association. “These opportunities pop out from time to time from forced selling and occasional market dislocations.”

Another category of special situations involves what Wright refers to as “icebergs” where investors focus solely on surface-level metrics while disregarding underlying dynamics. Additionally, Brock has consistently sought out businesses undergoing substantial positive transformations. “Although financial statements might look relatively stable on the surface, some businesses may have rapidly growing segments beneath the surface, obscured by the need for a deeper dive into their unit economics,” explains Wright. Some companies may exit low-margin segments, resulting in transformative financial outcomes. “By spinning off divisions or implementing strategic changes, some businesses can deliver value to shareholders. Often, the market is slow to price these transformations.”

“We want to make sure that the implied expectations of a company in its valuation have not got too far.”

Irrespective of whether analyzing Champions or Special Situations, the Coeli Global Opportunities team carefully assesses the valuation of potential investments and underlying portfolio companies. “We want to make sure that the implied expectations of a company in its valuation have not got too far,” says Wright. “If reverse engineering a company’s discounted cash flow (DCF) model reveals unrealistic growth expectations, it’s a red flag,” he explains. “We want to have a low burden of expectations.”

The Toolkit and 2023 Performance

Coeli Global Opportunities has the mandate to maintain an equity exposure ranging from zero to 150 percent, employing leverage, index futures, options, and other instruments to adjust market exposure. “Sometimes there are hedges on, sometimes there are none,” says Wright. The team uses this toolkit in “euphoria-style situations,” according to the assistant portfolio manager. For instance, the team increased exposure through leverage late last year following the Federal Reserve’s decision to pause its interest rate hike campaign at its September policy meeting. “Obviously, the market did really well on the back of that. This was an event-driven situation that we capitalized on,” says Wright.

“While calling the market isn’t really our bread and butter, we can utilize situations where we find cheap insurance via options.”

The team also puts on hedges when insurance becomes cheap. “After the huge market run from October to December, different indicators signaled overbought conditions,” recalls Wright. “While the market has been running extremely hot, the cost of 15 percent out-of-the-money put options was very low,” he continues. “While calling the market isn’t really our bread and butter, we can utilize situations where we find cheap insurance via options,” says Wright. “While we tend to avoid macro speculation, this leg of the strategy gives us added flexibility. We want to be zigging when everyone else is zagging.”

2023 proved to be a solid year for Coeli Global Opportunities, with “our theses going according to plan,” says Wright. The long/short equity fund delivered a 26.2 percent gain in 2023 to end the year as the third-best performing hedge fund in the Nordic universe. “In 2023, the majority of our portfolio did well, with the specific factors that we were looking at playing out as anticipated,” explains Wright. “Last year’s performance wasn’t a bounce-back recovery. We try to make as many good shots as possible and that worked well for us in 2023.”

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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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