15 JUL, 2021
By Constanza Ramos
Nordic Equity Funds stand out in terms of performance and their weighting in the main European index is between 12-15%. The Nordic countries are comprised of Denmark, Finland, Iceland, Norway and Sweden, and the region with their GDP combined would be the 11th biggest economy in the world. After the COVID-19 pandemic outbreak, they performed quite strongly compared to the rest of Europe after.
We wanted to analyse the Nordic Equity Funds with best Total returns in 5 years annualised, as per Morningstar. We have chosen 3 funds from Nordea, Evli and DNB.
Source: Morningstar (13/07/2021)
Wilhelm Bruun, Fund Manager Evli Nordic
Evli Nordic is a mutual fund that invests in Nordic equities. A region that, further to generating strong historical returns, could allow some de-correlation for investment portfolios.
Their weighting in the main European index is between 12-15%, but the Nordics stand out in terms of performance: their performance over the last 10 years has overcome emerging markets equities. Sometimes, you don’t have to go that far…
Investing in the Nordic region has also provide investors the option to de-correlate the portfolio from the rest of Europe, and the US, due to its high degree of intra-regional trade, the remarkable value creation resulting from its high competitiveness and innovation, and its longer tradition of responsible investing. Since the turn of the century, ESG criteria have been well established in the Nordic culture, and this has also played in benefit of greater stability for investment returns.
Launched on 29.09.2006, the Evli Nordic fund’s current strategy has been implemented since 1.11.2012, and focuses on undervalued companies that generate consistently positive Cash-Flows, with strong debt coverage. The fund is not constrained by index, sector, country or market capitalization restrictions within the Nordic area.
The fund’s AUM is around EUR 120 million as of June 30, 2021. Evli Nordic has a four-star rating from Morningstar and was recently awarded with the Best 10-year Nordic equity fund in Europe by Refinitive Lipper. The fund’s 12-month return is 45.85% and has achieved a return of over 16% on average per annum over the past 5 years.
Qualities of the management strategy
The fund’s management team applies a strategy that achieves high returns, with consistent Alpha generation in the long time. The stocks selected are equal-weighted within a range of similar liquidity, which generates the underweighting of large companies.
PMs team selecting stocks criteria for the portfolio, are guided by the independence of economic or business growth expectations, because they asume an initial scenario of negative or zero growth. In other words, they consider companies that are attractive in valuation even in non-positive environments, thus avoiding overpaying for the quality of their positions.
The investment style is blend flexible with respect to the election of sectors, countries, and market capitalization levels, applying an approach which is purely bottom up.
One of the advantages of this fund investment process is the ability to de-correlate portfolios. We filter out companies with positive and growing Free Cash Flow for at least ten years, which can recover their debt in a short period of time and are cheap. It’s not possible to include in portfolio banks or insurance companies, as they are not subject to cash-flow analysis. On this universe, we perform a forensic analysis of the financial statements, which allows us to identify irregularities, figures that are too high, etc. The result is a portfolio made up by quality companies that are resilient to any market turbulence scenario.
The advantages of the Nordic model
Evli Nordic is a fund that takes advantage of the benefits of the Nordic economic model for investors, and has historically generated high returns compared to peer group.
Advantages such as historical GDP growth above the european growth average; very open and value-adding economies; exposure to the strength of its industry and technology; and to be pioneer companies on trends such as equality and sustainability. The Nordic model is the world’s largest nest of start-ups because of its facilities for companies to create and maintain a business. It is a model, therefore, that combines the advantages of the market economy and the welfare society, in terms of quality of life and broad redistribution of income.
Øyvind Fjell, Lead Portfolio Manager
The Nordics are comprised of Denmark, Finland, Iceland, Norway and Sweden. The region has a population of almost 30 million people and with a combined GDP of EUR 1.5 trillion the region would be the world´s 11th biggest economy.
Nordics – diversification, sustainability and strong returns for your portfolio
The Nordics are comprised of Denmark, Finland, Iceland, Norway and Sweden. The region has a population of almost 30 million people and with a combined GDP of EUR 1.5 trillion the region would be the world´s 11th biggest economy. Nordic countries rank near the top in numerous metrics of national performance, including education, civil liberties, quality of life, human development, income equality and GDP per capita. High investments in innovation and new technologies have guaranteed the Nordic economies long term competitiveness. The economies are very open with exports representing 40-60 % of GDP. The openness of the economies is also reflected in the companies. Nordics host many globally leading companies in a variety of sectors. The countries share many similarities, but also have their particular characteristics when it comes to the composition of the economies providing a diversified investment universe.
Nordic companies have for years been leaders in sustainability. The average ESG score of the region is higher than for Europe or for the world, while the average carbon intensity is lower. Investing in the Nordics is a way of increasing the ESG profile of your portfolio. DNB Group is the biggest financial services company in Norway and DNB Asset Management is one of the biggest Nordic asset managers. DNB Asset Management introduced ESG/SRI principles in 1988 and launched the first environmentally themed strategy and the first low-carbon strategy in 1989.
DNB Fund Nordic Equities was launched in 1999 and DNB Nordic Equities Institutional A in 2014. The fund’s lead portfolio manager Øyvind Fjell joined DNB Asset Management in 2018. Øyvind, however, has been successfully managing Nordic equities already since 2007. The Nordic investment universe is comprised of around 1300 companies. The fund’s focus is on mid- and large-capitalization companies. After applying minimum market cap and liquidity filters, the focus universe of the fund comes down to around 250 companies. 30-50 best ideas are selected to the portfolio. The investment process combines in a rather unique way trend analysis with fundamental analysis. The PM screens for and identifies companies with longer term positive share price trends and also analyses if the trends are strengthening or weakening. This analysis is combined with a more traditional evaluation of business models, company positioning, value creation and industry attractiveness. The fund’s investment process is integrated into DNB´s ESG process and the fund has obtained the Towards Sustainability label granted by Febelfin in Belgium. Among the top 10 holdings of the fund are the Danish jewelry manufacturer and retailer Pandora, world´s largest developer of offshore wind power Ørsted and the Norwegian renewable power plant developer, owner and operator Scatec Solar.
The Nordic region has provided strong returns over the years. During the last 20 years the MSCI Europe index has had a total return of 158 %, MSCI World Index 240 % and the MSCI Nordic Index 375 %. DNB Fund Nordic Equities Institutional A has since inception returned 12.81% per year after fees and has five stars in Morningstar.
Niklas Kristoffersson and Marie Karlsson, Fund Managers
The Nordic market performed quite strongly compared to the rest of Europe after the outbreak of the COVID-19 pandemic. Profitability has been across the board and outperformance compared to the rest of Europe has been observed in all sectors. Before and during the pandemic period (from 2020 onwards) we narrowed the portfolio into fewer names in order to better capitalise on our bottom-up selection efforts and to better capitalise on our long-term investment horizon.
This has allowed the portfolio to outperform the generally sustainably strong Nordic market, especially thanks to the performance of companies in the Consumer and Industrials sectors. From a quantitative perspective, it is difficult to find factors that explain the outperformance of the Nordic markets in the short and long term.
However, in the longer term we can see more clearly that certain components of the Nordic region work in their favour, such as their strong macroeconomic fundamentals and the favourable environment in which their companies operate. Another aspect worth noting is that Nordic companies typically need to expand globally and become internationally competitive at an early stage in their life cycle due to the size of their domestic markets.
On the other hand, strong governance structures aimed at encouraging management teams and owners to maximise their opportunities are also common denominators in the Nordic market. Finally, Nordic companies are positioning themselves to take advantage of future 5-year opportunities even better than they did in the last 5 years, so the likelihood of continued Nordic outperformance remains there.
After taking over Nordea 1 – Nordic Equity Fund (NOEF) in October 2014, we implemented our strategy of building portfolios consisting of seriously researched company stocks with considerable upside potential over a 3-5 year period. Prior to the onset of the pandemic (end of 2019), both our performance and that of the Nordic market in general already looked competitive against the rest of Europe. In the NOEF in particular, this was mainly due to the positive performance of the industrial and consumer sectors.
In particular, companies such as compressor giant Atlas Copco and truck manufacturer Volvo in the Industrial sector contributed positively to the performance. In the Consumer sector, Bakkafrost and Swedish Match were the most significant contributors to the fund’s overall performance. These companies have been part of the portfolio since 2014 and have in common that they have distinctive competitive advantages, operate globally in defined niches and are led by skilled management teams, which we expect will give them equal or even better opportunities over the next 5 years than when we started investing in them a little over 5 years ago.