There’s no reason to worry about the recent rise in interest rates and the threat of inflation. The important thing is to select companies that somehow have, or will have, the wind in their sails. Banks, tech companies and companies that will benefit from the infrastructure boom are particularly attractive now, according to Joakim Ahlberg, portfolio manager of the North American Stars Equity fund at Nordea Asset Management.
Ahlberg is little concerned about the recent rise in interest rates, which has increased volatility in financial markets, especially in the tech sector. ‘Today the 10-year US interest rate is trading at 1.63 percent but in 2018, when the US economy was also showing strength, it was at 3%. We think the market is overreacting and has too much fear.’
He stresses that the fund’s strategy is not determined by macro trends such as climbing interest rates or rising inflation. However, the management team is aware of the risks. ‘We expect the more cyclical values such as industrials and financials to continue to outperform the market in the coming months. And if there is high inflation, you need to own companies that have pricing power and can deal with that inflationary pressure. So we have an overweight position in the banking sector which should do well in such a scenario.’
Healthy correction
He sees the current price declines in the technology sector as a healthy correction in the still ongoing bull market. ‘Higher interest rates are creating headwinds given the high valuations and the sector could still lag a little in the short term. Many loss-making technology companies went through the roof during the pandemic thanks to a lot of expectations and hopes. The current correction is taking a lot of that overstatement out of the price.’
However, the Nordea manager remains convinced that we are still in the early stages of some secular tech trends. ‘We are looking favourably to the sector and are overweight. We find the big names, which are more fairly valued today, interesting and are positive on several sub-segments such as virtual simulation (with Ansys a favourite), cloud computing and the semiconductor sector with names such as Applied Materials and Texas Instruments. There is a big shortage and in the short term this very cyclical sector looks very good,’ he concludes.
Energy transition
Ahlberg also indicated that there finally is a clear transition path to sustainability in the US, especially with Joe Biden’s infrastructure plan on the legislative agenda, and that it is possible to identify sustainable stocks in notoriously unsustainable sectors such as energy. ‘We focus on stocks that are in transition, for example energy stocks that are switching to renewable energy. A good example of this is the utility and energy group Xcel Energy, which, partly due to our impetus, is changing course and aiming for climate neutrality by 2050. Being able to pick up on such stories early on can provide huge returns.’
He also invests in United Rentals, the largest construction equipment rental company in the US. ‘It is one of the few companies that will benefit most from infrastructure investments. And the company is also an ESG performer. We have many banks in the portfolio, as mentioned earlier, because this group will also benefit from the credit growth that the huge investments will bring. The sector has also moved in the right direction on several ESG factors and that is hardly reflected in the prices today.’
Fund overview
The North American Stars Equity fund (ISIN code: LU0772957808) is long-only and focuses on bottom-up stock selection in the US equity markets. The fund has USD 1.03 billion under management.
The objective is to achieve an additional annual return of 2.5 per cent over a longer period. The fund has existed in its current form since November 2018. Prior to that, it was managed externally but due to disappointing returns, it was decided to manage it in-house (well seen in the illustration below). In 2019 and 2020, the fund clearly outperformed its benchmark, the Russell 3000 - Net Return Index.
Today, the portfolio consists of 63 stocks with an average investment horizon of three and a half years.
