Best Swedish Asset Manager Cuts Real Estate, Heads for the Woodsby and
Fund managers say offshore investors underestimate forestry
PriorNilsson says Sandvik shares still have hidden potential
The best performing fund managers in Sweden last year are turning their backs on real estate assets and shifting into stocks they say are under-appreciated by offshore investors.
PriorNilsson Fonder started their actively managed Sweden fund in late 2012. In the roughly four years since, fund manager Torgny Prior and his partner PO Nilsson have more than doubled clients’ money by consistently outperforming Sweden’s benchmark stock index. Over the past 12 months, no other fund focused on medium-sized and large Swedish listed companies did better, according to Morningstar.
With 749 million kronor ($84 million) in assets under management, the actively managed fund has moved away from real estate stocks and into areas that tend to do better when economies start growing faster. Prior says he sold most of the fund’s holdings in property companies in August 2016 based on a bet that interest rates probably won’t drop further.
“We felt that the next move in interest rates couldn’t be in the same direction,” he said in an interview at the firm’s headquarters in Stockholm. Some property stocks might have “fallen too much,” and Prior says they’re again “buying a bit,” but the fund now has “a lot less than before.”
Instead, the PriorNilsson fund has turned its attention to forestry companies like Stora Enso and Finland’s UPM-Kymmene Oyj, which goes into the 10 percent quota for non-Swedish Nordic companies. It’s an industry that’s been “slightly out of favor,” Nilsson said, as investors were quicker to move into engineering companies. But the fund managers say there are plenty of reasons to take a closer look.
“We felt that economic activity was picking up, which should benefit forestry companies as well as the capital goods sector,” Nilsson said. “We also had a positive currency situation for most of those companies.”
The rally that started late last year put cyclical stocks on a trajectory that will probably “continue for a while,” Nilsson said. “For example, in manufacturing companies our view is that the growth is strong enough for profits to increase. Our conclusion is that we have the estimate downgrades behind us and that there may even be scope for upgrades.”
Based on that view, the fund has bought its way into Sandvik AB, a cutting-tools and mining-equipment maker. It was considered a crown jewel of Swedish manufacturing until the financial crisis, which was followed by an unsuccessful turnaround attempt under the leadership of Olof Faxander. He was ousted in 2015 and replaced by former Wartsila Oyj boss Bjorn Rosengren. While that switch helped the company’s share price, Nilsson thinks investors are still too focused on Sandvik’s past.
“I think the market expectations are still low when it comes to margin improvement,” Nilsson said. “Foreign investors haven’t bought Sandvik. So far they haven’t given any credence to this case.” With a bit of luck, Rosengren will be helped in his efforts by increased volumes as the market for mining equipment recovers, and then “it can really take off,” Nilsson said.