Handelsbanken Europa Selektiv (A10 NOK)

Fund performance was negative during Q3. The key contributor to returns was DSV, which was largely affected by its successful bid on DB/Schenker. Positive contributors also included defensive holdings in Compass Group and Deutsche Börse, as well as companies with focus on Western markets, such as JD Sports, Ashtead and Experian. In addition, companies with construction exposure were valued upwards ahead of brighter prospects, where we have exposure through Sika and have recently added Legrand to the portfolio. We saw significant declines in valuations at the start of the quarter for major growth companies such as ASML, Infineon and Novo Nordisk, as well as within the luxury segment where the competition’s weakness overshadowed the stable results from Richemont and L'Oréal. The political uncertainty that continues to weigh on the stock market in France has left a deep negative imprint on Edenred, despite earnings trends and outlooks that indicate stable growth. Returns at the end of the quarter were weighed down by Rentokil’s announcement that improvements in the acquired Terminix were not proceeding as anticipated.

The changes in the risk factors in the European market have led to an adjustment to the portfolio risk. For example, we sold JD Sports, which is showing higher volatility and additional acquisition risk, and instead added Inditex to the portfolio. We also took a position in Autoliv, where we believe that the current valuation does not reflect the company’s underlying stability and cash generation even though the short-term market outlooks are uncertain. We expect the solid earnings trends in the holdings to generate higher returns ahead and the convergence of the covariance we saw in Q3 to normalize and return to a financial performance that will drive valuations upward.