Finding stability in uncertain times

Advertising Material for professional investors only*

In tumultuous markets, investors must meet fundamental challenges with fundamental investing

Cristian Balteo, Product Manager

Highlights

  • Market conditions are forcing investors to re-evaluate their positions
  • New fundamental economic challenges may best be met with fundamental investing
  • The Nordea 1 – Global Stable Equity Fund invests in companies with strong business models, “stable” profits, robust balance sheets and attractive valuations. This approach has historically offered a degree of protection in falling markets while still enabling investors to participate when markets rise

  • Today’s challenge

    The world – and the global economy – has been rocked by the war in Ukraine. Coming on the back of pandemic-related supply chain disruption, inflationary pressures are now forcing central banks to act. After more than a decade of low interest rates, investors are now facing rising inflation, rising interest rates and the possibility of a hard landing. Where can they turn?

    As markets are hit by these difficulties, investors need to meet fundamental challenges with fundamental investing. Fundamentals point us towards assets that can generate the kind of returns that can offset the impact of inflation. This suggests equities – but equity risks have risen. So, how can investors capture real returns while at the same time finding an element of downside protection? The answer: be very selective in the stocks you put into your portfolio.

    How to meet the current challenge

    Investors need companies that can withstand fundamental pressures inflation, interest rates, economic weakness while still being able to grow their businesses. We believe these are companies with steady earnings and robust balance sheets that can act as a stabiliser, providing an element of protection against both economic downturn and rising interest rates. These are the companies our Nordea 1 – Global Stable Equity Fund invests in.

    What does “stable” mean to us?

    When we target stability, we are aiming for a lower volatility portfolio1. There are several components to this, starting with a stable universe of stocks.

    Our stable universe

    Our investment universe is made up of high quality companies with steady earnings. These companies are typically less economically sensitive than the market in general, producing products or services that many might consider to be staple goods meetings basic needs, whether this be basic food and personal care items or the provision of utilities or certain IT goods and services. These companies will see relatively consistent demand throughout the economic cycle, but this alone is not enough. We seek out companies whose consistent demand is complemented by >pricing power. Companies with pricing power are better able to pass on cost increases, thereby ensuring that sales rise in an inflationary environment (even without volume increases). The final step in our equation is a strong balance sheet, ensuring that sales growth translates into earnings growth. As a result, such companies offer an element of inflation protection without being highly cyclical and vulnerable to recession.

    Our stable shares

    In our eyes, a stable company isn’t automatically a stable share. Valuation plays a key role as we select holdings. We require a fundamentally attractive valuations for our stable companies, because we have seen very clearly how high valuations themselves bring additional volatility to shares. Companies trading on very high valuations are subject to sentiment far more than those whose ratings reflect their fundamental prospects. This is why we typically avoid companies with unrealistic valuations, instead finding opportunities in high quality companies that may have been left behind.

    Our portfolio’s stable shares are actively managed

    Our stock selection process has several implications for the portfolio. One important thing to note is that our focus on valuation means our portfolio is actively managed and will change as valuations change. Companies remain stable but their share prices do not, so while our universe remains fairly fixed over time, the holdings in the portfolio change as companies’ valuations move in and out of our valuation zone. The most important outcome of our investment approach is that our portfolio’s performance is generally less volatile than the market, while at the same time still capturing upside returns. We look at this as downside capture vs upside capture. The chart below shows you that since we started this strategy (31.12.2005), in the months when global equities (MSCI World) have fallen, the portfolio fell only 62% as far as the index. In the months when global equities went up, the portfolio went up 83% as far as the index. Because it is doing better (com- pared to the benchmark) on the way up than on the way down, the portfolio has generated long-term outperformance. More importantly, it offered a degree of protection in falling markets without losing too much potential upside performance in rising markets.2 As we enter a period of great uncertainty for equity markets, isn’t this exactly the profile investors want?

    Case study: Alphabet

    Alphabet, the company which owns Google, has enjoyed strong earnings growth for over 10 years, driven by its leading positions in web activities ranging from its search engine through maps, mobile operating systems, consumer content and advertising.

  • Sales: Not economically sensitive – secular growth driven by continued growth in mobile usage, video usage, Google Play activity and connected device growth.
  • Pricing power: Yes – owns leading search technology, Android and YouTube.
  • Profitability: Good – strong expense discipline means that sales growth translates into earnings growth.
  • Balance sheet: Robust – no debt and high return on capital.
  • Valuation: Attractive, both in absolute terms and relative to the market, especially when we consider its consistent earnings growth and strong balance sheet.
  • How Nordea1 – Global Stable Equity Fund could meet your current needs

    With markets oscillating, many investors do not want to retreat from equity markets completely but nevertheless would like to reduce their portfolio risk levels. Thanks to its universe of high quality companies with steady earnings and strong balance sheets, combined with a focus on valuation that gives a firm fundamental under-pinning to our stock selection, Nordea 1 – Global Stable Equity Fund has been able to deliver a return profile that offers investors downside protection without compromising too much on returns in positive markets.

    The nature of the companies we invest in means they should be well-positioned to meet inflationary pressures and enjoy continuing growth even during periods of economic weakness. Furthermore, this may bring potential for an upward re-rating as investors tend to seek these characteristics in economic conditions such as we are experiencing today. Claus Vorm and Robert Næss, members of NAM’s highly-regarded Multi Assets Team, have managed Nordea 1 – Global Stable Equity Fund for more than 17 years using this process, which they have honed and enhanced along the way. Their active management enables them to optimize the risk/return trade off, and has generated long-term outperformance with below-market overall portfolio risk.3 This fund is classified Article 8 and is MiFID-eligible for clients with sustainability preferences.

    *investing for their own account – according to MiFID definition. Any investment decision in the sub-funds should be made on the basis of the current prospectus and the Key Investor Information Document (KIID). 1 There can be no warranty that an investment objective, targeted returns and results of an investment structure is achieved. The value of your investment can go up and down, and you could lose some or all of your invested money. There can be no warranty that an investment objective, targeted returns and results of an investment structure is achieved. The value of your investment can go up and down, and you could lose some or all of your invested money. The performance represented is historical; past performance is not a reliable indicator of future results and investors may not recover the full amount invested. The value of your investment can go up and down, and you could lose some or all of your invested money. 2 There can be no warranty that an investment objective, targeted returns and results of an investment structure is achieved. The value of your investment can go up and down, and you could lose some or all of your invested money. 3 The performance represented is historical; past performance is not a reliable indicator of future results and investors may not recover the full amount invested. The value of shares can great-ly fluctuate as a result of the sub-fund’s investment policy and cannot be ensured, you could lose some or all of your invested money.

    The sub-funds mentioned are part of Nordea 1, SICAV, an open-ended Luxembourg-based investment company (Société d’Investissement à Capital Variable), validly formed and existing in accordance with the laws of Luxembourg and with European Council Directive 2009/65/EC of 13 July 2009. This document is advertising material and does not disclose all relevant information concerning the presented sub-funds. Any investment decision in the sub-funds should be made on the basis of the current prospectus and the Key Investor Information Document (KIID), which are available, along with the current annual and semi-annual reports, electronically in English and in the local language of the market where the mentioned SICAV is authorised for distribution, without charge upon request from Nordea Investment Funds S.A., 562, rue de Neudorf, P.O. Box 782, L-2017 Luxembourg, from the local representatives or information agents, or from our distributors as well as on www.nordea.lu. Investments in derivative and foreign exchange transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of shares can greatly fluctuate as a re-sult of the sub-fund’s investment policy and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. For further details of investment risks associated with these sub-funds, please refer to the relevant Key Investor Information Document (KIID), available as described above. The investment promoted concerns the acquisition of units or shares in a sub-fund, not in any given underlying asset such as shares of a company, as these are only the underlying assets owned by the fund. Nordea Investment Funds S.A. has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Nordea Investment Funds S.A. only publishes product-related information and does not make any investment recommendations. A summary of investor rights is available in English through the following link: https://www.nordea.lu/documents/engagement-policy/ EP_eng_INT.pdf/. Nordea Investment Funds S.A. may decide to terminate the arrangements made for the marketing of its sub-funds in any respective EU-country of distribution in accordance with Article 93a of Directive 2009/65/EC. Published by Nordea Investment Funds S.A., 562, rue de Neudorf, P.O. Box 782, L-2017 Luxembourg, which is authorized by the Commission de Surveillance du Secteur Financier in Luxembourg. Further information can be obtained from your financial advisor. He/she can advise you independently of Nordea Investment Funds S.A. Please note that all sub funds and share classes might not be available in your country of jurisdiction. Additional information for investors in Switzerland: The Swiss Representative and Paying Agent is BNP Paribas Securities Services, Paris, Succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. Additional information for inves-tors in Germany: The Information Agent in Germany is Société Générale S.A. Frankfurt Branch, Neue Mainzer Straße 46-50, 60311 Frankfurt am Main, Germany. A hard copy of the above-mentioned fund documentation is also available here. Additional information for investors in Austria: The Facility Agent in Austria is Erste Bank der österreichischen Sparkassen AG, Am Belvedere 1, 1100 Vienna, Austria. Additional information for investors in the Netherlands: Nordea 1, SICAV is a Luxembourg Undertaking for Collective Investment in Transferable Securi-ties (UCITS) registered in the Netherlands in the register kept by the AFM, and as such is allowed to offer its shares in the Netherlands. The AFM register can be consulted via www.afm.nl/register. Additional information for investors in France: With the authorisation of the AMF the shares of the sub-funds of Nordea 1, SICAV may be distributed in France. Centralising Correspondent in France is CACEIS Bank, located at 1-3, place Valhubert, 75206 Paris cedex 13, France. Investors are advised to conduct thorough research before making any investment deci-sion. Additional information for investors in Belgium: The Financial Service Agent in Belgium is BNP Paribas Securities Services S.C.A., Brussels Branch, Rue de Loxum, 25, 1000-Brussels, Belgium. A hard copy of the above-mentioned fund documentation is available upon demand free of charge. Additional information for investors in Spain: Nordea 1, SICAV is duly registered in the CNMV official registry of foreign collective investment institutions (entry no. 340) as authorised to be marketed to the public in Spain. The Depositary of the SICAV’s assets is, J.P. Morgan Bank Luxembourg S.A. In Spain, any investment must be made through the authorised distributors and on the basis of the information contained in the mandatory documentation that must be received from the SICAV’s authorised distributor prior to any sub-scription. The Representative Agent is Allfunds Bank S.A.U., C/ de los Padres Dominicos, 7, 28050 Madrid, Spain. A complete list of the authorised distributors is available in the CNMV’s webpage (www.cnmv.es). Additional information for investors in Portugal: The Management Company of the SICAV, Nordea Investment Funds S.A., and the Depositary of the SICAV’s assets, J.P. Morgan Bank Luxembourg S.A., are validly formed and existing in accordance with the laws of Luxembourg and authorized by the Commission de Surveillance du Secteur Finan-cier in Luxembourg. The Paying Agent in Portugal is BEST – Banco Electrónico de Serviço Total, S.A., duly incorporated under the laws of Portugal and registered with the CMVM as a financial intermediary. Additional information for investors in Italy: Fund documentation as listed above is also available in Italy from the distributors and on the website www.nordea.it. The updated list of distribution agents in Italy, grouped by homogenous category, is available from the distributors themselves or from the Paying Agents: State Street Bank International GmbH – Succursale Italia, Allfunds Bank S.A.U. – Succursale di Milano, Société Générale Securities Services S.p.A., Banca Sella Holding S.p.A, Ban-ca Monte dei Paschi di Siena S.p.A., CACEIS Bank S.A.,Italian Branch and on the website www.nordea.it. Any requests for additional infor-mation should be sent to the distributors. Before investing, please read the prospectus and the KIID carefully. We recommend that you read the most recent annual financial statement in order to be better informed about the fund’s investment policy. The prospectus and KIID for the sub-funds have been published with Consob. For the risk profile of the mentioned sub-funds, please refer to the fund prospectus. Additional information for investors in the United Kingdom: The Facilities Agent is FE Fundinfo (UK) Limited., 3rd Floor, Hollywood House, Church Street East, Woking GU21 6HJ, United Kingdom. Additional information for investors in Ireland: The Facilities Agent is Maples Fund Services (Ireland) Limited, 32 Molesworth Street, D02 Y512 Dublin 2, Ireland. Additional information for investors in Sweden: The Paying Agent is Nordea Bank Abp, Swedish Branch, Smålandsgatan 17, 105 71 Stockholm, Sweden. Additional information for investors in Denmark: The Representative Agent is Nordea Danmark, Filial af Nordea Bank Abp, Finland, Grønjordsvej 10, Postbox 850 0900 CopenhagenC, Denmark. A hard copy of the above-mentioned fund documentation is available here. Additional information for investors in Norway: The Nordea 1, SICAV is registered in Norway. Additional information for investors in Finland: The Nordea 1, SICAV is registered in Finland. Additional infor-mation for investors in Latvia: The Representative Agent is Luminor Bank AS, 62 Skanstes iela 12, 1013 Riga, Latvia. Additional information for investors in Estonia: The Representative Agent in Estonia is Luminor Bank AS, Liivalaia 45, 10145 Tallinn, Estonia. Additional information for investors in Lithuania: The Representative Agent in Lithuania is Luminor Bank AB, Konstitucijos pr. 21 A, 03601 Vilnius, Lithuania. Share-holders must evaluate possible investment risks and take this into consideration when making investment decisions. Additional information for investors in Brazil: This is a strictly privileged and confidential document for the purposes of a potential investment in foreign securities on a one-on-one basis with potential investors with a pre-existing relationship with Nordea Investment Funds S.A. This document contains information addressed only to a specific individual and is not intended for distribution to, or use by, any other person. This document (i) is provided for informational purposes only, (ii) should not be construed in any manner as any solicitation or offer to buy or sell any securities or any related financial instruments, (iii) should not be construed in any manner as a public offer of any securities or any related financial instruments, and (iv) and will be addressed to a potential investor with restrict access of information. Neither Nordea Investment Funds S.A. nor Nordea 1, SICAV have been, and will not be, registered with the Brazilian Securities Commission (Comissão de Valores Mobiliários – CVM). Nordea 1, SICAV must not be offered or sold in Brazil except in circumstances which do not constitute a public offering or distribution under Brazilian laws and regulations. Any public offering, placement or distribution, as defined under Brazilian laws and regulations, of securi-ties in Brazil, is not legal without prior registration under Law No. 6,385 of December 7, 1976, as amended. Documents relating to the offering of the Nordea 1, SICAV, as well as information contained therein, must not be supplied to the general public in Brazil (as the offering of the Nordea 1, SICAV is not a public offering of securities in Brazil) or used in connection with any offer for subscription or sale of the Nordea 1, SICAV to the general public in Brazil. Investors within Brazil should consult with their own counsel as to the applicability of these laws and regulations or any exemption there from. Source (unless otherwise stated): Nordea Investment Funds S.A. Unless otherwise stated, all views expressed are those of Nordea Investment Funds S.A. This document may not be reproduced or circulated without prior permission and must not be passed to private investors. This document contains information only intended for professional investors and financial advisers and is not intended for general publication. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabili-ties will depend on individual circumstances and may be subject to change in the future.Securities Commission (Comissão de Valores Mo-biliários – CVM), and must not be offered or sold in Brazil except in circumstances which do not constitute a public offering or distribution under Brazilian laws and regulations. Any public offering, placement or distribution, as defined under Brazilian laws and regulations, of securi-ties in Brazil, is not legal without prior registration under Law No. 6,385 of December 7, 1976, as amended. Documents relating to the offering of the Nordea 1, SICAV, as well as information contained therein, must not be supplied to the general public in Brazil (as the offering of the Nordea 1, SICAV is not a public offering of securities in Brazil) or used in connection with any offer for subscription or sale of the Nordea 1, SICAV to the general public in Brazil. Investors within Brazil should consult with their own counsel as to the applicability of these laws and regulations or any exemption there from. Source (unless otherwise stated): Nordea Investment Funds S.A. Unless otherwise stated, all views expressed are those of Nordea Investment Funds S.A. This document may not be reproduced or circulated without prior permission and must not be passed to private investors. This document contains information only intended for professional investors and financial advisers and is not intended for general publication. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabili-ties will depend on individual circumstances and may be subject to change in the future.

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