Sissener Canopus has received The Hedge Fund Journal’s UCITS Hedge award for best risk adjusted returns in the global equity long/short category on several occasions. Most recently, for the 7 years ending in December 2020, it annualised at 13.73% with volatility of 10.35%, generating the highest Sharpe ratio in the global equity/long short peer group. Sissener is also outperforming in corporate credit: “Our Nordic corporate bond fund, launched in 2019, has shown impressive performance – making 8% against a market and peers near zero,” says bond fund portfolio manager, Philippe Sissener.
Sissener has skillfully navigated the volatility and violent factor rotation in 2020 in both equities and credit. Sissener Canopus, which is mainly invested in equities, started 2020 with a shift into value and cyclicals, such as autos, raw materials and industrials, but swiftly returned to a more defensive mode in February 2020 – and even went slightly net short in March 2020. Hedges on the STOXX 50 and OSX that were partly monetized in March 2020 proved to be the second largest profit contributor in 2020. “Hedges have been mainly done through index shorts to reduce market risk, though we also have a few single stock shorts,” says co-portfolio manager, Bjorn Urdal.
Our outlook is moderately bullish with strong economic growth in the second and third quarters as companies slowly reopen.
Bjorn Urdal, Co-Portfolio Manager, Sissener Canopus
Canopus then steadily rebuilt equity market beta, value and cyclical exposure, and was able to capitalize on the big rotation trade with a 17% return in November 2020, adding further gains over the balance of 2020 and into 2021. “Net exposure in 2020 averaged 55% but ranged between -4% and +90%. In April 2021 it was down to 50%, somewhat below the historical average of 64% because there is some probability of a correction and we might have expected a more violent rotation to value,” says Urdal.
“Our move into cyclical value was also partly based on macroeconomic factors: higher interest rates increase the market focus on near term cashflows, and companies with more distant future growth then have a lower net present value. The Norwegian bond yield is in fact more closely correlated with US Treasuries than continental European interest rates and has gone from 1% in late 2020 to 1.8% in April 2021, while the US ten year has gone from 0.5% to 1.6% over the same period,” says Sissener.
“We have sold out of utilities partly because they are rate sensitive, and added cyclical exposure including three European auto-makers: Volkswagen, Daimler and Renault. These are partly calls on value and cyclical value but are also wagers on the companies transforming into electric vehicle makers. Diversified and integrated miners like Rio Tinto and BHP have also been bought, and we judge them to be trading at a significant free cash flow yield discount versus pure play resources companies. We also have some oil producers,” says Urdal.
Some longer-term holdings also profit from higher rates: Sissener has held Norwegian insurer, Storebrand, since 2012, and UK listed Prudential for many years. “They have benefitted from higher interest rates reducing their liabilities and are also well capitalized enough to stay solvent if rates go down again. We have also started getting larger dividends,” says Urdal. Elsewhere in Norway, Norwegian bulk buying retailer, Europris, was the third largest contributor in 2020 as Covid prevented Norwegians from crossing the border into Sweden to stock up on household essentials.
Canopus’ top five holdings do not change much from month to month, but core holdings such as Storebrand are traded around with option writing. “We sell both upside and downside to earn money from volatility. We made several percentage points of extra return on Storebrand last year. We also sold put options on high quality companies where we saw limited downside risk,” says Sissener.
“Our Nordic corporate bond fund has shown impressive performance – making 8% against a market and peers near zero,” says bond fund portfolio manager, Philippe Sissener.
Canopus did not make a wholesale or binary shift from value to growth however, and kept some very selective exposure to technology and growth stocks. “The largest profit contributor in 2020 was Nordic Semiconductor in Norway, which has grown from around USD 1 to USD 5 billion market cap over the years. We also held two other semiconductor-related names: STMicroelectronics in France, and SPR in the US. These are not actual producers of semiconductor chips, but they benefitted from an explosion in demand for displays as home working increased demand for computers,” says Urdal.
Sissener participated in one Nordic technology IPO – videoconferencing firm Pexip – but sold it swiftly and has generally been cautious on IPOs. “In 2020, the Oslo Stock Exchange was flooded with small IPOs, which creates a risk of the market becoming saturated. A lot of IPOs in 2020 were green concept stocks with growth and cashflows far into the future. Though they have corrected, we think they are still in a bubble,” says Urdal.
Canopus has been selective on ESG plays: “We did profit from Scatec Solar, which has made us 20 times our money from NOK 16 to NOK 300. We sold it at that level and have now bought back around 250. This is a quality company selling solar parts all over the developing world,” says Urdal.
Sissener’s ESG analysis blends external and in-house analysis: “As a smaller player we use a lot of more public information to incorporate ESG into our process, but we also do our own research. We monitor Sustainalytics scores for companies’ social and environmental profiles. Our largest holding, Storebrand, scores well on these ESG criteria, but we do not only rely purely on automated scores which do not always make fundamental sense. We are looking forward to the EU taxonomy which will be more specific to sectors and companies,” says Urdal. “Last year, we saw an opportunity for alpha based on the EU taxonomy which has now played out. We are not an ESG fund as such, but recognize that spotting price discrepancies due to ESG can generate alpha. To differentiate our approach, we want to focus on how ESG impacts valuation of companies.”
We think that nuclear power will gain traction, because it will be essential for the EU to become carbon neutral by 2050.
Bjorn Urdal, Co-Portfolio Manager, Sissener Canopus
“Now, in sectors such as hydrogen, investors are really differentiating in areas such as hydrogen between real companies and concept companies. We own a small Italian engineering company, which is exposed to traditional gas and refining, and is also well positioned to transfer knowledge from its more traditional engineering and construction of energy facilities to the hydrogen space. We also think that nuclear power will gain traction, because it will be essential for the EU to become carbon neutral by 2050. Uranium is a commodity in a ten-year bear market after the Fukushima accident,” says Urdal.
ESG-related forces such as de-globalization and less resource exploration could be inflationary, as could other factors. “We have no house view on whether inflation will be transitory, as the US Federal Reserve expects, but we see some upside risk of it lasting longer, due to higher raw material and higher input prices. There are also labour shortages in some areas in the US. We have no gold, silver or Bitcoin because they do not generate cashflows. We prefer miners with hard assets and cashflows. We have a fair chunk of oil exposure. We expect oil to be rangebound in the 60s. OPEC do not want it below 50 but more supply could be added at higher levels. We think Iranian supply is most likely to be a risk when demand is picking up anyway,” says Sissener.
“Our outlook is moderately bullish with strong economic growth in the second and third quarters as companies slowly reopen, and consumers spend their forced high savings. But much of this is already discounted by high valuations,” says Urdal.