PREPARED FOR A NEW INTEREST RATE ENVIRONMENT
Excalibur Asset Management offers management of fixed income assets for institutional investors and private savers alike. The Excalibur and Trude unit trusts have experienced a couple of difficult years in the current low interest rate environment, although both are prepared with a management model that will generate positive returns when interest rates rise.
The two companies, Excalibur Asset Management and Trude Asset Management, are separate legal entities owned in parallel by Mellby Gård through majority votes in each. In their operations, however, the two companies work together closely applying similar but complementary management models.
Of total managed assets of SEK 3.5 billion, Excalibur manages SEK 2.5 billion and Trude SEK 500 million. The remaining SEK 500 million is managed discretionarily in a mixed unit trust on behalf of Lancelot Asset Management.
Both Excalibur and Trude operate in the fixed income market, which has significantly lower risk than the stock market. Highly simplified, the difference between the two unit trusts is that Excalibur invests in securities with a high credit rating in the bond market, government bonds for example, while Trude is a credit hedge fund that invests in corporate bonds and derivative instruments for example.
“Together, we offer exposure to the entire fixed income market. Thanks to our highly experienced management team, we can offer management that not even the major banks can provide,” says Thomas Pohjanen, MD of Excalibur Asset Management and one of the founders.
The two funds apply an absolute return management model, meaning that invested capital shall grow. This differs from many other unit trusts with relative returns that target outperforming a certain index. That type of management may be considered successful, even if managed capital decreases in absolute terms, as long as the return exceeds the benchmark index.
“For each of our 16 years in operation, except one, Excalibur has achieved a positive absolute return. This is because we can take positions providing positive returns even when asset values are falling. For example, during the financial crisis of 2008/2009 we had an annual return of more than 10 percent,” says Thomas Pohjanen.
In 2017/2018, the total return ended up at a modest 0.5 percent. The reason was the highly aggressive monetary policy implemented by western central banks with negative interest rates and bond purchases.
“This year has been about preserving and defending capital. Real returns on government bonds have been negative and the central banks’ market interventions have suppressed volatility, making it difficult to find shorter-term fluctuations in which to take positions,” Thomas Pohjanen continues.
The pressured situation in the fixed income market has also subdued interest in fixed income investments. Customers such as pension funds and insurance companies, as well as private savers, have chosen the stock market where returns have been higher, albeit at significantly higher risk. It is often said that investors have been squeezed out along the risk scale.
However, all of this is about to change. The US Federal Reserve has begun to raise its key rate and reduce its support buying of bonds. The Swedish Riksbank is expected to start raising its key rate within the next year. The European Central Bank, ECB, is also expected to reduce it support buying.
“We are witnessing the end of the repercussions of the 2009 financial crisis. The labour market is strong, primarily in the US, inflation is close to the 2 percent target in both the US and Sweden and central banks are ready to start normalizing their monetary policy. This will generate greater fluctuations in the market, giving us better conditions for raising returns,” says Thomas Pohjanen.
“The exposure to credit bonds in the market is six times greater now than in 2008,” adds Trude’s MD Anders Nordborg. “In the future, skill will be needed to navigate the market, but we see considerable opportunities.”
A reawakening of the fixed income market also means that the two unit trusts can look forward to an influx of capital from customers.
“Things can happen very fast when customers gain interest in our type of management. We anticipate at least SEK 1 billion in Trude and SEK 5 billion in Excalibur,” says Thomas Pohjanen.
Mellby Gård’s interest in Excalibur was aroused in 2000 when Thomas Pohjanen presented his business plan to Rune Andersson who liked what he saw. Although the unit trust company was initially owned by Lancelot, Mellby Gård acquired that holding in 2006 and Rune Anderson took over as Chairman. Trude started in 2015.
“Mellby Gård is part of our DNA. We have been partners ever since the original business plan was to be translated into reality. Here, we apply the long-term approach to investment of which our Chairman Rune Andersson often speaks,” says Thomas Pohjanen.
“Mellby Gård applies a long-term approach in its undertakings, which provides strong support when starting a business as we are at Trude. It is also an advantage to have the backing of a strong owner when we are assessed by our counterparties,” says Anders Nordborg.