2018-11-02: Status Report


• In the autumn of 2016, we increased the risk (beta) in both funds, CB European Quality Fund (EQF) and CB Save Earth Fund (SEF), primarily by increasing our exposure to cyclical companies within Industrials. Now, two years later, we have reduced the risk in our portfolios, primarily by reducing exposure to highly valued growth companies in favor of larger quality companies with lower but stable growth as well as lower valuation. This means that the funds’ betas are lower today, as are the P/E ratios. Please see pages 2 and 3.

• We believe that the high valuation of growth companies are threatened by rising interest rates and a mature economic cycle, especially in the United States. This in itself does not have to be detrimental to the stock market, but it will probably push down the valuation of the growth companies and lead to a market rotation from growth companies to quality and value companies (that benefits from a mature business cycle and higher interest rates respectively) - a rotation that we have seen recently. The obvious example of this is the IT sector that has driven the market for the past 5 years – with a magnitude we have not seen from any other sector since the IT bubble 99-00 – both in terms of excess return and how long it has lasted. The fact that a sector is performing so much better than any other sector does not mean it's a bubble, but it probably means that some other sector needs to take over as the best sector and the sector that leads the market going forward i.e. rotation. Please see page 4.

• It does not appear to us as that the market has gained too much in recent years, rather the opposite. In Europe, most markets are under their long-term trend return, exemplified here with the UK, Sweden and Switzerland. The exception is the U.S. that is above its long-term trend return. Before previous major drawdowns (>20%, red vertical lines), several markets have been above their long-term trend return - that's not the case this time. Please see pages 5 and 6.


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