Nordea Nordic Friends 2023 - English

When traditional instruments no longer hit the right note, it’s time for an alternative approach: Nordea’s Multi Assets Team strikes a different chord than traditional multi-asset portfolios by relying on risk premia

REAL To make real progress in the transition to a green economy, it is time to get high-emitting companies on board / 08

RELIABLE In 200 years, European covered bonds haven’t defaulted once. Today, they can show their additional qualities / 12

ROBUST US corporates are catching up on sustainability, which should make them even stronger in the long run / 16

Advertising material for professional investors only , according to MiFID definition Any investment decision in the sub-funds should be made on the basis of the current prospectus and the Key Information Document (KID) or the Key Investor Information Document (KIID) for UK investors. nordic friends

ISSUE 01.2023

Amidst high inflation, elevated interest rates and economic weakness, Nordea’s Global Stable Equity strategy offers investors a rock of stability / 04 Strength in stability

2 FUND TABLE

Selected Nordea funds at a glance Find out more about Nordea´s full product range at nordea.lu

ESG solution

NORDEA 1, SICAV

ISIN

SHARE CLASS CURRENCY

LAUNCH IN THIS ISSUE

Equity Europe European Small and Mid Cap Stars Equity Fund 1

LU0417818407

EUR

23.03.2009

European Stars Equity Fund

LU1706106447

EUR

14.11.2017

Nordic Stars Equity Fund

LU1079987720

EUR

19.08.2014

Emerging markets Asian Stars Equity Fund

LU2152927971

USD

28.04.2020

Chinese Equity Fund

LU0975278572

USD

05.12.2013

Emerging Stars Equity Fund

LU0602539602

USD

15.04.2011

Emerging Stars ex China Equity Fund

LU2528868008

USD

27.09.2022

Latin American Equity Fund

LU0309468808

EUR

01.08.2007

Global Global Real Estate Fund

LU0705260189

USD

15.11.2011

Global Stable Equity Fund

LU0112467450

EUR

02.01.2006

Global Stable Equity Fund – Euro Hedged

LU0278529986

EUR

05.03.2007

Global Stars Equity Fund

LU0985320562

USD

17.05.2016

North America North American Stars Equity Fund Bond Covered bonds European Covered Bond Fund

LU0772958525

USD

30.05.2012

LU0076315455

EUR

05.07.1996

European Covered Bond Opportunities Fund

LU1915690595

EUR

29.01.2019

Low Duration European Covered Bond Fund

LU1694212348

EUR

24.10.2017

Credit Emerging Stars Bond Fund

LU1915689316

USD

17.01.2019

Emerging Stars Corporate Bond Fund

USD

10.08.2022

LU2500359935

European Corporate Stars Bond Fund

EUR

10.01.2019

LU1927797156

European Cross Credit Fund

LU0733673288

EUR

22.02.2012

European Financial Debt Fund

LU0772944145

EUR

28.09.2012

European High Yield Bond Fund

LU0141799501

EUR

04.01.2006

European High Yield Stars Bond Fund

EUR

15.01.2019

LU1927798717

North American High Yield Stars Bond Fund

LU1937720214

USD

07.02.2019

US Corporate Bond Fund

LU0458979746

USD

14.01.2010

US Corporate Stars Bond Fund

LU1933824283

USD

05.02.2019

US High Yield Bond Fund

LU0278531610

USD

28.07.2008

Unconstrained solutions Multi-asset solutions Flexible Fixed Income Fund

LU0915365364

EUR

02.05.2013

Stable Return Fund

LU0227384020

EUR

02.11.2005

Liquid alternatives Alpha 7 MA Fund

LU1807426207

EUR

23.05.2018

Alpha 10 MA Fund

LU0445386369

EUR

30.09.2009

Alpha 15 MA Fund

LU0607983896

EUR

11.08.2011

Thematic sustainable Global Climate and Environment Fund 2

LU0348926287

EUR

13.03.2008

Global Climate and Social Impact Fund

LU2355687059

USD

06.07.2021

Global Climate Engagement Fund

LU2463526074

USD

26.04.2022

Global Gender Diversity Fund

LU1939214778

USD

21.02.2019

Global Green Bond Fund

LU2327920356

EUR

22.04.2021

Global Sustainable Listed Real Assets Fund

LU2500361329

USD

17.08.2022

Please note that not all sub-funds and share classes might be available in your country of jurisdiction. 1 With effect as of 01.08.2022, the sub-fund is renamed from Nordea 1 – European Small and Mid Cap Equity Fund to Nordea 1 – European Small and Mid Cap Stars Equity Fund . . 2 Soft closed as of 26.02.2021.

nordic friends

EDITORIAL + CONTENTS

In this edition

Dear reader,

After an incredibly tough environment in 2022, investment markets and the broader global economy have shown resilience so far this year. Neverthe- less, the landscape remains uncertain. Even though energy prices have fallen back sharply from the spike caused by Russia’s invasion of Ukraine last year, inflation is still elevated in many parts of the developed world, causing

central banks to continue raising interest rates.

While returns of 3-4% can now be achieved via typically safe investments, this is well below current inflation. In order to extract returns to meet or exceed inflation over the coming months, investors may need to tolerate increased levels of risk. However, this stance could prove problematic, as inflation and volatility are tipped to stay high over the near term and geopolit- ical tensions – including the distressing war in Ukraine – remain. In addition, we are already seeing signs of the impact of tighter financial conditions, with the recent bank failures in the US and the deterioration within areas of the real estate market. As the allocation to stocks is typically the riskiest component of a diversified portfolio, investors are likely to increasingly seek equity solutions able to display resilience. In the cover story of nordic friends , the portfolio managers of our Global Stable Equity strat- egy explain why companies with robust underlying fundamentals are best placed to withstand elevated price pressures and further bouts of uncertainty. Resilience is also a term commonly associated with European covered bonds. While these assets have recently been impacted by the negative sentiment surrounding banks, this has opened up an opportunity for skilled active managers. Remember, there has never been a default in the European covered bond market since its inception more than two centuries ago! Finally, after years of seemingly unstoppable momentum behind ESG, sustainable investing has witnessed heightened debate recently. However, we remain convinced of the long-term merits of sustainability for both investors and corporates. As we embark on a multi-decade transition to a greener world, you will read why we believe it is crucial for investors to engage with today’s heavy emitters. From all of us at NAM, we would like to express our thanks for your ongoing trust and support. We wish you all the best for the summer period and look forward to seeing you soon.

Cover story

Strength in stability In times of high volatility, global stable equities provide much-needed stability for the portfolio. Fund in focus 8 Engage for change It is through engagement with heavy emitting companies that real change becomes possible. Market view 12 Safe and sound For 200 years, European covered bonds have offered investors safety and protection. Macro opinion 15 Cool-down for the inflation Headline inflation is showing signs of easing. However, the relief is only temporary. Inside Nordea 16 The American edge US companies are catching up in terms of sustain- ability, which gives them an additional edge. ESG decrypted 19 Act sustainably. Invest socially. Addressing the ‘S’ in ESG is not just the right thing to do; it also makes financial sense. Lounge 20 The sustainability strategy bears fruit Midsummer. Let’s play! On the lookout for solutions Numerous awards for Nordea’s strategies Nordic point of view: Building for tomorrow

Yours faithfully,

Christophe Girondel Global Head of Institutional and Wholesale Distribution

ISSUE 01.2023

4 COVER STORY

Stable equities can help investors find a viable path in an otherwise harsh and unstable environment of high inflation, high interest rates and weak growth. Strength in stability

nordic friends

COVER STORY 5

„ Our approach targets companies with

steady earnings and robust balance sheets, which act as stabilisers during periods of heightened volatility. Claus Vorm portfolio manager at Nordea Asset Management

These companies often grow at higher rates than typical stocks within the universe – but are still relatively stable, less cyclical and currently trade at attractive valuations.” Solid fundamentals provide stability Robert Næss, who manages the portfolio alongside Vorm, says stability is an underrated quality in the current environment. “Looking at today’s investment backdrop, investors will need to identify solutions able to offer protection against a wide spectrum of economic and market scenarios,” Næss says. “In our view, investors must meet fundamental challenges with fundamental investing. The most successful companies for the remainder of the year and beyond are likely to be those able to withstand stubborn inflation, elevated interest rates and continued eco- nomic weakness.” The investment process employed by Vorm and Næss on the Nordea 1 – Global Stable Equity Fund takes a deep view of the fundamentals, with the team analysing the development of a company’s stock price, earnings, dividends, EBITDA and cash flow over prior years. Within the process, one key characteristic is prioritised above all: stability.

After navigating through turbulent and testing market conditions last year, investors entered 2023 with hopes of a more benign backdrop . But far from calm, the early part of 2023 has been charac- terised by frequent bouts of volatility and fear. While much of the market’s recent instability surrounded sharp swings in inflation and interest rate expecta- tions, concerns over the health of a number of global banking institutions created additional uncertainty. With heightened market volatility tipped to persist, it is understandable if investors are more risk averse for the foreseeable future. As long-term investors still need exposure to equity markets, stocks exhibiting robust characteristics are likely to be in increasing demand. In 2005, the Multi Assets Team at Nordea Asset Management (NAM) created the concept of “stable equities”, which are stocks typically less economically sensitive than the broader market. These businesses usually produce products or offer services largely essential to everyday consumption. “Stable equities are often perceived as ‘boring’, which means the stocks attract less attention from the market and the broader public,” Claus Vorm, portfolio manager of the Nordea 1 – Global Stable Equity Fund , explains. More attention is given to ‘hot’ stocks with interest- ing narratives, typically companies operating in areas of new technology. “As a result of being out of the limelight, the pricing of stable stocks does not neces- sarily reflect a rational weighting of expected returns relative to risk,” Vorm explains. In addition to this, as Vorm points out, there are many companies that deserve the label “stable”, but not “boring”: “In fact, a number of high-profile names within communications services and IT have stable qualities – such as tech giant Alphabet. 1

“Our approach actively targets companies with steady earnings and robust balance sheets, which

At a glance ` Stable equities may be perceived as “boring”, but stability is an underrated quality in the current environment ` The managers actively target companies with steady earnings and robust balance sheets, which act as stabilisers during periods of heightened volatility ` Higher-quality companies possess the ability to protect margins – even in an inflationary environment

1 Reference to companies or other investments mentioned should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration.

ISSUE 01.2023

6 COVER STORY

Rock solid: stable equities can offer investors solid ground to stand on – a quality that is particularly important in a highly volatile and challenging environment.

often have strong brands or market-leading posi- tions, which enables them to increase prices,” Vorm explains. His colleague Næss adds: “With strong busi- ness models and good management teams, higher- quality companies possess the ability to protect mar- gins – even in an inflationary environment. Robust revenues and margins mean such companies are able to maintain steady profits regardless of inflation.” Until recently, there has never been an extended period of high inflation over the history of the Nordea 1 – Global Stable Equity Fund . However, the team tracked the earnings per share of branded consumer staples giants Coca-Cola, Procter & Gamble and Johnson & Johnson 2 during high inflationary periods seen during the 1970s and 1980s. These com- panies, which have regularly featured in the portfolio over recent years, consistently demonstrated strong pricing power.

act as stabilisers during periods of heightened volatil- ity,” Vorm says. “We do not specifically target low- beta or high-dividend stocks. However, the invest- ment process typically results in a portfolio which includes stocks with lower beta and higher dividend yield than the overall market.” Withstanding the turmoil of high inflation After more than a decade of historically low interest rates and unprecedented monetary support, the investment backdrop has changed markedly over the past year or so. In an environment of high inflation, el- evated interest rates, and the clouds of recession still hovering, equity investors will need to have solutions able to combat such scenarios. In terms of contending with high inflation, Vorm and Næss believe inves- tors should be gravitating towards higher-quality companies. “Our investment universe is made up of high-quality companies with steady earnings. These

2 Reference to companies or other investments mentioned should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration.

nordic friends

COVER STORY 7

„ Higher-quality companies possess the ability to protect margins – even in an inflationary environment. Robert Næss portfolio manager at Nordea Asset Management

“In addition, by focusing on low-risk companies with solid underlying fundamentals – such as robust earnings and cash flow – we can be more confident of its P/E as a meaningful valuation metric for the company. In our view, it is very hard to trust a valua- tion of a company displaying volatile earnings,” Næss points out. Providing safety by minimising earnings risk Finally, when faced with the prospect of recession, Vorm and Næss are looking to identify less eco- nomically sensitive companies, which carry lower fundamental risk. “In times of recession, markets often fall for two reasons: earnings fall or fail to meet expectations, or earnings are de-rated by the market. Our stable equity approach minimises the risks of both of these scenarios,” Vorm says. The portfolio manager continues: “Stable earnings are a key part of our identification of stable equities. Our selection process targets high-quality businesses capable of maintaining stable earnings throughout the economic cycle, including during downturns.” Most of these are less sensitive to economic growth than the market average. The valuation overlay that the team employs gives an additional level of protection because the holdings have a lower risk of devaluing. “As a result, the lower volatility of earnings feeds through into less volatile share prices and less volatile performance. In fact, during periods when the earnings multiple for the market has fallen sharply, the earnings within our portfolio proved to be far more resilient,” 3 Vorm concludes. 

Valuation as guiding lighthouse Additionally, in a world of still-elevated interest rates, Vorm and Næss think investors are best placed by prioritising attractively valued companies. “We have an actively managed and flexible approach when managing the Nordea 1 – Global Stable Equity Fund , but as a result of our valuation overlay, our portfolio tends to tilt towards the value style more than the growth style,” Næss states. “Holdings with lower valuations are less sensitive to high interest rates from a technical perspective because there is less weight attached to long- term expectations,” Næss explains. According to the expert, this is similar to a bond’s interest rate sensitivity, which will be lower in a shorter-dated bond. These lower-valued holdings also bring lower risk, as they are less volatile than their higher-rated peers.

Nordea 1 – Global Stable Equity Fund

Claus Vorm and Robert Næss

Managers

EUR

Base currency

LU0112467450 (BP-EUR) LU0097890064 (BI-EUR)

ISIN

02.01.2006 (BP-EUR, BI-EUR)

Launch date

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 your investment can go up and down, and you could lose some or all of your invested money.

ISSUE 01.2023

8 FUND IN FOCUS

Engage for change

The Nordea 1 – Global Climate Engagement Fund targets real change by engaging with companies to improve their environmental performance and aligning business models with a low-carbon economy. 1

As the world embarks on the great migration to a greener society, the transition from fossil-based energy production and consumption to renewables is a key priority. New ecosystems are forming and in- novative technologies are emerging; however, there are still numerous companies lagging behind in the green transition, especially today’s heavy emitters, which are responsible for a large part of the global pollution problem. Consequently, there has been a significant investor exodus from heavy-emitting companies.

At a glance ` Many companies that currently have heavy environmental footprints are likely to play a crucial role in the transition to a green economy ` There is value to be unlocked through convincing the wider market of their place in the future green economy. NAM pushes them to make commitments backed by science, and demonstrate credible sustainability plans backed by capital

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.

nordic friends

FUND IN FOCUS 9

„ We engage with selected

heavy-emitting companies in order to drive real change. Alexandra Christiansen portfolio manager at Nordea Asset Management

panies to order to drive real change,” says Alexandra Christiansen, portfolio manager of the new fund. “The reality is that many of these companies will still be around in the low-carbon economy of the future, and some may even play a crucial role in achieving important sustainability goals. Excluding them from portfolios may look good on paper but will have a limited impact in the real world.” Christiansen and her team believe a significant factor in unlocking value in these businesses is convincing the wider market of their continued relevance and ability to generate positive returns in the future green economy. “This means making commitments with full transparency and backed by science, to which we can hold management teams accountable and meas- ure progress,” she says. “It also means demonstrating the viability of their sustainability plans in practice, backed by credible capital allocation.” In running the Nordea 1 – Global Climate Engagement Fund , Christiansen is supported by Thomas Sørensen and Henning Padberg, the highly regarded managers of NAM’s Global Climate and Environment and Global Climate and Social Impact strategies, as well as the broader Fundamental Equities Team. They also draw upon the extensive engagement expertise of NAM’s 22-strong Responsi- ble Investments Team. 3 Five primary sustainability pillars In order to enact meaningful change through engagement, the team focuses on five primary sustainability factors. Unsurprisingly, one of the key considerations are greenhouse gas emissions, which are the leading driver of global warming. As econom- ic production requires substantial energy inputs, energy management is also paramount for success- ful climate action. Water and waste management is another vital issue. The world’s limited resources cannot meet growing demand, which creates long- term uncertainty for companies highly dependent on natural assets. Similarly, companies need guidance on natural resource management. This includes using recycled and renewable materials, reducing the use of key supplies, and maximising resource efficiency in manufacturing. Finally, corporate management

The increasing consideration of environmental, social and governance (ESG) factors contributed to this flight of capital, as asset managers sought to demon- strate strong sustainability credentials. Nordea Asset Management (NAM) has built up years of experience in environmentally focused investing, with its renowned Nordea 1 – Global Climate and Environment Fund – one of Europe’s largest Arti- cle 9 vehicles 2 – launched more than 15 years ago. But while the Global Climate and Environment strat- egy achieved success by identifying companies offer- ing innovative climate solutions, NAM understood the need to actively target real-world emissions change. This was an important reason behind launching the Nordea 1 – Global Climate Engagement Fund last year: “We engage with selected heavy-emitting com-

ISSUE 01.2023

10 FUND IN FOCUS

„ Despite its emissions-intensive profile, the steel industry is a key structural enabler in the energy transition. Alexandra Christiansen portfolio manager at Nordea Asset Management Instead of categorically excluding certain industries on the basis of their current emissions, NAM’s portfolio managers keep an eye on the big picture. Their goal: a sustainable future.

within the Nordea 1 – Global Climate Engagement Fund .4 “Despite its emissions-intensive profile, the steel industry is a key structural enabler in the en- ergy transition. For example, an offshore wind farm or photovoltaic plant can be multiple times more steel-intensive than a conventional coal or gas plant,” Christiansen explains. “Even if this was not the case, a material as ubiquitous as steel cannot be ignored in the global decarbonisation drive. Decarbonising the steel making process should be taken very seri- ously in the context of a global net zero ambition.” ArcelorMittal 5 , one of the largest steel producers in the world, is central to the debate around investing in “green” steel production via the implementation of hydrogen and carbon capture technology in the pro-

teams must be willing to reposition businesses to be resilient to the transition and physical risks of climate change. “Through the engagement process, we work with corporate management teams to assess and achieve meaningful short- and long-term goals, with regular progress reviews,” Christiansen explains. If positive momentum stagnates, the NAM team can decide to escalate interactions or divest. Corporates on the right side of change Responsible for roughly 9% of global emissions, the carbon-intensive steel industry is viewed negatively on ESG criteria – which means stocks in this space are unlikely to feature in many sustainability-focused investment strategies. And yet, steel companies are

4 As at 31.05.2023. 5 Reference to companies or other investments mentioned should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration.

nordic friends

FUND IN FOCUS 11

lay the foundations for future long-term positive im- pact in the real economy. Feasibility of engaging is key, in terms of both management teams’ willingness and ability to adapt. “Our engagement efforts are focussed on management teams taking appropriate action to deliver on our expectations,” Christiansen points out. NAM is committing to transparency on emissions through a measurement called cumulative issuer-level decarbonisation. Each year, the team will monitor the reported carbon emission change of every holding in the portfolio, with each annual change added to a cu- mulative portfolio total. “If our engagements bear fruit and the wider market begins to believe and endorse these companies, we will turn our attention to new companies with heavy footprints. This is how we plan to make the biggest real-world impact, and crystallise value for our clients,” Christiansen concludes. 

duction process. However, despite its decarbonisation commitments, the company has only committed to a few green steel production projects so far. This is why NAM will keep engaging with management. “We will continue to hold management accountable to their decarbonisation commitments, and we are pushing for a more transparent and granular transi- tion plan,” Christiansen says. A tangible long-term difference For asset owners who seek to construct a portfolio targeting a lower carbon footprint, there are several approaches. One widely adopted course of action is to divest from high-emitting sectors and companies, which immediately reduces the carbon footprint versus the respective index. However, this approach penalises many sectors which are critical for the transition, while virtually eliminating the chance of real-world change. Another method is to invest in relative low emitters in a late transition phase. While this is effective at bringing a portfolio carbon foot- print down over the short and medium term, this fails to include investments able to deliver meaningful future decarbonisation. The approach which is best aligned with the real decarbonisation objective of the Glasgow Financial Al- liance for Net Zero is to invest in relative high emitters during the early transition phase. This approach may not result in an immediate positive benefit, but it will

Nordea 1 – Global Climate Engagement Fund

Alexandra Christiansen

Manager

USD

Base currency

LU2463526074 (BP-USD) LU2463525423 (BI-USD)

ISIN

26.04.2022 (BP-USD, BI-USD)

Launch date

ISSUE 01.2023

12 MARKET VIEW

Safe and sound

European covered bonds could be a good fit for investors looking for safety. They are a true alternative to traditional government bonds. But the asset class has other, equally attractive qualities.

After years of low yields, followed by a dra- matic drop in prices during 2022, returns in the fixed income markets are finally poised to rebound. It's likely to be a bumpy ride due to the cross currents created by global central banks' tightening policies, a volatile global economy, and ongoing political uncertainty both within and outside of Europe. That said, we believe current market dynamics have created a particularly attractive opportunity in covered bonds as an alternative to government bonds in Europe. Recent events in the banking sector, triggered by the failure of Silicon Valley Bank, have led to questions about the safety of financial debt, and an inevitable widening of associated spreads. European covered bonds were not immune, given that they are issued by financial institutions. The impact could last be seen in March this year, when market concerns around Credit Suisse re- sulted in a spread widening of around 20bps be- tween European government and covered bonds from trough to peak. “Historically this kind of con- tagion effect has opened up attractive opportuni- ties for investors to deploy capital into the asset

class,” says Henrik Stille, portfolio manager of the Nordea 1 – European Covered Bond Fund . “In addition, there are also supply dynamics at play in the rates market that are likely to be construc- tive for European covered bonds as an attractive alternative to sovereign debt.” In his opinion, a key part of the foundations to both these points is an understanding of the safety level that covered bonds can offer to investors. The double safety of covered bonds “One of the primary advantages of investing in European covered bonds is their high credit qual-

At a glance

` Recent events in the banking sector have led to a widening of financial debt spreads, including covered bonds ` At the same time, supply dynamics in the market mean that now is an extremely attractive time for investors in European covered bonds over government bonds

nordic friends

MARKET VIEW 13

„ Longer-term supply dynamics suggest European covered bonds will outperform European government bonds. Henrik Stille portfolio manager at Nordea Asset Management

ity,” points out Stille. These bonds are typically issued by banks and other financial institutions that, in the majority of cases, have strong balance sheets and high credit ratings. Furthermore, the cover pool assets that back these bonds are generally of high quality, such as mortgages or public sector loans. In contrast to Asset Backed Securities, covered bond pools exclude non-per- forming loans, which adds yet another layer of comfort. “In addition to elevated credit quality, covered bonds are a type of debt instrument that offer investors an extra level of security due to their dual recourse feature, which means that bondholders have a claim on both the issuer and the underlying assets,” Stille explains. “In fact, there has never been a default in the European covered bond market since its inception over 200 years ago.” In aggregate, this means that covered bonds have a multitude of features that make them attractive low-risk investments. Integrated protection Aside from their intrinsic safety features, European covered bonds are also subject to regulatory protection in the form of the European Union’s

ISSUE 01.2023

14 MARKET VIEW

Safety first: orange clownfish are among the safety-conscious inhabitants of the oceans, and for good reason. They have little to defend themselves against their predators. That is why they seek shelter among anemones, whose poisonous tentacles offer them protection.

Bank Recovery and Resolution Directive (BRRD), which exempts covered bonds from bail-in. A bail-in helps financial institutions on the brink of failure by requiring the cancellation of debts owed to creditors and depositors. “Bail-ins have been considered across the globe to help reduce the burden on taxpayers,” Stille states. “The ex- emption of covered bonds means that, in case of a defaulting bank, the BRRD excludes them from absorbing any losses via bail-in. Notably this is not the case for senior debt and other securities lower in the capital structure. With the regulatory backstop, this leaves covered bonds at a safe- ty level equal to insured deposits in your bank account. Currently, this includes any assets up to a value of EUR 100,000.” Opportunity knocks So why is now such an attractive time to be looking for exposure to covered bonds instead of government debt as a safe haven investment in Europe? “We already touched on the spread widening, which in itself is reason to consider an investment in this asset class,” Stille says. “Howev- er, there are also longer-term supply dynamics at play in the market that suggest European covered bonds will outperform European government bonds over time.” According to a Citigroup Inc. market report published in January this year, net supply of government bonds in the Eurozone was around EUR 100bn in 2022. The same report predicts this figure will increase four to five times during 2023 as governments in Europe issue debt to fund large current account deficits. At

the same time, the European Central Bank (ECB) has not only stopped its Quantitative Easing (QE) programme, but has also been actively pursuing Quantitative Tightening (QT) since 1 March. “This means the ECB will no longer be a buyer of all this new government debt,” Stille explains. “Thus, it will be up to private investors to pick up the slack.” In contrast, European covered bond issuance is expected to decline by 50% compared to the previous year. “This is because new mortgage activity in Europe is extremely low for the time being. So, issuance is only happening in cases where maturing bonds need to be replaced,” Stille argues. “With market dynamics as they are, it is difficult to imagine that spreads between Europe- an government and covered bonds shouldn’t, at a very minimum, tighten back to historical averages. We believe this makes the investment case for European covered bonds extremely compelling right now.” 

Nordea 1 – European Covered Bond Fund

Henrik Stille

Manager

EUR

Base currency

LU0076315455 (BP-EUR) LU0539144625 (BI-EUR)

ISIN

05.07.1996 (BP-EUR) 09.12.2011 (BI-EUR)

Launch date

nordic friends

MACRO OPINION 15

Laurent Gorgemans , CFA, Global Head of Investment Products at Nordea Asset Management:

Cool-down for the inflation

Milestone achieved: inflation is showing signs of easing. However, the battle central banks are fighting is not over yet, and a recession is looming. Hedging and flexible investment strategies are therefore in demand.

Finally, restrictive monetary policies around the globe, tighter financial conditions and lend- ing standards (following the recent turmoil in some banks) are starting to kick in and markets are experiencing the longed-for cool-down of inflation data. In particular, headline inflation is easing, thanks to declining natural gas costs. However, that does not mean that central banks’ fight against inflation is over. Instead, core infla- tion rates – stripping out more volatile items like food and energy – remain elevated. Financial conditions continue to tighten Latest economic readings have brought mixed sentiment. Some indicators are pointing to lower growth (such as jobless claims), while others are still firm, leading US government bond yields to be quite volatile recently on the back of debt ceil- ing negotiations. Central banks remain committed to inflation expectations to be around 2% and further hikes are still on the agenda. We might experience two quarters of negative growth in the US in 2023, which is, by definition, a recession. In Europe, we will probably see very low economic growth, according to consensus expectations. In this environment, the European Central Bank (ECB) will have to continue its rate hike in order to curb core inflation and, more importantly, dampen expectations of future inflation. In China, after the sessions held by the Nation- al People’s Congress and the Chinese People’s Consultative Conference, the pro-growth stance was again emphasised and monetary policy loos- ened. Inflation is well contained in this part of the world. The growth target for the Chinese Gross Domestic Product (GDP) was set at around 5%.

Temporary relief: the danger of overheating seems averted for the moment as global inflation figures are falling.

attractive today than they were in 2022. Bond yields, both government and credit bonds, seem interesting for some investors, given the bleaker economic outlook. In real terms, though, it only gets more challenging. In case we should experience a more pronounced economic downturn, covered bonds remain a safe choice. At the same time, companies that are offering stable and robust cash flows should also be able to navigate this environment well. Vola- tility is likely to remain high for the remainder of the year both in fixed income and equities, leaving the door open to solutions that have the flexibility in their investment strategy to adjust and that can exploit different directions of the financial markets. 

What are the solutions for investors? Some segments of the financial markets are more

ISSUE 01.2023

16 INSIDE NORDEA

The American edge The managers of the Nordea 1 – North American Stars Equity Fund , Joakim Ahlberg and Johan Swahn, explain why stocks from the region remain a cornerstone allocation in investor portfolios.

nordic friends

INSIDE NORDEA 17

„ The US is the most innovative and

flexible economy in the world, offering exceptional companies to invest in. Joakim Ahlberg portfolio manager at Nordea Asset Management

Joakim Ahlberg: As many readers of nordic friends would know, all of our ESG STARS strate- gies at NAM have three clear objectives: invest in companies living up to robust ESG standards, create a lasting impact through our capital allocation, and deliver alpha for our clients by beating the bench- mark. 1 Speaking specifically about our region, the US is the most innovative and flexible economy in the world, which will continue to offer exceptional companies to invest in over the long term. This is why North American equities will remain a corner- stone allocation in most investor portfolios. Moving to ESG, the North American stock market has historically been less concerned with sustainability factors relative to Europe. Have you noted any change over the course of managing this fund? Joakim Ahlberg: We certainly have. Five years ago, many companies turned down our invitation to meet and talk about ESG. Today, not only do most companies want to discuss ESG, but manage- ment teams are also listening to, and acting upon, our proposals. While there are still some broader headwinds, such as political interventions in certain states, corporate management teams increasingly recognise the need to improve ESG profiles and reporting practices. We do not believe this momen- tum can be stopped.

Lead portfolio manager Joakim Ahlberg (left) and co-portfolio manager Johan Swahn not only keep an eye on the North American stock markets but also its ESG progress.

Nordea Asset Management’s (NAM) ESG STARS fund range hardly needs an introduction for long- time readers of nordic friends. Since the launch of the first STARS fund in 2011, Nordea has built up a strong suite of equity and bond solutions where environmental, social and governance (ESG) factors are an integral part of the investment process. Today, NAM’s ESG STARS funds include both global and regional offerings. One such regional strate- gy, the Nordea 1 – North American Stars Equity Fund , was re-engineered under the STARS philoso- phy in late 2018. Below, nordic friends talks to lead portfolio manager Joakim Ahlberg and co-portfolio manager Johan Swahn about ESG developments across the North American region and the prospects for equity markets in 2023 and beyond. Hi Joakim and Johan. Firstly, Joakim, it has been almost five years since this fund transitioned into NAM’s renowned ESG STARS suite. Can you quickly sum up what you are trying to achieve with this strategy?

Johan, can you tell us a little about your bottom- up fundamental process for selecting stocks?

At a glance ` Corporate management teams across North America are increasingly recognising the need to improve ESG profiles and reporting practices ` With markets displaying heightened volatility, the portfolio managers have maintained a focus on higher-quality securities ` The Biden administration’s green spending programmes will provide a long-term tailwind for selected industries

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18 INSIDE NORDEA

The two portfolio managers are convinced of the long-term investment opportunities in the US for investors with a sustainability focus.

Johan Swahn: Joakim and I have almost 40 years of combined investment experience and our active approach is centred upon identifying compelling opportunities across two types of stocks. This process is identical to the Nordea 1 – Global Stars Equity Fund , which we also oversee. In the first bucket are what we call our “moat and tailwind” stocks, which constitute about 70% of the portfo- lio. The distinguishable competitive advantages or moat and the idiosyncratic or structural tailwinds for these stocks have the potential to provide attractive long-term returns on a risk-adjusted basis. 2 The remaining 30% of the portfolio is allocated in what we call the “expectations gap” bucket, which are stocks where we have a materially different view than the market. This is often more research-inten- sive, requiring an exhaustive due diligence before taking on a position. However, this effort can deliver very attractive upside. We have witnessed elevated market volatility over the past year or so. How is this impacting your outlook for equities? Joakim Ahlberg: While our long-term view of North American stocks is optimistic, it has been prudent to be slightly defensive and focus on higher-quality se- curities throughout this volatile period. However, as bottom-up investors, we aim to generate our alpha from stock picking, which is why we are constantly looking to take advantage of shorter-term market

dislocations. On a longer-term horizon, it is definitely worth mentioning the significant tailwind of “green” spending in the US, such as the USD 370bn of climate-related investment within the Biden administration’s Inflation Reduction Act.

Do you have an example of a company set to benefit from the US green revolution?

Johan Swahn: One company we are optimistic about is NextEra Energy3, the largest renewable energy generator in the US. As energy generation is responsible for more than 70% of global greenhouse gas emissions, decarbonising the sector is essential for our net zero ambitions. NextEra – which gen- erates electricity from wind, solar and natural gas – has one of the highest quality utilities businesses in the entire country, its Florida Power and Light subsidiary. More broadly, we are confident about the company’s long-term solar energy capability. 

Nordea 1 – North American Stars Equity Fund Manager Fundamental Equities Team Base currency USD ISIN LU0772958525 (BP-USD) LU0772957808 (BI-USD) Launch date 30.05.2012 (BP-USD, BI-USD)

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 Reference to companies or other investments mentioned should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration.

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decrypted ESG

Act sustainably. Invest socially.

Addressing the ‘S’ in ESG is not just the right thing to do; it makes financial sense – and it is becoming more widely shared by investors.

Many think sustainability is about the envi- ronment. But that’s only one part of the story. Across the globe, social disparities are rising, posing real challenges to the fundamentals of societies as well as their economies, in both emerging and developed markets. In 2015, the United Nations (UN), recognising the need to safeguard the future wellbeing of global society, launched 17 Sustainable Development Goals (SDGs) to be achieved by 2030. In order to meet these goals, annual investments of USD 5 to 7 trillion are required. The SDGs offer a common framework with which companies and investors alike can align long-term value creation with the world’s most pressing needs. Given that 11 of the 17 UN SDGs focus on social challenges, there is a substantial investment opportunity in the gap between social needs and available solutions. There are enormous needs in areas like access to finance, formal education, affordable housing and a plethora of others. The idea that investing in people and working to address social issues is good for business is shared by investor groups across the globe. A company that can meet these demands is in a position to generate attractive returns. And the opposite is also true: companies with weak records on human rights or labour practices are likely to suffer from increased supply-chain dis- ruptions, affecting both operational performance and brand reputation.

Ensuring inclusive and equitable quality education is one of the UN’s 17 Sustainable Development Goals.

the social SDGs is in the best interest of investors, as the profitability of their investments depends on the continued wellbeing of the world’s society,” says François Passant, ESG Leader at Nordea Asset Management. 

Nordea offers three equity solutions that focus on the ‘S’ in ESG:

` Nordea 1 – Global Climate and Social Impact Fund ` Nordea 1 – Global Social Empowerment Fund ` Nordea 1 – Global Social Solutions Fund

For more information: nordea.lu/ThematicSustainableSolutions

“At Nordea Asset Management, we strongly believe that working towards the achievement of

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6 CONTACTS + PUBLISHER’S DETAILS + PHOTO CREDITS 20

nordic friends lounge

The sustainability strategy bears fruit Climate change concerns everyone. Nordea Asset Management (NAM) recognised this early on and planted the seeds for its own climate and environmental strategy back in 2007, which has since grown and is now bearing fruit.

The world is facing a collective challenge in the form of the climate crisis, which is reflected in manifold social and environmental problems. Everyone can, and must, contribute to addressing this crisis through economic, social and institutional change. NAM has embraced its own role as a responsible investor and is committed to doing its part to achieve the grand goal of carbon neutrality. “Our commitment started more than 15 years ago when we signed the United Nations‘ Principles for Responsible Investments (UN PRI),” recalls Christophe Girondel, Global Head of Institutional and Wholesale Distribution. NAM has

since built up extensive sustainability expertise in both the Fundamental Equities Team and the Responsible Investments Team.

NAM is committed to being industry forerunner

Together with other industry repre- sentatives, NAM has developed the Net Zero Investment Framework, a method for asset managers to set cli- mate targets that are compliant with the Paris Agreement. NAM is also a founding member of the Net Zero Asset Managers Initiative. Within this industry cooperative, NAM has de- clared its own target of being climate neutral across all assets under man-

Ripe for the picking: as one of the first in the industry, NAM planted the seed for its sustainability offering 15 years ago. Today, clients can take their pick from a range of sustainable solutions.

agement by 2050 and has defined clear milestones for its path towards this goal. For example, by 2025, NAM plans to phase out investments in coal-burning companies which do not have sufficient plans to phase out coal by 2040 themselves. In 2021, NAM launched the Global Climate and Social Impact Strategy, followed one year later by the Global Climate Engagement Strategy. As an active investor, NAM is seeking to enter a constructive dialogue with the com- panies it invests in, influencing them and offering strategies to drive their decarbonisation. Returns with responsibility “We ensure that the companies we invest in contribute to achieving the

Nordea Asset Management offers investors a broad range of ESG products: ` Nordea 1 – Global Climate and Environment Fund focuses on companies that offer solutions in the areas of resource efficiency, environmental protection and alternative energies ` Nordea 1 – Global Climate and Social Impact Fund invests in companies that provide solutions to pressing environmental and social challenges ` The ESG STARS fund family , which includes both equity and fixed income solutions, offers investors the opportunity to invest in the winners of tomorrow and support the net zero target ` Nordea 1 – Global Climate Engagement Fund comprises attractively valued climate laggards, whose potential can be unlocked through engagement ` Other thematic solutions address the major social and sustainable issues of our time. These include: the Nordea 1 – Global Sustainable Listed Real Assets Fund , the Nordea 1 – Global Social Empowerment Fund and the Nordea 1 – Global Social Solutions Fund

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NAM’s climate journey

1.5 degree Celsius target and are in line with other forward-looking envi- ronmental initiatives. We continuously monitor achievements, report trans- parently to investors and the public, and engage in dialogue, adjust or dissolve positions where necessary,” Girondel explains. “What‘s important to us at NAM is that we feel good about the investment decisions we make, because we know that they will have a real-world impact and can move society in the right direction. We are proud to offer investors the opportunity to invest their money responsibly for the future – and to do so in a way that is both return- and value-based.” 1 Award-winning expertise Numerous awards testify to the success of NAM‘s sustainability strategy and the milestones already achieved. In 2022, NAM won at total of 13 national and international awards, including the title ESG Manager of the Year by Funds Europe and the award for Best ESG Team Europe presented by Cfi.co. At the FD Insider Awards, NAM re- ceived the award for Sustainable

Asset Manager of the Year – Europe 2022, while NAM was recognised as Best ESG Asset Management Company Northern Europe 2022 at the International Investors Awards. 

Learn more about NAM‘s approach and capabilities in decarbonisation: Net Zero Investor Playbook

And NAM‘s sustainable products: nordea.lu/ResponsibleInvestment

Midsummer. Let’s play! Nordea Asset Management (NAM) is once again inviting clients and friends to join the Midsummer celebrations. Guests can look forward to good food, good conversation and perhaps a game or two.

Midsummer is one of the highlights of the Nordic social calendar. It is the day when Swedes celebrate the summer solstice by taking time off from work to go outside and enjoy nature and the warm weather. It is an opportunity to get away from it all and remem- ber why you work so hard in the first place. Fresh air, good food and fun activities with family and friends are at the centre of the festivities.

NAM is pleased to invite clients, colleagues and friends to join the Midsummer celebrations again this year. And for the tenth time, too! In keeping with this year’s motto, there may even be an outdoor game or two waiting for guests. But the focus will be on exchange and being together. So, let’s play and recon- nect while enjoying the unique midsummer atmosphere! 

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