In the wake of increasing defense spending, Joakim Agerback’s portfolio has seen significant growth. Since Russia’s invasion of Ukraine, the managed capital in the Global Security Fund has surged from 100 million to 1 billion kronor.
"Interest is high now. It was harder to secure meetings a few years ago," says the defense fund manager, as he heads to Luxembourg to meet with investors.
The recent geopolitical turmoil, with a failed presidential meeting and the US’s withdrawal of support for Ukraine, has prompted the EU Commission to kick into high gear.
Finserve Global Security Fund
- Manager: Joakim Agerback
- Managed Capital: 1 billion kronor
- Performance: YTD +20%, 1 year 36%, 3 years 67%
- Top 10 Holdings: Rheinmetall, Kongsberg Gruppen, Leonardo, RTX, Palo Alto, Rolls-Royce, SAAB, CrowdStrike, Cloudflare, BAE Systems
- Management Fee: 1.6%
Need for Allies
On Tuesday, Chair Ursula von der Leyen announced that the EU is ready to invest an additional 800 billion euros through the rearmament program ReArm.
"It is clear that Europe is coming together and wants to show resolve. We will be much more dependent on our own defense industry and also need to find more allies," says Agerback, mentioning South Korea, Japan, and Canada as potential partners.
Following Monday’s sector surge at the failed presidential meeting, Tuesday’s Trump announcement, and the ReArm program, further boosted the market.
German Hensoldt rose by 22%, Rheinmetall by 11%, French Thales by 19%, and Italian Leonardo by 13%. The Nordic sector counterparts did not experience the same uplift, with Saab and Kongsberg Gruppen instead seeing slight declines.
Nuclear Powers
The uncertain situation has reignited discussions about a European nuclear strategy, particularly among French President Emmanuel Macron and Germany’s Friedrich Merz, who is likely to be the next chancellor.
The strategy would primarily benefit nuclear powers France and Britain, with companies like Thales and BAE Systems, both present in the fund. However, Britain’s nuclear arsenal requires US approval, limiting flexibility, according to Agerback.
"French, British, and German companies clearly have the most upside in such a scenario."
Best Capacity
Defense conglomerate Rheinmetall is the fund’s largest holding. The stock has surged by 20% since Monday when Merz announced that Germany is considering defense investments of 500 billion euros.
"Rheinmetall has the best production capacity in Europe. Considering how rapidly they are expanding, the high valuation multiples are not unreasonable when looking ahead a few years."
Agerback also highlights German Hensoldt as an example of subcontractors that could benefit from increased interest in a European defense system. The company primarily produces technical solutions in radar, air surveillance, and avionics. They are a key supplier to the Eurofighter aircraft.
The competitor F-35 is made by Lockheed Martin, where the buyer currently pays a premium to be part of the international alliance with the US. Agerback believes this premium may be reevaluated now.
"Even if we want to reduce vulnerability to the US, we must continue to import from there, maybe even a little more than currently. Therefore, South Korea will become a very important supplier. If they are not pressured by the US not to deliver too much to Europe."
US Retreat
As European companies have surged, the American ones have faltered. Giant Lockheed Martin is down 6% this year and only up 2% over three years, compared to Rheinmetall’s 83% and 655% respectively.
The reduced defense budget in the US has not yet affected companies like Lockheed Martin and Northrop Grumman, with long contracts that take time to change. In the short term, major contracts in the space sector may be at risk, according to Agerback.
"There’s Elon Musk with his SpaceX as an advisor."
British Balance
The UK, which has played a key role in peace negotiations, is balancing between EU cooperation and its close alliance with the US.
"I have great faith in the UK moving forward. Even though they have had some difficulty financing the defense sector in the short term, the ambition going forward is very clear," says Agerback.
The fund includes BAE Systems, Rolls Royce Holdings, and Babcock International, all up over 35% this year.
"BAE Systems is diversified and has quite a bit of US exposure, but Babcock is interesting. They are well-positioned in the industry and particularly strong in the maritime sector, with frigates and nuclear submarines."
Swedish Strength
The Swedish tiger Saab is the fund’s sixth-largest holding, with a price increase of nearly 50% this year. Dynamics, which manufactures ammunition and the Carl-Gustaf grenade launcher, could benefit the most from the current world situation, according to Agerback.
"They have great potential to increase production capacity. I believe that some of the estimates on sales growth and margins may even be a bit low."
Agerback also highlights the Global Eye surveillance system and believes the JAS Gripen could become a more attractive choice compared to the F-35.
"Even though Saab is a bit expensive now, they still have a strong position."
Other Swedish holdings include Mildef, Clavister, and Invisio.
"Many want exposure to subcontractors now. It’s not super easy since there aren’t many," says Agerback, who is also eyeing W5, 4C, and Astor.
"We would like to increase further in Sweden and the Nordic region because we will also benefit from the significant growth ahead."
"Incredible Amounts"
Is it too late to upgrade the portfolio now that defense companies have already performed so well?
"This sector stands out. Doubling defense spending involves incredible amounts. Companies also have the potential to improve margins and increase profits."
The manager’s tip is a diversified basket of holdings from Europe, the US, and the Indo-Pacific region.
"Valuations have come down significantly in the US. In the Indo-Pacific, I think South Korea is a good example, but perhaps also Japan," says Agerback, who has both Korea Aerospace and Hyundai Rotem among the holdings.
Top Three
If you could only own three defense companies, which ones would you choose?
"Then I would take the Korean Hanwha Aerospace, Rheinmetall, and Babcock International. I would also like some exposure to Hensoldt – even though there is higher market risk. But there will probably be rebounds that could be interesting."
How would a long-awaited peace agreement in Ukraine affect the sector?
"I don’t see conditions for a long-term sustainable peace at the moment, possibly a frozen conflict. If there were peace, it could have a certain impact on stock prices. But Russia’s and the Trump administration’s actions have made it incredibly clear that we need a much stronger defense that is not dependent on the US. I am extremely critical of how Trump has handled this and what benefits it can bring to totalitarian regimes."