Monthly Update - January 2024

Strong month in a volatile market

January started more cautiously compared to the turn-of-the-year optimism that marked December 2023. Repositioning and profit-taking resulted in relatively sharp jumps between different sectors and asset classes during the start of the new year. The market has continued to focus heavily on incoming inflation data and how the world's central banks are expected to act in 2024. Speculation about when the first interest rate cut will become a reality has been rife. Most indications are that the first interest rate cut is approaching, whether it will be late spring or summer remains to be seen.

At the time of writing, reporting season is in full swing. Last year was clearly macro- and flow-driven, but our expectation is that 2024 will bring more focus on micro factors and how the various companies are coping in an environment of falling demand, softer economic conditions and geopolitical unrest. Our analysis is that resilient business models will be rewarded during the year, especially if you can demonstrate organic growth and margin stability. The Stockholm Stock Exchange (OMXSGI) lost momentum and fell 1.6% in January. The Swedish small cap index (CSRX) also retreated 2.4%, while the Nordic small cap (VINX Small Cap) fared better and advanced, albeit modestly, by 0.5%.

The return for the month amounted to 0.3%, which means 7% last year and 9% in annual average return during the almost 11 years that the fund has existed. On an aggregated level, we saw rather small changes within the portfolio during the month. The long book rose slightly during the month with the short book falling slightly, meaning that the long/short spread produced a positive result. Derivatives on indices contributed slightly negatively. Three investments stood out positively, of which two were long holdings: SOBI and A&O Johansen and a short position in the gaming sector. On the negative side during the month we find a long holding; Bilia.

The salmon sector was under pressure following the news that the European Commission is investigating whether six salmon farmers may have breached EU competition rules, based on inspections in 2019. One of the named farmers, MOWI, was quick to respond with a sharp response that they were convinced that any breaches had not happened. QUEST previously had investments in Norwegian salmon, but since last autumn the fund's position consists of the Faroese company Bakkafrost. Our initial assessment is that the commission's analysis may be flawed, but that it involves a clear uncertainty factor and may become a wet blanket over the sector. Our holding Bakkafrost, on the other hand, can be a relative winner In the long term, Nordic stocks and US stocks have followed each other quite well, but now we see clear bubble risks in the US tech sector at the same time that Nordic small and medium-sized companies are valued below their historical average. In our opinion, the Nordic stock market is very attractive with many companies that are at the forefront of structural trends such as automation, the environment and energy.

However, we started the new year by increasing the short side of the fund. After the strong share appreciation during Q423 where several leading indices rose by 10-15%, and with increased geopolitical tensions, as well as an impending and highly uncertain quarterly report season, we chose to take several new short positions and increase the short book in total. When we take short equity positions, it is not only "broken business models" that we are looking for, but we also include companies that we judge will underperform against the market.

SELEQT rose 4.9% during the month. The positive development was broad-based in the fund, where several holdings contributed to the positive development. Trifork, Norva24 and Medicover made positive contributions to the fund's development. Negative contributions came primarily from the holdings in TGS, Hanza and Vaisala.

The holdings in SELEQT are clearly different from both indexes and similar funds. The portfolio is exposed to companies with strong business models, often focused on service, maintenance and sales of consumables. During the past year, sectors such as industrial services and health care have been weighted up, where we find businesses that can maintain growth even in a weaker economy. At the end of January, the Norwegian insurance company Protector Forsikring presented its financial statements. As usual, the company pleasantly surprised again. Growth continues, with premiums increasing 48 percent in local currency in the fourth quarter. At the same time as the combined ratio landed at 86.4% in Q4 2023, driven by both good cost control and an improved claim rate. The shareholder-friendly policy is clear in Protector, where the company has returned significant amounts to the owners in the form of cash dividends, often on a quarterly basis, in recent years. The stock has developed strongly and has been included in ORIGO SELEQT since the fund's launch in March 2022.

Among the month's losers, the Norwegian energy data company TGS stands out with a clear negative contribution. TGS came out with a surprisingly weak trading update in January, where the - seasonally strong - Q4 showed weaker development than expected. The explanation can be found partly in lower energy prices, but mainly in the fact that larger energy companies focus on M&A rather than investing in organic growth. It's nothing new, but a trend that has been evident lately and reinforced with major transactions among players such as Exxon, Chevron, etc. Following the merger with industry peer PGS, TGS has the premier library of energy data in the world. The TGS share is in the valley of disappointment, but trades on low multiples given conservative synergy estimates and a normalization of the pace of investment going forward.

/Team Origo