Monthly Update - December 

The best Nordic Small-Cap Fund in 2024

• Seleqt rose by 25.3% in 2024 (Index increased by 11.7%)
• Quest increased by 15.1% in 2024 with a market-neutral profile
• M&A Theme: Increased activity in 2025 benefits small and medium-sized companies

Origo Seleqt
Origo Seleqt had a strong finish to an overall very strong year. Seleqt rose by 4.2% during the month, which was 4.3 percentage points better than the Nordic small-cap market. At the top among contributors were Spar Nord Bank, Freetrailer, and Hanza. Elekta and Norva24 had a weaker development and contributed negatively to returns.

The full-year return thus amounted to 25.3%, a result that positions the fund as the absolute best small-cap fund in the Nordics in 2024 (Source: Morningstar, all 78 Nordic and Swedish small-cap funds), 13.6 percentage points ahead of the benchmark index VINX Small Cap. The fund's best investments during the year were Spar Nord Bank, Freetrailer, and RaySearch.

Seleqt’s strategy, combined with the investment team's experience, has contributed to a portfolio composition and individual stock selections that significantly deviate from the index. The fund is more concentrated, has a higher share outside Sweden, and generally holds smaller companies than both the index and other traditional small-cap funds. The strategy has been very successful, with several under-analyzed and under-owned Origo holdings outperforming the market clearly. A sound risk-taking approach and a well-established investment process have also been positive factors, with several reallocations during the year being executed with good timing.

Origo Quest
The hedge fund continued to deliver competitive risk-adjusted returns in December, while leading stock indices fell by 1-6%. The long book made a strong positive contribution, while the fund's short positions had a neutral impact. Positive contributions came from Spar Nord Bank, Freetrailer, and Hanza. Invisio and Elekta had a marginal negative impact.

Quest rose by 5.5%, and for the full year 2024, the fund delivered 15.1%, which exceeds both the fund's indicative target of 10% per year and its 12-year historical annual return of 9.3% after fees. The most value-creating positions were Spar Nord Bank, Freetrailer, and RaySearch. On the negative side we find Intrum 11.875%, Profoto, and Elekta.

It is encouraging to note that the fund's low-beta strategy continues to generate high risk-adjusted returns and significant alpha. The beta-adjusted net exposure during the year has averaged close to market-neutral, fluctuating between -6% and 46%, with the fund's beta at 0.3.
The combination of an annual return in line with the stock market's historical returns, BUT WITH a risk level more akin to corporate bonds, positions the fund as an excellent core investment in the alternative portfolio for investors seeking low risk and low correlation with the stock market. The fund is also suitable for investors seeking a stable equity fund with less than half the risk compared to the stock market.

Market Overview
The American central bank lowered its interest rate for the third time by the expected 0.25%, but still it created more concern than confidence. It is evident that the economy is stronger than expected, and the FED wants to see where things go from here. They now guide for two future rate cuts instead of the previously expected four. The decision is reasonable, as inflation has surprised on the upside recently, and the FED likely also wants to see what a new government under Trump will do. Overall, it resulted in markets hitting a wall, with leading indices such as the U.S. S&P 500 falling by almost 3%.

The broad Nordic index, Vinx Benchmark SEK NI, dropped by 4.4%, and the Swedish OMXSGI fell by 0.9%. Small-cap stocks, which often suffer more when risk appetite declines, defied the downturn and had a relatively neutral development in the Nordic region, including Sweden.
The broad Nordic index, Vinx Benchmark SEK NI, including dividends, closed 2024 with a gain of 3.4%.

The Danish and Finnish markets gave slightly negative returns, while the Swedish and Norwegian markets saw moderate gains. Overall, one could say that the stock market year 2024 was mediocre and did not quite live up to expectations. However, it is interesting to note that small-cap stocks (Vinx Small Cap) rose by 11.7%, breaking the pattern of the previous three years, where small-cap stocks have lagged behind.

Investments in focus
The most enjoyable part of the fund manager's job is the analysis work itself. Often, it can be very exhausting and frustrating, but sometimes also extremely rewarding when you suddenly understand the numbers and context in a completely new way. It's an enormous rush to suddenly solve a puzzle you've been struggling with for a long time, sometimes for years.

However, we don’t know in advance what kind of return the analysis work will yield, and we know even less about when this potential return will come. Of course, we hope that the work will result in investment ideas that lead to significant value creation in our funds, but we are aware that there are pitfalls and that returns, especially in small and medium-sized companies, are rarely a straight line.

At Origo, despite the challenges, we are convinced that a fast pace, a structured process, and many, many, many hours of analysis on every possible investment create good conditions for sustained alpha generation.

Our view at the start of the year was that the consumer sector offered a good risk/reward despite the challenging environment for consumers. Many companies met our quality requirements, and it was more a matter of timing.

Our top pick for the year has been the Danish company Freetrailer, which has developed a leading platform for renting trailers and e-bikes, and collaborates with partners such as IKEA, Byggmax, and ICA. The company’s business model is modern and sustainable, capturing a strong trend where more and more end customers want to rent instead of own. The operational development was impressive in 2024; revenues grew by 41% and EBITDA grew by 136%. The number of rentals grew to 1.3 million, compared to 0.9 million the previous year. We particularly noted that they signed several important new partnerships (e.g. Silvan Bygg) and that the expansion into Europe continues. The stock rose by 106% and was one of the most rewarding investment ideas last year.

In the fall, both funds invested in the gaming companies Paradox and MTG with good timing. At the time of the purchases, both companies had low valuations relative to their free cash flow potential, large net cash positions compared to their market value, and a topline temporarily affected by certain game releases that were not well received. MTG and Paradox are otherwise very different companies. Paradox is, in the long term, one of the most interesting gaming companies with niche strategy games and a growing customer base of players who spend a lot of time and money on the games and their updates. We also believe that Paradox is an attractive acquisition target over time with its unique games and customer base

Generally, we had a cautious stance on the industrial sector. Europe's weak economic development, high inventory levels in certain segments, and relatively high valuations with excessive expectations contributed to our wait-and-see approach.
During the summer, Finnish Cargotec spun off Kalmar, a leading manufacturer of forklifts and tractors for container handling in ports. We have followed the company for over 20 years, including the period when the company was previously listed on the Stockholm Stock Exchange. Our assessment was that Kalmar had all the attributes we look for in a quality industrial company: a high service component, a strong market position, and historically high returns on capital. The fact that the company was under some cyclical pressure was already reflected in the valuation, which was around 8 times operating profit. In the second half of the year, we received the news we hoped for when the company reported record strong profitability and increased order intake. Kalmar was our largest holding in the sector, and the stock rose by 18% during the year.

Our largest financial-related holding when the year began was Denmark's fifth-largest bank, Spar Nord. There was a general view among financial analysts that bank stocks had reached their peak in this cycle, and that interest rate cuts would put pressure on bank margins and valuations. We had a different view, which was based on the belief that record-low credit losses, optimization of the balance sheet, and general "operational excellence" would lead to increased shareholder value through significant dividends and share buybacks. Operationally, the bank followed our plan, and the buybacks contributed to strong earnings growth and stable value appreciation in the stock. On top of this, we received a surprising all-cash offer for the entire bank from the major shareholder Nykredit, with a 49% premium.

Over the past year, increased claim frequency, especially in motor insurance, has kept profits low for insurance companies, which created an interesting investment opportunity. The funds started buying the Danish insurance company Alm Brand in 2024, and the stock ended up 18% plus a significant dividend of over 5%, making it the second-best insurance stock in the Nordics, after Protector, which rose 60%, and which the funds also own.
Sampo's (the largest insurance company in the Nordics) CEO recently said what we also believe: 'I’ve never seen a better insurance market in my career than now,' referring to how disciplined everyone is after the market has consolidated in recent years. Alm Brand has undergone a major transformation, selling its bank and then acquiring Codan's Danish operations. The balance sheet is now very strong, as they chose to sell off the global energy business they inherited from Codan. Over the next few years, they will enjoy the synergies of the acquisition, both cost-wise and revenue-wise."

The healthcare sector has been valued low relative to its earnings growth for several years, partly due to pressurized hospital budgets in the aftermath of the COVID-19 pandemic. The large global pharmaceutical companies have also been heavily pressured by price reductions, which has further depressed valuation multiples across the sector. This created an unusually interesting investment opportunity a few years ago, and we have gradually built up a very interesting sub-portfolio of healthcare stocks from 2021–2024. The leading holdings in our funds have been SOBI (medications for blood diseases) and ALK-Abello (medications for allergies). SOBI's performance in 2024 has impressed us, with growth after nine months reaching 22%, while the operating margin increased from 32% to 37%. The growth is the result of several successful acquisitions and complementary research, and we assess that SOBI's drug portfolio has never been stronger than it is now. The stock was revalued in line with the revenue growth (19%).
ALK-Abello is a pioneer in the allergy sector and holds a world-leading position. It is worth noting that allergies are the most common chronic disease globally, and this health problem tends to increase due to trends like urbanization and warmer climates. When we started investing in 2022-2023, we saw that growth was beginning to accelerate, and the operational leverage should provide a significant margin lift. The operating margin, which was between 7-10% in 2021-2022, increased during 2023 and continued to rise to over 22% last year. In turnaround phases, the stock market often underestimates the strength of the change. The stock rose by more than 55% during the year.

Earlier in the year, we also invested relatively heavily in cancer treatment companies RaySearch and Elekta. Both of these innovation-driven companies have a mixed history, having gone through various phases of both profitable growth and heavy development periods. At the time of the investments, we saw several factors that explained much of why they had underperformed compared to their competitors and the stock market. We spent a lot of time on this project and met with company management, competitors, and major shareholders multiple times both at the time of investment and throughout the year. Our assessment then, and now, was that both companies had invested heavily over several years in their product portfolios and were now ready to reap the rewards. The new products have better profitability, and as the old order books are replaced with new orders, margins will improve. Additionally, customers (hospitals and clinics) are starting to catch up after several years of COVID focus. Furthermore, we see that management teams are now focusing on shareholder value, and we perceive a cost-consciousness that we haven’t seen before. In RaySearch, we were proven right faster than we had expected. Margins took a huge leap, and almost the entire stock market was caught off guard. The stock rose by 138% and became one of the funds' best contributors during the year.

Our second cancer company, Elekta, had a different development where product launches came at the end of the year, and the important Chinese market faced some challenges with heavy bureaucracy around anti-corruption rules. During 2024, we saw pressure on the gross margin and weak performance in Europe, but at the end of the year, we also saw increased activity in China and improvements in productivity. The stock, which is currently trading about 15% lower than when we invested, is, in our view, heavily oversold and tainted by a very negative sentiment. In other words, it is likely to be an eventful year for Elekta, both operationally and in the stock market.

Theme: Mergers & Acquisition
For 2025, we at Origo see an interesting theme in that M&A transactions will once again rise from the low levels seen in 2024. With the uncertainty that characterized 2024, it became a year in which global M&A transactions reached their lowest level since 2009, particularly evident in smaller companies (1–5 billion SEK). We expect 2025 to be a more active year, which Goldman Sachs, the largest global advisor in transactions, also indicates with a forecast of a 25% global increase in M&A transactions. Risk appetite has already started to improve in the second half of the year. The IPO market has reopened, the U.S. election is over, and interest rates have fallen from their peak levels.

Larger companies are generally valued higher than smaller ones. Many more mature sectors with growth problems, such as the oil industry and the consumer sector, view M&A as a growth strategy. Valuation differences between the U.S. and Europe – both generally and within sectors – open up opportunities for increased cross-border transactions, supported by a strong dollar against the euro and Nordic currencies.

Falling interest rates provide more investment capital for the PE industry. They have historically never had more capital in absolute dollars. The Nordic market is showing the same trend. For instance, Carasent received a bid this year from a PE firm focused on software – a sector with unique financial characteristics that make it attractive to PE. Historical examples include Fortnox, Visma, and IFS, where a private environment has led to strong growth after buyouts.
Banking: Companies have lower leverage than historically, which can be seen as positive for M&A. Banks have the strongest balance sheets since the 2009 financial crisis but are struggling with growth. This makes M&A an attractive way to build scale and manage cost increases driven by inflation and regulation. During 2024, Commerzbank in Germany and Spar Nord in Denmark received bids. The bid for Spar Nord, one of our largest positions within the financial sector, offered a premium of around 50%. For 2025, we also own Danish Ringkjøbing LandboBank, one of the best-managed banks in the Nordics, with strong lending growth and low losses.

P&C (Property and Casualty Insurance): We expect continued consolidation within the property and casualty insurance sector (P&C). During 2024, Direct Line in Europe and Topdanmark in the Nordics received bids. We own Protector and Alm. Brand – both smaller than the large insurance companies and over time potential consolidation partners for, for example, Tryg if they want to strengthen their position in Norway or Gjensidige if they want to strengthen their position in Denmark.

Gaming Industry: The gaming sector’s M&A activity has followed global trends and is now starting to become better (Embracer sold a couple of assets, MTG bought a mobile company, Tencent has shown activity again). We own Paradox Interactive, which we consider unique with games in niches that are hard to replicate. This makes the company interesting for large players and tech companies like Microsoft.
Healthcare: We own SOBI, which has already received a bid, but also Biogaia and Dynavox, which we believe are unique companies with an open ownership structure. Elekta and RaySearch are companies we believe have had interest, but where major shareholders have not been open to being acquired, as they have been in an investment phase – historically in the case of RaySearch or more recently in the case of Elekta.
  
Expectations for 2025
Exactly one year ago (December 2023), we tried, as usual, to sketch out our thoughts for the coming year. This doesn't mean we have a 12-month investment horizon (we invest with a 3-5 year horizon) and it doesn't mean we consider ourselves global strategists. We are, as before, small-cap specialists with a strong focus on the Nordic region. In any case, it is useful internally and hopefully of some support externally to occasionally gather our thoughts and convey a perspective as we see the world.

Last year, we had the following seven theses for 2024:

• A mild global recession
•  The end of monetary tightening
• ·An investment boom in certain niches
• Continued focus on Free Cash Flow (FCF)
• High volatility continues
• Nordic small-cap stocks regain the lead
• Best relative value: Stocks excluding the U.S., small caps, value stocks

On the first two points, we can conclude that we were quite accurate. The global economy has not fallen into a deep recession as some predicted, and the U.S. economy is doing significantly better than consensus forecasts indicated at the time. The investment boom we envisioned concerned certain segments like minerals and commodities, HVAC, climate solutions, and infrastructure. Here, we must note that some parts have taken off, but within the climate area, we see that certain niches (e.g., batteries) have rather taken a small step back. The focus on FCF has been a central theme on the stock market, and the strong fluctuations have continued just as we predicted. After three years of weak relative performance for small-cap stocks, we stuck our necks out and said that small-caps would be the winners. This also turned out to be true from a Nordic perspective, but as is well known, not when we evaluate the U.S. stock market.

So, how do we view 2025?

What stands out to us right now is that small-cap stocks tend to move in cycles, and the fall of 2024 may have been the turning point. Over time, small-cap stocks outperform large-cap stocks. Better earnings growth, clear majority shareholders with entrepreneurial qualities, and the fact that small companies are often acquired by large companies are some factors frequently highlighted in research. What is sometimes missed in the analysis is that, in addition to the structural outperformance of 1.5-2% per year, there is also a cyclical factor.

When studying longer periods of time, one can observe a pattern where large-cap stocks outperform relative to small-caps as inflation rises. This is not entirely illogical given that large companies generally have a bit more ease in handling increased costs and are quicker to raise their own prices.

Additionally, investors' risk appetite typically decreases when inflation expectations rise, leading capital to be allocated from small companies to large companies. Historically, these cycles have averaged 10 years, and the most recent large-cap/inflation cycle started around 2013 in the U.S. We see the same trends in Europe and the Nordics, but what’s interesting is that here, small companies reversed their trend and became the winners in the second half of 2024. The shift followed the historical pattern, and we now see a possible 10-year small-cap cycle ahead of us.

Our theses for 2025 are:

• Global recovery
• Interest rates continue to decrease, but expect hesitant central banks
• Volatility remains high, especially in the bond market 
• Earnings growth momentum shifts from mega-caps to new segments
• Peak AI in the stock markets
• Large companies turn to smaller companies (See theme: M&A)
• A new multi-year small-cap cycle begins

Lastly, we want to take the opportunity to thank all our investors and partners for your excellent support and valuable collaboration during 2024. If you're ever in the area of Kungsgatan 8 in Stockholm, feel free to stop by for a coffee!
 
Best regards,
Team Origo
 
Risk Information
Past performance is not a guarantee of future returns. If you invest in securities or funds, your investment can both increase or decrease in value, and it is not certain that you will get back the entire invested capital. An investment in our funds should be viewed as a long-term investment.
 
 
 
 
 
 
 
 
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