Monthly Update - November

Strong alpha in both funds

• Seleqt – Over 8 percentage points ahead of the index YTD
• Quest – Up 2.3% in a weak Nordic market
• Defensive Growth Companies: The core of our portfolio

Origo Seleqt
Origo Seleqt rose by 1.9% during the month, outperforming its benchmark index, which declined by 0.9%, by nearly three percentage points. The strongest contributors to this positive performance were RaySearch, MTG, and Freetrailer, while Profoto and New Wave detracted.

Year-to-date, the fund has gained 20.2%, exceeding its benchmark by 8.4% and outperforming most Nordic market indices by approximately 15 percentage points. This success has been achieved with a conservative risk profile, featuring lower beta and volatility compared to the market.

During the month, we continued to increase our exposure to the healthcare sector (notably SOBI and Elekta) while partially funding these investments by taking some profits in MTG.
Origo Seleqt is a distinctly active small-cap fund with a long-term, deeply analysis-driven investment process. It focuses on quality, value, and transformation, avoiding an index-driven approach. The team prioritizes investment ideas often overlooked or misunderstood by the market. Since its inception in 2022, this has resulted in a portfolio that differs significantly from typical small-cap funds: fewer holdings, a stronger emphasis on true small caps, and a higher proportion of non-Swedish companies. This strategy has delivered great results in 2024, regardless of the metric, with several typical "Origo cases" generating significant returns. 

The fund's top investments in 2024 have been Freetrailer, RaySearch, Protector, ALK-Abelló, and Spar Nord Bank. Reviewing the 2022–2023 period, when these positions were established, we see that all were (and in some cases still are) under-analyzed and under-owned, despite having excellent growth prospects. This year, we have also been successful in selling overvalued stocks and avoiding pitfalls, which is always a challenge in the small-cap space. We believe that independent analysis and prudent risk-taking will remain just as crucial in 2025.

Origo Quest
Our hedge fund, Origo Quest, increased by 2.3% during the month. It is satisfying to note that the fund once again delivered strong returns with low risk, despite the market moving in the opposite direction. Performance was broadly distributed, with both the long and short books contributing positively. RaySearch and MTG stood out on the long side, while Husqvarna and a digital game developer continued to deliver solid returns on the short side. We have increased the number of positions in the short book, with no single position costing more than 0.15 percentage points during the month.

So far this year, the fund has returned 9.1%, which is in line with the fund's long-term annual performance (since 2013) of 9%. Volatility has continued to remain at "corporate bond levels" between 5–10% (8.7%), with a correlation to the stock market of 0.3. As in previous years, stock selection has been the primary driver of returns rather than market developments. The fund has essentially been market-neutral throughout the year, with the beta-adjusted net exposure fluctuating between -10% and +30%.

Over the year, both the long and short books have generated positive alpha, with RaySearch being the fund's best long position and Better Collective topping the short book. Profoto has had a challenging business and stock market year, contributing negatively. In the short book, several companies have generated 0.3–0.5 percentage points, but no position has cost more than 0.15 percentage points.

Market Overview
Leading Nordic indices had a weak performance in November, with VINX Benchmark closing at -0.3%. OMXS30 fell by 1.1%, and VINX Small Cap SEK NI dropped by 1.9%.
The market's focus, however, was primarily on the U.S. and the U.S. presidential election. The S&P500 (USA) hit a new all-time high, but perhaps the most interesting development is that small-cap stocks (Russell 2000) also gained momentum and reached a new peak. This means that U.S. small-cap stocks have outperformed large-cap stocks by 12-13% since the summer. We have seen this type of movement before, notably at the TMT peak in 1999/2000, when internet-related companies started to plateau, and the rest of the stock market caught up. The similarities between the internet and telecom companies of that era and today's semiconductor companies are many, and we expect the market's appetite for yesterday's winners to diminish while the rest of the stock market, including the lower-valued micro- and small-cap segments, will receive increased attention.

Europe is having its worst year in decades against the U.S. when measured in U.S. dollars since Trump's election victory, tariffs in the news, and a German economy in decline. We have previously written about how weak the European stock market has been and how undervalued European small-cap stocks are. However, what has helped balance this is the so-called dispersion in the market, which is the highest observed dispersion in the European stock market since 2009 (dispersion refers to the difference between the stocks that perform well and those that perform poorly). We are seeing the same type of pattern in the Nordics, and it's an environment we believe favors stock pickers like us at Origo.
One sector that has been hit hard before and after Trump's election win is the healthcare sector. The healthcare sector is near its lowest weight in the S&P 500 since 1990 and has had one of its worst 3-month periods in 30 years. The market interprets the appointment of Robert F. Kennedy as health minister as an increased risk for regulation and involvement in the sector. We believe this creates opportunities when an entire sector declines on the same news. We think some companies will not be particularly affected, and we are actively searching for new opportunities in this area right now. More on this in the section on defensive growth stocks.

Investments in focus
The Norwegian discount chain Europris (long position in Seleqt) delivered a Q3 report below our expectations. However, the sales were relatively good, with organic growth of 4.4% in an otherwise weak consumer market. As a comparison, Rusta is trending around organic zero-growth. The problems are more related to the gross margin, which is being pressured by several factors, with a weak price/mix development being the most important, along with higher transportation costs. Management emphasizes that they are working effectively to improve the product mix, which is not optimal after the acquisition of the Swedish ÖoB earlier this year, and that they are consciously accepting lower margins for a limited period. We also note that they have been very active this autumn, implementing changes regarding management, the assortment, the purchasing organization, and introducing Europris' campaign model for ÖoB as well. The stock has fallen about 10% YTD and is valued at 11–12 times next year’s operating profit, which is a discount to Rusta of 20-30% despite better underlying growth.

A company we have been short (in Quest) on and off for a long time is Synthetic MR. SYNT develops software for MRI that aims to support shorter examination times and provide more information for users of the product. The product has been questioned over time, and it has been unclear what the customer benefit has been. Our short thesis, however, has not been based on the product's strengths or weaknesses but rather on what we have seen as extremely aggressive accounting, as accrued revenues and receivables as a percentage of sales have risen from nearly 0% in 2022 to 90% today. This has resulted in the reported operating profit looking completely different from the cash flow, which has continued to be negative.

We rated the accounting as a 5/5 (5 being the highest risk). The timing (when the risk could play out) has been a bit harder to assess, and in this case, we had a 3/5. The stock has fallen over 50% since the Q3 report, which showed a 39% drop in sales. Notably, cash flows are marginally better compared to the first 9 months of last year, though still negative. The difference in the income statement is driven by the balance sheet reversing accrued revenues and receivables. A week after the results, the company announced a share issue to secure the balance sheet and make a small acquisition. The stock was down 50% for the month and 75% YTD at the end of the month and is now a very small position in Quest.

Defensive Growth Companies – The core of our long portfolio for the coming years
If there is one thing we have learned over the past five years, it is that forecasts often miss the mark. At least when it comes to macro assessments.

It’s no surprise to loyal Origo investors that we have a preference for quality, and after strange market movements during the autumn and after the U.S. presidential election, we have increased this segment of the portfolio, with plans to increase it even more in the future.
So, what do we mean by defensive growth companies, and what criteria do we focus on?

The quick answer is that we look for companies that can deliver stable returns above the market over at least a five-year period. Breaking this down, we see that the companies should have:

• Good organic growth opportunities and a solid business model
• Operate in relatively non-cyclical industries
• Be conservatively financed
• Have an attractive or reasonable valuation

Regarding growth opportunities, we focus, among other things, on market conditions, the ability to allocate capital to value-creating business areas, and the innovation and investment plans. We are not looking for companies with ultra-high growth potential, but rather companies that can steadily outpace GDP growth. In some cases, growth is driven by acquisitions, but typically these are companies capable of generating organic growth.

When comparing our entire long portfolio against the small-cap index*, we have an expected revenue growth of 9.9% for 2025(p), compared to 4.9% for the market.

Non-cyclical companies are generally in short supply, especially in the Nordics. Among these, the degree of economic sensitivity also varies. 100% non-cyclical is hardly ever found, but there are some sectors that stand out as significantly more stable than average; healthcare, technology, and insurance are our top three favorites at the moment.
To qualify for the list of defensive growth companies, the balance sheet must also be defensive. Much of the companies' growth is driven by their ability to develop new products and enter new markets. Conservative financing often ensures that the company can continue to invest and remain innovative. Our long portfolio has a net debt-to-equity ratio of 22.6% compared to the Nordic small-cap market at 29.4%.

Lastly, we want to invest at a reasonable valuation, which is a challenge in itself since this group of quality growth companies sometimes has too challenging a valuation to fit the Origo model. Typically, we try to combine our value-based valuation approach, where we look for companies that are undervalued relative to their intrinsic value, with a more growth-oriented valuation approach that takes into account a long-term normalized margin. We can compare this to a GARP* valuation, which also includes a margin of safety.

ALK-Abello, SOBI, RaySearch, BioGaia, Carasent, Protector, Alm. Brand, Vaisala, MTG, and Paradox are examples of defensive growth companies we have invested in during the year.
* Small-Cap Index = VINX Nordic Small Cap Index Top 30
 
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.