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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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.

Good returns despite market headwinds

• Strong stock selection lifted funds despite market challenge
• A multi-year opportunity in undervalued small-cap stocks
• Short book – focus on accounting

Origo Seleqt
Origo Seleqt rose by 0.4% during the month. Meanwhile, the Nordic small-cap market fell by 2.6%, and the Swedish small-cap index CSRX declined by 5.4%. Year-to-date, the fund's return stands at 18.9%, which is about 5 percentage points above its benchmark.
Protector, Hanza, and Thule experienced significant revaluation and made strong contributions to the total return. Conversely, real estate company Catena, along with the broader real estate sector, underperformed and had a negative impact.
During the month, we continued increasing our holdings in the healthcare sector, which has been a recurring theme for Origo throughout 2024. BioGaia is a new investment where we see an interesting combination of accelerating growth in a forward-looking industry and a valuation at a 10-year low. The fund’s top five holdings are currently Elekta, Freetrailer, Vaisala, SPNO, and SOBI.
It is worth noting that the fund's strong relative performance compared to the market and similar funds has not been achieved through unusually high risk-taking. Both beta and volatility have been significantly lower than the index and fund category since its inception in 2022, ensuring that the excess returns are of high quality.

Origo Quest
Our hedge fund, Origo Quest, gained 4.4% during the month, while the Nordic stock market fell by over 5%. The fund’s volatility was half that of Carnegie’s small-cap index CSRX, and its correlation (beta) was 0.3. Risk-adjusted, October was one of the strongest months for the fund since its inception in 2013. Since inception 12 years ago, the total return has reached 166%, compared to the Nordic hedge fund index (NHXE), which has delivered 111%.

The fund’s long investments defied market trends and posted absolute gains. Protector, Hanza, and Thule made positive contributions, while Elekta, one of the top holdings, negatively impacted returns. The long book remains relatively concentrated, featuring high-quality Nordic small- and mid-cap companies where we see significant discrepancies between operational improvements, fundamental value, and broader market perceptions.

Meanwhile, several companies in the short book reported weak quarterly results, leading to significant price declines. Better Collective was the standout performer in the short book, with its stock dropping 40%. Nonetheless, the short book's success was broad-based and not reliant on any single position. Our short book focuses on identifying companies with significant risks in accounting, balance sheets, or cash generation. More details about this strategy will be provided later in the report.

Market Overview
Globally, the market has been influenced by increased concerns about inflation and interest rates. The U.S. 10-year Treasury yield rose nearly 0.5% during the month to 4.25%. The MSCI World Index closed the month down by 1%.

Nordic markets showed mixed performance. The Oslo Stock Exchange rose slightly despite declining oil prices, driven by strong banking sector reports and a continued rally in salmon stocks following a proposal for substantial tax cuts on salmon farming. Other Nordic markets fell by around 4%. In Sweden, the interest rate-sensitive real estate sector dropped 11%, putting significant pressure on Carnegie’s small-cap index (-5.4%).

Investments in focus
We are currently in the reporting season for the third quarter, and so far, there has been a marginal overweight of reports exceeding expectations in the Nordic region. For Origo, the majority of companies have delivered strong results so far.

Nolato delivered a strong quarter, with organic growth of 5%, which was double the expected figure. We appreciate the company’s increasing focus on the non-cyclical Medical Solutions segment and the continued positive trend in margins.

The Norwegian insurance company Protector impressed with its Q3 results. Historically, the company has often delivered surprisingly strong financial management results, but this time it was the insurance operations that stood out, with results 41% better than consensus estimates. We also note that the international expansion in markets like the UK and France is progressing better than planned.

SOBI came out with yet another strong report, well above expectations. We have repeatedly emphasized that SOBI is undervalued given its broad, promising, and fast-growing product portfolio. As such, SOBI has been an Origo favorite since the failed acquisition attempt in 2021. Revenue of SEK 6.9 billion was 39% higher than the same quarter last year and 15% above expectations, prompting the company to raise its full-year forecast. The stock has risen by over 75% in the past two years, but this revaluation has been entirely driven by rising profits. We still find the valuation multiple highly attractive given the growth we foresee for 2024–2026.

Our Danish distributor A&O Johansen delivered a report roughly in line with expectations. The market for HVAC and other construction products is very weak, with declining volumes directly impacting AOJ. This is most evident in the large enterprise segment, where the gross margin was squeezed by nearly two percentage points. Nevertheless, organic growth reached 1.9% for the quarter, demonstrating continued market share gains. The strategic expansion plan is fully underway and progressing as planned. The company recently completed three acquisitions with successful integration and plans to open two new facilities in Stockholm within the next six months. The stock has stagnated over the past two years, and we underestimated its sensitivity to economic conditions. However, leverage works both ways and we expect significant improvement when the macroeconomic picture stabilizes and rate cuts begin to impact the economy.

The star of the reporting season so far must be the contract manufacturer Hanza, at least in terms of expectations. Sales declined by 4%, but this was far better than the -10% to -20% seen among similar contract manufacturers like Note and Kitron. The margin increased to 6.7% (from 5.7%), and most notably, the company reiterated its message of solid profitability growth from the Orbit One acquisition completed earlier this year, maintaining its margin target of at least 8% by 2025. We recently met with both the main owner and the company’s management and see no reason to change our positive assumptions from when we invested during the 2022 share issue. Since then, Origo, along with the main owner Gerald Engström, has increased its holding in Hanza, and we anticipate continued strong execution while the reshoring trend provides structural tailwinds.

Multi-year opportunity in undervalued small-caps
In several monthly letters, we have highlighted an interesting and long-term opportunity in the small-cap segment, following a historically weak performance compared to large-cap companies in recent years in Europe, the Nordic region, and even more so in the U.S. Valuations are at very low levels relative to large-cap companies, as the largest firms in the U.S. (the "Magnificent 7"), Europe (LVMH, SAP, Novo), and the Nordics (Novo, Atlas Copco, Astra, etc.) have performed much better. When interest rates fall, it is typically the starting signal for small-cap companies.

Origo's investment thesis for the Nordic region in the coming years is that the greatest returns will be found in smaller and lower-valued small-cap companies when the small-cap cycle begins a more long-term phase of outperformance.

In the initial phase, the market often buys what worked best in the previous cycle. Looking at returns over the past 12 months, since small-cap companies started showing signs of revival, the strongest performance has been seen in larger small-cap and especially mid-cap companies. However, our thesis is that for small-cap companies to outperform over the long term, valuation must also play a role, not just potential earnings growth.

At Origo, we focus on value, quality, and transformation, which we believe will drive both earnings growth and valuation change, as opposed to relying solely on earnings growth. Comparing the largest companies in the small- and mid-cap segment today with those in 2017, we can see that the largest companies are now valued higher than historically, both in absolute terms and at a greater premium than seven years ago. In 2017, the 20 largest companies traded at a roughly 15% premium to the small-cap market, while today, the premium is about 30%. Looking beyond the top 20, the valuation is at 15 times earnings, which is roughly the same as in 2017.

ABG Sundal Collier conducted an analysis on the theme "the most overweight small-cap companies in Sweden," and unsurprisingly, several of the highest-valued and mid-cap companies appear on the list. ABG also notes that over the past three years, the concentration of top positions (top 10) in small-cap funds has increased from 37% to 42%, the highest level in many years. At the same time, these top 10 positions are valued at an aggressive 29 times earnings, the highest valuation in many years, and a 50% premium to the index.

The short book – Focus on aggressive accounting
As mentioned earlier in this report, we have had a great spread between the long book and the short book this month. The long book remained stable as the market declined, while the short book fell even more than the market. Some of the biggest contributors in Quest came from the short side of the fund, which is unusual given that position sizes on the short side are typically smaller than in the long book. Our short strategy generally relies on having a high "batting average" — meaning the majority of positions should perform well rather than relying on a few standout cases.

We hold several short positions in the online gambling segment due to structural issues we see in the industry. The most significant positive contributor to returns in October was Better Collective. The stock dropped over 40% after issuing one of the largest profit warnings in Europe this earnings season. The company revised its EBITDA forecast down by 30%, impacting net profit even more due to interest expenses eating into earnings. The stock was a top position in Quest's short book. While the position has organically reduced, we will monitor whether the industry's challenges persist in 2025 and whether Better Collective can significantly cut costs without affecting revenues.

It’s worth mentioning that Origo’s short book strategy is substantially different from the approach taken in managing the long book in Quest or the Seleqt fund. The primary focus of the short book is on accounting practices and balance sheets. We look for companies with questionable accounting and/or balance sheet issues, which can serve as early indicators that a company is performing worse than its income statement suggests. We grade the "aggressiveness" of the accounting and balance sheet concerns on a scale of 1–5. After this evaluation, we assess the timing and attempt to determine how we expect the position to play out within 12 months. Beyond this, we prefer to see additional signals, whether fundamental or more subtle, that support a short thesis.

Using Better Collective as an example, we rated the aggressiveness of its accounting a 4 out of 5. From an accounting perspective, it has been difficult to understand how the company reports its organic growth and how acquisitions have impacted results. This lack of transparency has persisted for some time, raising a red flag that the company’s underlying health may be weaker than portrayed.

When Better Collective made a large acquisition this spring and raised its financial targets, we interpreted it as a sign that the company had become more negative about profits from its legacy business. Additionally, we had concerns about potential accrued-like revenues, which might have obscured price pressures in the market.

As for timing, we rated it a 5 out of 5. We noted that competitor Catena Media was already experiencing significant issues and mentioned that its clients were reducing marketing spend. In the Q2 report from major U.S. operator Rush Street, we found the following statement:
“There were some recent articles about us that recently came out where we decided to pull back some affiliate spend in some markets. The reason why we did that is ultimately we want to have the flexibility to spend more with affiliates in other markets, make sure we focus on the markets where we get the best ROI. And secondly, there are other channels in the markets where we may have pulled back that we see opportunities to do other types of channels to acquire customers.

So we’re constantly looking at the data and evaluating the right opportunities to deliver the best ROI for us in those markets.”
Rush Street clearly indicated their view on affiliate marketing investments, leading us to assume that other U.S. operators might adopt a similar stance. Additionally, there were discussions about Better Collective's partners being increasingly impacted by Google’s algorithm changes. Coupled with insiders preferring cash over shares in their warrants, we believed the likelihood of a negative scenario unfolding was high. We rarely assign a 5/5 to timing, but in this case, we did.
While the exact details remain unclear since the company has not yet released its official report following the profit warning, it’s likely a combination of all these factors contributed to the collapse of the income statement. We expect EPS for 2025 may need to be revised down by as much as 50%
 
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.