Monthly report August 2024

Performance

Adrigo Small & Midcap L/S  Class A and Class C fell by 7.59% in August after fees.
The Carnegie Small Cap Return Index Nordic fell by 0.52% in August. So far in 2024, Adrigo Small & Midcap L/S Class A and Class C have risen by 0,1% and -2,69% respectively. So far this year, the Carnegie Small Cap Return Index Nordic has increased by 13%.

Among the fund's larger holdings, Opter (software), Leroy (salmon farming), and Sinch (software) have all made good contributions. Among the fund's smaller and medium-sized positions, we noted good contributions from Enea (software) and Bonesupport (medical technology). The fund's short positions, in aggregate, had a positive impact on the funds overall return.

Since inception, Adrigo Small & Midcap L/S Class A has delivered a total return of 95.26% after fees. During the same period, the comparison interest rate, STIBOR 1M, returned 6.32%, and the Carnegie Small Cap Return Index Nordic returned 104.0%. The fund’s average annual return since inception is 10.29%.

The Market and the Companies

Global stock market performance in August was positive. The MSCI World Index rose by 1.9%, the S&P 500 increased by 2.4%, and the EURO STOXX 50 also saw gains. Emerging markets, represented by the MSCI EM, increased by 0.4%. Brazil's Bovespa noted gains of 6.5%, and India's BSE rose by 1.0%, while Russia's RTS and MSCI Korea recorded declines. In the Nordics the Finnish market rose by 3,2% followed by the Danish market with a 1,3% rise. The Swedish market had a neutral development of 0,1% while the Norwegian market fell by 1,4%.

Our strategy with a focused portfolio, where a handful of companies are allowed to carry significant weight, has been favorable for the fund's performance since inception. We have indeed gone through some periods of weak returns, but we have also demonstrated the ability to recover the lost returns. Furthermore, our portfolio strategy has meant that the portion of the portfolio we call dynamic (investment horizon up to one year) has often been able to compensate when our larger holdings have underperformed.

The last few months have been painful, and we are determined to reverse the trend without increasing the level of risk. For August, the majority of the negative returns can be attributed to four holdings. Two of our smaller but riskier positions delivered bad news, which led to sharp, albeit not unexpected, drops in their share prices. The stocks that contributed the most to the negative returns were Online Brands (e-commerce) and Ossdsign (medical technology), both of which fell by around 20% after reporting their second-quarter results. We find these share price reactions to be puzzling, as both companies showed strong development.

Ossdsign's sales grew organically by 139% during the quarter with a gross margin of 93.2%. However, sales commissions continued to rise to 50.7% compared to 49.7% in the first quarter. According to management, a couple of competitors are behaving more aggressively than before, and they have driven up the compensation levels for distributors. It seems reasonable to assume that these levels will remain consistent in the coming quarters. Ossdsign signed a group agreement with Premier Inc during the quarter, which brings together 4,350 hospitals under its purchasing umbrella in the US. The agreement itself provides no guarantees, but it is a prerequisite for selling Ossdsign's product Catalyst to these hospitals. We expect to begin seeing the effects of the agreement during the current quarter. Strategically, we believe the company is at a crossroads: should it focus on becoming cash flow positive at a sales level of around SEK 200 million, or should the company invest more in development and expanding the sales organization? We believe the latter option is preferable, even if it would involve capital injections from shareholders.

Online Brands had a challenging 2023, but in recent quarters, they have shown clear improvements. In the second quarter, sales increased by 32%, while cash flow strengthened. The gross margin rose from 56.2% to 62.6%. Their subsidiary, Bread and Boxers, grew by over 50% during the quarter, and we are now beginning to see the effects of an increased share of their own e-commerce. We also note that their largest and most profitable subsidiary, Trendcarpet, grew by over 25%. Online Brands has a clear strategy to grow outside of Sweden. The strategy is now bearing fruit, and international markets grew by 45% during the quarter. Unfortunately, trading in the stock is extremely thin, which hampers the valuation. We have also noted that one or more shareholders have been and continue to be aggressive sellers, which has a significant effect on the illiquid stock.

We visited Mowi and Leröy Seafood in Bergen during early summer. The most interesting signals were those of significantly improved biology. In recent years, several regions in Norway have had major problems with salmon lice, which has led to early harvesting and high mortality. The effect on income statements has been significant. Through various methods, they have managed to greatly reduce the number of treatments, which has led to better growth and lower mortality. Leröy Seafood's quarterly report confirmed this, and we therefore expect significant earnings growth in the coming year. Valuations in the sector are at low levels, so we have chosen to continue increasing our exposure.

Finally, as always, we would like to thank our co-investors for their trust. Do not hesitate to contact us with any comments or questions.