Navigating volatility

Performance

Adrigo Small & Midcap L/S Class A and Class C fell by 11.05% in September after fees. The Carnegie Small Cap Return Index Nordic rose by 0.93% in September.

Among the fund's larger holdings, Himalaya Shipping (transport), Golden Ocean (transport), and Online Brands Nordic (e-commerce) made solid contributions. Among the fund's smaller and mid-sized positions, we noted positive contributions from Scandic Hotels (hotels) and Corem Property (real estate). The fund's short positions collectively had a negative impact on returns.

Adrigo Small & Midcap L/S Class A has generated a return of 73.68% since inception, after fees. During the same period, the benchmark STIBOR 1M returned 6.32%, and the Carnegie Small Cap Return Index Nordic returned 104.2%. The average return for the fund since inception is 8.31%.

The Market and the Companies

The global stock market performed positively in August. MSCI World increased by 1.5%. S&P 500 rose by 2.1%, and EURO STOXX 50 climbed by 0.9%. Emerging markets MSCI EM rose by 5.6%. The Brazilian Bovespa fell by 3.1%, while the Indian BSE increased by 2.4%. The Russian RTS and MSCI Korea had unchanged market developments and declines respectively. In the Nordics, Sweden performed best with an increase of 1.4%, followed by Finland with a 1.3% rise, while Norway and Denmark fell by 1.6% and 10.0%, respectively.

The past few months have been quite challenging for us shareholders. We expect the fund to sometimes experience high volatility and to have months where we deviate significantly from the market. This is due to our relatively large exposure to smaller companies, where liquidity sometimes affects prices more than the fundamental developments of the companies. What we have experienced in recent months could be called a perfect storm.

We start with the stock that contributed most negatively to our returns this month. Vicore Pharma shocked us and the market by announcing a very large rights issue of SEK 782 million (43% of the then market value), offering shareholders the chance to subscribe for new shares at SEK 7, compared to the current price of SEK 16. The price reaction was, not surprisingly, very strong and the stock is now trading just above the issue price. The announcement came as a complete surprise, as the company conducted a SEK 500 million issue in 2023, which was supposed to cover the same studies that are now being referred to, to cover the capital needs until the first quarter of 2027. We invested in the company in the spring based on these premises. Unfortunately, the management and the board seem to have a very low understanding of how capital markets work, and this issue is a textbook example of how to destroy shareholder value in the short to medium term.

Other stocks in the portfolio that performed weakly include Pierce Group, Initiator Pharma, OssDsign and Braincool. All are less liquid, and we have not noted any fundamental news that explains the declining prices.

Our new holding, Scandic Hotels, performed well. The company's large convertible loan has now been fully converted into shares. Thus, the company can resume dividend payments, and we can also expect share buybacks to be on the agenda. The good cash flow also allows for continued expansion.

We note that the market for the software company Enea seems to be improving. Over the summer, the company received an order for a 5G network data layer worth USD 2.9 million from an existing tier-1 mobile operator customer in North America. In September, a contract worth USD 2 million for traffic management was signed with a customer in the Middle East. The potential contract value is USD 5.5 million over a five-year period. These two contracts underscore Enea's advanced product offerings and how attractive the company's various products are in the global market. Enea invested 25% of revenues in product development during the first half of the year (and the amortisations exceeded the capitalisations). The company aims for double-digit growth, a 35% EBITDA margin, and strong cash flows. We believe the company is well placed to achieve this. In addition, the strong balance sheet allows for niche acquisitions in addition to continued share buybacks. With a free cash flow yield of around 11% and good opportunities for both growth and margin expansion, we believe the company remains undervalued.

Initiator Pharma's stock performance this year has been disappointing. A year ago, the company reported very good results from its phase IIb study of pudafensine. This is a drug candidate for the treatment of erectile dysfunction (ED) and female sexual dysfunction (FSD). There is currently a significant percentage of men who do not respond to current alternatives such as Viagra and Cialis. Regarding FSD, there is a considerable unmet need. Initiator Pharma is currently in discussions with potential regional and global partners. We fully understand that this takes time, even though it can be frustrating when there are gaps in the flow of information.

Finally, we would like to thank our co-investors for their trust, as always. Please feel free to reach out to us with your comments or questions.