Monthly Report September 2022

Performance

Adrigo Small & Midcap L/S Class A fell 3.67% and Class C fell 3.67% in September net of fees. As of September, Class A is down 1.52% in 2022. The Carnegie Small Cap Return Index Nordic fell 12.12% in September and is down 31.15% in 2022.

The fund's smaller holding, Bioarctic (biotechnology), and larger holding, Camurus (pharmaceuticals) provided good contributions to our return. Our short book provided good returns and our active trading contributed handsomely. However, our negative exposure could not compensate for our mid-sized holdings which led to a negative return in September.

Adrigo Small & Midcap L/S Class A has returned 76.6% since inception, net of fees. The compounded return has been 12.3% since inception. In the same period, the benchmark STIBOR 1M rate has returned -0.7% and the Carnegie Small Cap Return Index Nordic has a gain of 41.2%.

Market comment & the companies

Global interest rates continued to rise during the month, and the central banks have raised their interest rates to ease inflationary pressures.

We note that the USD has continued to trade strongly against the EURO and even stronger against the GBP. The GBP has lost some 20% of its value against the USD over the last 12 months. The Bank of England (BoE) has decided to intervene to “restore orderly market conditions”. The BoE will acquire long-term government bonds and stated it will be ready to do what it takes to deliver on its objectives. These actions show the vulnerability of higher interest rates in a highly leveraged economy.

During September, we noted how Swedish real estate companies had difficulties refinancing their bonds, and companies that did got significantly higher margins. Currently, we often see margins above the underlying asset yield requirements. Highly leveraged companies, and their main owners, have undoubtedly an uncertain future ahead. Potential systemic risks are evident.

Camurus held a capital markets day (CMD) in September. Camurus reiterated its overall message although slightly upgrading its long-term targets for the long-acting opioid dependency drug Buvidal, and highlighted its R&D pipeline. The market evidently liked Camurus’ message as the share price rose some 10% the same day. We are optimistic that the market rollout of Buvidal in Europe, Australia, and the Middle East will continue strongly. We believe it is likely that Camurus will reach 3 bn SEK in sales from these markets alone. In addition, we see a US approval for its partner in 2023. A US launch will more than double the peak sales potential. We continue to find the share attractively valued as the market does not discount the US approval nor the R&D pipeline at the current share price.

Bioarctic announced that its partner, Eisai, reached positive results from their phase 3 trial in Alzheimer’s disease. We had reduced our position significantly in September, but Bioarctic provided a solid contribution despite being a minor position. We divested the position post the announcement and await additional data, which will be presented in November.

Markets have contracted, so what is the potential downside from current levels? If we study our small-cap indices, last time the market discounted higher interest rates, i.e., December 2018, there is some 25% downside accounting for stronger balance sheets (excl. real estate companies) and some EPS growth over the last four years. History tells us that the stock market does not move linearly; bounces will come. Central banks will continue to set the tone for the upcoming six months. We continue to be bottom-up investors focusing on company-specific triggers. However, we must study macro events to move swiftly and navigate a melancholy market that one could compare to Eurhythmics' tune "Here comes the rain again".

Finally, we thank you for your trust and see good return opportunities in the future.