Inertia, oligopolies and rent-seeking - December 2024
Dear Partners,
Protean Small Cap beat its benchmark in December. It returned 0.3%, while the index retracted by -0.1%. The full year 2024 return was 24.3%, 13.2% ahead of benchmark. Since launch June 2023 it has gained 39.1%, which is 21.9% ahead of the Carnegie Nordic Small Cap Index. Much pleased.
Top contributors were Acast, Getinge and Intea. Detractors include Devyser, Proact and ITAB.
The hedge fund Protean Select returned 0.8% in December. Full year 2024 return ends at 10.6% and 25.6% since launch in May 2022. Volatility for the year, calculated on daily returns, was 5.5%, generating a Sharpe ratio of 1.35.
Top contributors were long positions in Getinge and Hexagon, and short positions in index futures. Notable detractors were longs in Devyser, Tryg and a short position in a basket of small caps.
This month’s letter elaborates on what’s happened since launch in 2022, what we think about the industry structure of the savings market, how we plan to address a market failure with a new fund, details on performance and a few holdings, and a longer write-up on recent IPO Intea by our new Partner and Investment Manager Richard Bråse.
Thank you for being an investor!
// Team Protean
À la recherche du temps perdu
Protean was formed in January 2022 and the first fund launched on May 2nd of the same year. We have come a long way in three years. As we enter 2025, we do it with a team of five, over 200m USD in assets under management and a third fund about to launch. But most importantly: our performance since starting out is very good in the case of the hedge fund Protean Select – and excellent, in the case of the Protean Small Cap fund.
When we started the firm, we promised both ourselves and investors that without reasonable returns with reasonable risk, we would close down after three years.
In 2024 Protean Small Cap returned 24.3%. Beating the index by 13.2%.
Protean Select rose 10.6%, with a volatility of 5.5% and a 1.35 Sharpe ratio.
Protean Select has beaten all Nordic indices since inception, despite running an average net exposure of around 35% and average volatility of 6%. We run a diversified book, with low leverage. This means we, with almost mathematical certainty, are unlikely to be at the top of performance league tables in any given year. But on the other hand, we are likely to be on the upper half, and crucially: not to be in the bottom. Compounding capital at a steady rate, without catastrophic drawdowns, is how you get rich. Slowly and steadily.
Protean Small Cap is the higher-risk little sister. Small caps are inherently more volatile but also holds more return potential. The drawdowns can be severe but the upside is also substantial over a longer period of time. Since inception in June 2023, it has returned 39% and beaten its benchmark by 22%.
We’re not shutting up shop just yet.
It's far too easy when writing things like this to end up sounding like a corporate drone, glossing over weaknesses and exaggerating performance. We see reports from peers that are so bland and nondescript that one can wonder why even bother producing them. As Protean grows and ages, we actively remain rebels. Performance has been good so far, but we focus more on the things we have done poorly. Trust me, there are tons of decisions where we in hindsight scratch our heads and wonder what the **** we were thinking.
Why diversify?
Investing is a game of decision-making with incomplete information, where the rules change all the time. If you in addition sprinkle sketchy information, biases, flows, macro and sentiment on top, there’s ample room for error. This is why sizing and portfolio structure is important. A diversified liquid portfolio leaves room for error, as it allows us to course correct without too much hassle and market impact.
Diversification is an insurance policy against hubris. A self-confidence bordering on delusion is a prerequisite for thinking you can beat the market. Therefore, it is easy to see why adding to losing positions (or the inverse – not covering shorts going in the wrong direction) is such an alluring proposition: “it’s not me that’s wrong, it’s THE MARKET!”. The frustrating thing with markets is that sometimes doubling down is the right thing to do. On average, and over time, we believe diversification serves us well. To succeed, you must first survive. Hence a disproportionate downside can’t be tolerated, regardless of conviction.
Fiercely independent
Protean’s raison d'être is to manage our own savings in an optimal way. This means restricting the size of the funds to remain versatile and nimble, to restrict investing and selling the fund to monthly and quarterly, and to avoid unnecessary restrictions like styles, sectors and ESG-branding. We’re not optimizing for size or trying to please everyone. We’re fiercely independent and will remain so.
Industry structure creates opportunity
The inertia of the savings market is feeding a whole herd of rent-seeking asset managers and advisors. Some of the major players out there look more like a slow-motion day-light robbery than a well-meaning fiduciary. I get it though, investing is hard, not everyone cares or has the time to get involved in the details of various fees, strategies and what not. Sometimes I think every advisor should be obliged to show exactly how he or she has invested their own savings or pension. That would be fun.
Starting a business to challenge this industry structure is difficult. The regulatory burden is substantial. Every fraud or problem that has ever occurred in history, has been followed by new regulation aimed at fighting the previous war. Resulting in a patchwork of laws that collide and accumulate in exponential fashion. On top of that comes the EU (and don’t even think about what happens if you have a US-based investor and the SEC-regulations start applying). Just in the last year we have the substantial DORA-regulation coming into effect, aiming to improve the resilience of the IT infrastructure in the EU. For us, five guys in a room with computers, this has resulted in countless hours in meetings with internal audit, compliance, and consultants.
The result? New policies and documentation. Changes to what we already were doing on a daily basis? None. Improved IT-resilience? Unlikely. Cost? In the tens of thousands of dollars. Benefit to whom? Unclear.
The regulatory pressures and associated costs, and the rent-seeking advisor/platform community, is what’s driving the significant consolidation of the Nordic asset management industry. This raises terrific barriers to entry.
Plus, of course, the elephant in the room: passive investing. Sweden’s stock market has for decades been the envy of the world. The availability of growth equity for smaller companies has helped create a vibrant eco system of multiple players and active managers that are able to price and fund a plethora of ventures. But with fewer and fewer independent asset managers, outflows from active funds, and more voluntary (marketing-driven) restrictions like ESG, we risk cutting off the branch we are sitting on. Heck, even the CEO of one of the most aggressive consolidators is out in the press complaining about the negative consequences of consolidation!
Asset manager > asset gatherer
Asset management is a very scalable business. The costs are high, but largely fixed. When you reach a certain threshold, the incremental fees come at close to 100% margins. This is why asset managers often turn into asset gatherers rather than performance optimizers.
We don’t do that. Recently we participated in one of Sweden’s biggest Finance podcasts, and the host was aggressively questioning us along the lines of “surely you will launch additional similar products to get around that once you get there?”. It was like unfathomable that our approach is genuine and a crucial part of strategy. We believe (and academic research backs up) that a smaller fund has better chances of generating attractive returns. We started Protean to manage our own savings. We need a bit of scale to be able to access all the tools we need, that’s why we’re taking outside money. We want reasonable returns at a reasonable risk. That’s it.
The third fund… It’s getting closer
The third fund we’re about to launch has a different rationale: it aims to address the market inefficiency where only one in ten active managers outperforms the index over any given 10-year period. We will offer a product we think is missing for many investors: a sensible actively managed long-term Nordic equity fund with a Very Low Fee that can beat the index. The kicker is: the bigger the fund gets, the lower the fee. Our starting point will be at less than half the average fee for actively managed Nordic funds. And we cut the fee further at every 10bn SEK in assets under management. If (when!) the fund reaches 50bn SEK in AuM it will be on par with index-fund fees on net platforms. Scale advantages shared!
The fund will be managed by our recent hire Richard Bråse, one of the most interesting investment-thinkers I have ever come across. His capacity for independent thought and integrity is exactly what’s needed to sort the wheat from the chaff among the Nordic large- and mid-caps. Removed from the bustle of Stockholm, he has the ideal set-up for long-term thinking and patience required for a fund that in many instances has more in common with investment companies than other funds. For what is an investment company? A long-term thoughtful owner of decent businesses, at a low cost. We tip our hat and aim to replicate just that in a low-priced fund structure that gets cheaper as it grows.
The fund will be a daily traded UCITS fund. It will hold 40-50 stocks and have an investment horizon in excess of 10 years. Mathematically, this means 4-5 stocks are changed in a given year. Stylized, of course, but just to illustrate. With limited turnover, transaction costs are minimized. The fund will steer clear of over-indebtedness, low returns on invested capital and fads.
Who does it fit?
We think the fund will be well suited to a wide variety of investors.
- Those that are looking for a broad and common-sense driven exposure to reasonable companies at a competitive price but think index funds are boring (and potentially bad for market functioning).
- Those that think it’s worth trying to actually BEAT the market and just not get the market return.
- Global investors that think the Nordics are an underappreciated investment opportunity and are looking for a nice and tidy way to get exposure via a well-run, regulated and cheap vehicle.
- Those that think you can likely beat the index over time if you just manage to avoid the stupidest stuff that’s included in the index.
The contrast to an index fund is worth dwelling on. They have two significant drawbacks: it cannot, by definition, beat the index. And it must also own, by rule, the silliest things that are included in the index.
How to beat an index
We believe there are two ways for a long-only fund to beat the index:
1. Be small, work hard and be hyperactive. This is Protean Small Cap.
2. Own good businesses for a long time, pay as little as possible in fees and transaction costs and avoid stupid things. This is the new fund.
But for a low-fee fund to work, it needs assets. To get assets it needs distribution. Distribution in this context means being available on various platforms. Platforms are online brokers, insurance companies, banks and pension providers. Most distributors make their money by taking a significant part of the fund fee. This means the higher the fee, the better. For a Very Low Fee fund, this is a conflict of interest. And a challenge for us. And for those who want to invest.
We need your support
But hey, inertia, oligopolies and consolidation be damned. Market inefficiencies are there to be challenged. Let’s go!
Protean Small Cap
– Carl’s update for December
Protean Small Cap returned +0.3% in December. That is 0.4% ahead of the CSXRN (SEK) benchmark index for the month. This puts the fund 21.9% ahead of our index (CSRXN SEK) since inception and 13.2% ahead during 2024. The fund now manages SEK485m. Thank you for your trust.
Notable performers in December were Acast, Getinge and Intea,
We have initiated a mid-sized position in Bavarian Nordic. This Danish vaccine producer is mostly known for its Jynneos franchise, vaccines for smallpox and monkeypox. Rare diseases those, but the latter of the two has become a hot topic for the stock in recent years, and it often spikes (and subsequent declines) as outbreaks come and go with varying frequency. That adds an optionality to the story but is obviously difficult to build a case on. What attracts us is the strong performance Bavarian has shown in its travel vaccine franchise, where products against rabies and TBE are showing strong progress.
TBE – which has a certain ‘ick’ factor attached to it as it is spread by ticks – is getting more attention as it benefits from a warmer, wetter climate. To us, travel vaccine appears to be an attractive business for Bavarian to grow, also via acquisitions. It’s often a very small portion of the sales in big pharma companies, likely to be slightly neglected. Generic competition is not an issue. Through this, Bavarian has started to build a bread-and-butter business which reduces the overall risk level in the share. The company recently announced that its project to consolidate vaccine production is going as planned, and this will improve margins in 2025.
We also participated in the IPO of Intea which we will write more about later in this letter.
We have sold out of a few smaller positions, among them Humble and CINT. We have also sold Cargotec, which has been a very strong performer for us since the inception of the fund. The reasoning? The divestment of MacGregor brought less proceeds than we had anticipated. Still, a very strong balance sheet and a lack of M&A in the most recent years for HIAB would suggest a flurry of deals in 2025. However, recent comments from management indicate that a backlog of IT integration projects means that this will not be the case, which surprised us enough to part with the stock.
Reflecting on 2024, we see a year where our top performers have been with us since inception, such as Raysearch, Ambea and Acast. Out of our top ten performers, we still hold seven. Out of our top ten detractors, we own four. Perhaps we are getting better at sticking with the winners?
The ten largest positions in Protean Small Cap as we enter January are:
Protean Select
– Pontus’ update for December
*We illustrate our performance by showing a comparison with the NHX Equities index. This is an index constructed from the performance of 54 Nordic hedge funds focusing on equity strategies. NHX is published after our Partner Letter, so updates with one-month lag in the chart above. We aim to have positive returns regardless of the market, but no return is created in a vacuum, and a net-long strategy will correlate. Our hurdle rate is 6.9% annualized (4% + 90-day Swedish T-bills). All figures are net of fees and ratios in the above charts are calculated using monthly returns.
Protean Select returned 0.8% in December. Full year 2024 return ends at 10.6% and 25.6% since launch in May 2022. Volatility for the year, calculated on daily returns, was 5.5%, generating a Sharpe ratio of 1.35.
Top contributors were long positions in Getinge and Hexagon, and short positions in index futures. Notable detractors were longs in Devyser, Tryg and a short position in a basket of small caps.
We exit December with 37% beta-adjusted net long exposure and 108% gross exposure. The portfolio remains diversified, with the biggest position 4% of assets.
Novo Nordisk
The biggest drama in the Nordics in December was undoubtedly the much awaited read out of Novo Nordisk’s phase III-study on Cagrisema. If we printed out and laid all the emails and research reports generated by the investment banks side by side, they would easily reach across the English Channel. When markets are navel gazing to this extent, and positioning is extended to the Nth degree thanks to Novo being a multi-year winner, normal rules don’t apply. Our gut feeling going into the event was simply that it was not worth playing.
We are not in the business of trying to outguess those with the most intimate knowledge of trial designs, biological mechanisms and statistical analysis. Hence, we decided to sit out the read-out. Part luck, part experience meant we avoided the 20% drop in the biggest stock in Scandinavia in December.
It might look myopic and like an overreaction for Novo to drop 20% on what looks like a slight miss to expectations in one study but remember that pharma stocks trade differently than others. They are priced on growth potential 5+ years out in the future, as development times are long and visibility is reasonable. Therefore, Novo’s flagship next-generation product not exceeding its closest competitor is a big event.
Naturally, there are tons of details to be debated. Was the study design flawed? Why didn’t more than 57% of participants proceed to maximum dosage? Would the results look different (better) if more had done so? Is this study really that important? Etc etc. We are still enamored by Novo’s valuation and cash-flows, and history of innovation and execution combined with shareholder-friendliness in the form of buybacks and dividends. We have actively traded the stock in this volatility and considering it was almost -15% on the year and -40% from the intra-year highs, we are ok with “only” ending up losing a net 0.5% on the stock for the full year.
2024 full year details
Here's a break-down of our full-year biggest winners and losers in Protean Select. Notable is that our long-held core small cap positions are the ones driving the bulk of the outperformance. This solidifies our belief that small and mid-caps are our home turf and that we benefit from being a small fund.
Protean Select 2024 Winners and losers
The ”Small Cap Short” is a basket of >80 stocks we use to hedge our small cap exposure. We tried our luck in Evolution, seeing an attractive valuation, but covered our losses (and was even short for a while) when we realized the narrative of unregulated Asian revenues was likely to continue weighing on the stock. In H&M our thesis eventually played out, but our timing (and staying power) was poor. We were too early in Stora Enso on the long side as a second wave of “it’s not time for a cyclical recovery just yet” combined with continued poor execution knocked the wind out of its sail, and Embracer just kept on being its good old volatile self.
All told, 10.6% return for the fund was better than most (all? I haven’t checked all of them) Nordic long-only indices. To generate that return with 5.5% volatility, at a 1.35 Sharpe ratio, is a good year.
We look forward to repeating it again, hopefully a little better, in 2025.
Not your usual property stock
– Richard’s Reflections
The real estate company Intea refused to follow the PR consultants' playbook during the IPO process. Instead of showing up everywhere to tell us all about how great they are, about its rosy outlook and tempting financial targets, they chose to keep a low profile with few media appearances.
After spending the last 15 years at Sweden's business daily Dagens Industri, covering numerous IPOs, there is one conclusion: like with any pushy salesperson, it’s not the ones most eager to see their names in print that represent the best business opportunities. And it’s always better to let the numbers do the talking, rather than talking about numbers that never materialize.
Intea kept a low profile because they could. Instead of squeezing the last penny out of the most price-insensitive investors (looking at you AMF), the owners accepted a somewhat lower price to smoothly inject 2 billion SEK of new equity into the business. The capital will generate more than enough to offset the dilution.
Intea's portfolio consists of high-quality specialized properties, primarily leased to public tenants on long-term leases. These include police stations, college facilities, and prisons. The operational risk is as low as it gets, with low vacancy rates and longstanding, stable counterparties.
So far, it sounds like a reasonable defensive option in a sector where office owners are struggling due to both a weak economic cycle and structural factors. Meanwhile, perceived low-risk apartment companies don't generate enough cash flow to impress anyone with their low-yielding asset base. Stable cash flow isn’t much fun if it’s stable at a low level.
Intea offers higher yields than the office segment, but without the headwinds. And it’s more than just a reasonable defensive option due to its high project activity, with 3.7 billion SEK in ongoing developments. This gives our company a clear growth trajectory, with the project developments serving as the value driver.
Based on company guidance, the 2 billion SEK will be deployed at a yield on cost of about 6.5 percent, in a business that values its properties at 5.2 percent. That gap translates into profits.
And there is more to come. The Swedish Prison and Probation Service expects to increase the number of places in detention centers and prisons from 9000 in 2024 to 27,000 by 2033. "Such rapid and intense expansion will be challenging," as the Swedish Prison and Probation Service states in its capacity report.
State-owned Specialfastigheter is the number one player when it comes to prisons, and apart from Intea, Erik Selin’s Skandrenting is the only private prison owner.
For property owners in general, the glory days of the sub-zero interest rate era are gone. The Swedish 10-year yield is now a tad higher than when the Riksbank started lowering interest rates back in May. The US 10-year yield is up close to 100 basis points since the Fed’s first cut in September. This means you shouldn’t expect yield compression to do the trick - real estate companies must take the value creation into their own hands. Just as it should be.
Over the coming three years, Intea will be among the few listed Swedish real estate companies posting double-digit compound annual growth rates in both NAV and cash earnings, adjusted for dividends.
IPOs are tightly managed spectacles, but despite the highly orchestrated nature of these events, there hasn’t been much daylight for those who subscribed to the previous two real estate IPOs. Sveafastigheter, SBB’s rental apartment business, has yet to close above the issue price and is down 9 percent to date. Prisma Properties, a company with a focus on discount retailers and fast-food restaurants, stayed afloat on its first day in June but is down 12 percent since then.
After two broken IPOs in the sector, the investment banks got a happy ending. Intea has gained a healthy, but not overwhelming, 10 percent since its IPO in mid-December. The shares still trade with a discount to NAV and an implicit yield of 5,3 percent based on next year’s numbers.
Both the CEO and CFO have bought more shares after the IPO. They know that Intea’s growth trajectory relative to its price bodes well relative to the sector.
The monthly reminder
We optimize for performance, not for convenience, size, or marketing.
You can withdraw money only quarterly (monthly in Small Cap).
We will tell you very little about our holdings.
Our strategy is tricky to describe as we aim to be versatile.
A hedge fund can lose money even if markets are up.
We charge a performance fee if we do well.
You do not get a discount if you have a larger sum to invest.
We do not have a long track record.
Thank you for being an investor.
Pontus Dackmo
CEO & Investment Manager
Protean Funds Scandinavia AB
