Nordic Business Media - Adrigo Hedge, managed by Adrigo Asset Management AB, is a so called “Specialfond” according to the Swedish Act (2004:46) of Investment Funds and the Swedish Financial Supervisory Authority.Interviewees: Göran Tornée och Håkan Filipson, Adrigo Asset Management
Introduction:
Adrigo Hedge started in December 2006 based on own money and investments from ‘friends and family’ with the idea to build a record to prove that its low risk stock picking strategy would work. After a successful start, Swedish industrialists Melker Schörling and Carl-Henric Svanberg, joined by investing into both the Fund Management company, Adrigo Asset Management (51% ownership) and the Fund.
Introduction:
Adrigo Hedge started in December 2006 based on own money and investments from ‘friends and family’ with the idea to build a record to prove that its low risk stock picking strategy would work. After a successful start, Swedish industrialists Melker Schörling and Carl-Henric Svanberg, joined by investing into both the Fund Management company, Adrigo Asset Management (51% ownership) and the Fund.
The investment team and management, Göran Tornée (CIO and Fund Manager), Håkan Filipson (Man Director and Analyst) and Karl-Johan Bonnevier (Analyst) have all worked in the Nordic financial markets for leading banks and brokers for more than 20 years prior to setting up Adrigo Asset Management. The Fund, Adrigo Hedge, has returned 34% since its inception which compares with 11% for its benchmark, STIBOR, and -5% for the Nordic OMXN40 index.
Adrigo Hedge was recently nominated to Hedgefund of the Year 2010 by Swedish business magazine Privata Affärer.
Adrigo Hedge is a Nordic long/short equity fund – how do you go about the selection of your investments? Do you have fixed criteria?
We invest mainly into Nordic big and mid cap equities, both long and short positions. Our methodology is focussed on key elements like change (we need to see the trigger which should change the stock’s mispricing), alternative information (we search for additional information in unusual places, not just in management meetings) and we make a careful risk/reward calculation ahead of each investment. For example, we do not invest into biotech companies or exploration stocks where we cannot estimate the potential, or the risks. We meet or interact (conference calls, conferences, etc) with 150-200 companies each year.
Is the selection purely down to manager discretion or do you also use systematic elements?
The approach is very systematic but in the end our Fund Manager Göran Tornée decides which ideas go into the Fund, and when. Importantly, he handles the portfolio construction process which includes risk management by spreading bets over several sectors/themes and matching long and short exposures.
How do you decide when to enter and leave a winning/losing position?
We try to look at the portfolio every day with a fresh and open attitude, and not be influenced by whether it is a ‘winner’ or ‘loser’. Our investment decisions are always based on our stock picking methodology. This means that we need to see the value in a stock as well as the change factor which will unlock the value. In addition, we need to have done our homework by meeting the management and to have found some alternative information, for example; by interviewing unlisted competitors to the companies we invest into.
Can you give some examples of profitable and losing trades in the past.
We were early investors into Danish brewer Carlsberg which we bought in January 2009 after the shares had fallen by some 70% following the company’s ill timed purchase of Scottish & Newcastle. The acquisition left Carlsberg with too much Euro denominated debt at a time when its earnings power collapsed due to a dive in the Russian Rouble, which in turn was caused by the oil price crash. Our first purchases were made around DKK 180 and we have held the shares for much of the time, but not all, and seen the bulk of the appreciation to today’s DKK 580 level.
We see mistakes as a natural part of the investment business and we have plenty of losing trades each year. In percentage terms we held only a small position in Swedish directory company Eniro, but it turned out ill timed, with the stock losing 30% in a matter of days, albeit with only a minimal impact on the Fund.
Your chart would suggest a long bias. What was your typical and historic maximum of short exposure to the market?
Our net exposure to equity markets, measured as long exposure minus short exposure, in normal market conditions is around 20-50% and we have been mostly within those levels.
During the difficult time in the latter half of 2008, benchmarking to the equity index, you did relatively well. How did you get through that period – how were you positioned?
We are an absolute return fund, so we do not benchmark against a stock market index but rather against the Swedish interbank rate, STIBOR. In 2008 we saw a disappointing decline of 3,5% when our benchmark rose slightly. However, to place the decline in context, our Nordic markets fell by close to 50% in 2008 which was the worst stock market downturn in some 40 years. We think the 2008 experience proved that our investment philosophy worked well, both on stock picking and risk handling. At the time, our net exposure was lower, the long holdings were mainly in defensive companies (health care, telcos etc.) and the shorts were concentrated on high beta stocks, like industrials and financials.
Nonetheless your fund gave up almost 10% of its value from its 2007 peak. You do not claim to be totally unaffected by the stock markets, but how do you handle situations like that?
We know, and we can show, that there are always opportunities in stock picking, regardless of how the markets develop. While the market conditions were extreme in 2008, we remained confident in our methodology to select stocks, and we took the appropriate actions to reduce the market risks. At the worst point since the Fund was started it was down 0.9% for an original investor. However, the stock market’s worst point showed a decline of over 50%.
As a smaller manager, one could argue you are more exposed to manager risk, ie one of your key asset managers not being able or willing to continue work. How do you handle that?
All three members of our investment team are shareholders in Adrigo Asset Management and all have made substantial investments into the Fund. We work with something we love to work with, ie stock picking. Together with our main shareholders we have every intention of growing Adrigo to a leading player on a European scale. Our structure is set up to handle big money which we will do within a few years. As we grow, the manager risk will decline.
Any plans for the future, new products, new strategies?
We will continue to grow the company profitably in the coming years whilst adding shadow funds on Adrigo Hedge aimed at both domestic insurance platforms and more substantial international institutions. Our plans go beyond that, but we will not disclose the next steps just yet…
Adrigo Hedge is a Nordic long/short equity fund – how do you go about the selection of your investments? Do you have fixed criteria?
We invest mainly into Nordic big and mid cap equities, both long and short positions. Our methodology is focussed on key elements like change (we need to see the trigger which should change the stock’s mispricing), alternative information (we search for additional information in unusual places, not just in management meetings) and we make a careful risk/reward calculation ahead of each investment. For example, we do not invest into biotech companies or exploration stocks where we cannot estimate the potential, or the risks. We meet or interact (conference calls, conferences, etc) with 150-200 companies each year.
Is the selection purely down to manager discretion or do you also use systematic elements?
The approach is very systematic but in the end our Fund Manager Göran Tornée decides which ideas go into the Fund, and when. Importantly, he handles the portfolio construction process which includes risk management by spreading bets over several sectors/themes and matching long and short exposures.
How do you decide when to enter and leave a winning/losing position?
We try to look at the portfolio every day with a fresh and open attitude, and not be influenced by whether it is a ‘winner’ or ‘loser’. Our investment decisions are always based on our stock picking methodology. This means that we need to see the value in a stock as well as the change factor which will unlock the value. In addition, we need to have done our homework by meeting the management and to have found some alternative information, for example; by interviewing unlisted competitors to the companies we invest into.
Can you give some examples of profitable and losing trades in the past.
We were early investors into Danish brewer Carlsberg which we bought in January 2009 after the shares had fallen by some 70% following the company’s ill timed purchase of Scottish & Newcastle. The acquisition left Carlsberg with too much Euro denominated debt at a time when its earnings power collapsed due to a dive in the Russian Rouble, which in turn was caused by the oil price crash. Our first purchases were made around DKK 180 and we have held the shares for much of the time, but not all, and seen the bulk of the appreciation to today’s DKK 580 level.
We see mistakes as a natural part of the investment business and we have plenty of losing trades each year. In percentage terms we held only a small position in Swedish directory company Eniro, but it turned out ill timed, with the stock losing 30% in a matter of days, albeit with only a minimal impact on the Fund.
Your chart would suggest a long bias. What was your typical and historic maximum of short exposure to the market?
Our net exposure to equity markets, measured as long exposure minus short exposure, in normal market conditions is around 20-50% and we have been mostly within those levels.
During the difficult time in the latter half of 2008, benchmarking to the equity index, you did relatively well. How did you get through that period – how were you positioned?
We are an absolute return fund, so we do not benchmark against a stock market index but rather against the Swedish interbank rate, STIBOR. In 2008 we saw a disappointing decline of 3,5% when our benchmark rose slightly. However, to place the decline in context, our Nordic markets fell by close to 50% in 2008 which was the worst stock market downturn in some 40 years. We think the 2008 experience proved that our investment philosophy worked well, both on stock picking and risk handling. At the time, our net exposure was lower, the long holdings were mainly in defensive companies (health care, telcos etc.) and the shorts were concentrated on high beta stocks, like industrials and financials.
Nonetheless your fund gave up almost 10% of its value from its 2007 peak. You do not claim to be totally unaffected by the stock markets, but how do you handle situations like that?
We know, and we can show, that there are always opportunities in stock picking, regardless of how the markets develop. While the market conditions were extreme in 2008, we remained confident in our methodology to select stocks, and we took the appropriate actions to reduce the market risks. At the worst point since the Fund was started it was down 0.9% for an original investor. However, the stock market’s worst point showed a decline of over 50%.
As a smaller manager, one could argue you are more exposed to manager risk, ie one of your key asset managers not being able or willing to continue work. How do you handle that?
All three members of our investment team are shareholders in Adrigo Asset Management and all have made substantial investments into the Fund. We work with something we love to work with, ie stock picking. Together with our main shareholders we have every intention of growing Adrigo to a leading player on a European scale. Our structure is set up to handle big money which we will do within a few years. As we grow, the manager risk will decline.
Any plans for the future, new products, new strategies?
We will continue to grow the company profitably in the coming years whilst adding shadow funds on Adrigo Hedge aimed at both domestic insurance platforms and more substantial international institutions. Our plans go beyond that, but we will not disclose the next steps just yet…
Interview by Kamran Ghalitschi
CEO of Nordic Business Media AB.
CEO of Nordic Business Media AB.
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