Madrague lost 1.01% in July. The markets were in a hopeful mode at the start of the month with expectations for (even more) stimulus from central banks to prop up asset prices. However when the Fed and the ECB both disappointed the equity markets started to drift lower. The Fed indicated that the rate cut should not be seen as a start of a longer cycle of cuts and the ECB were non-committal on further stimulus and tiering for bank deposits. In Europe, banks took a dual hit from poor growth and the lowered earnings estimates resulting from the prolonged negative interest rates and lack of clarity with regards to tiering. Tiering is a system where banks can place their excess liquidity at 0% rate with the central bank rather than the negative rates they currently get charged. When banks are offering depositors 0% (offering 0%!) they are enjoying negative margins on part of their balance sheet. The world is upside down and the central banks are trying to figure out a way to keep it upside down without ruining the mechanisms of the banking system too much.

Sectors of note in July:

Technology: +1.5%

This has been our best performing sector throughout the year. Ovzon has been the main contributor and continued to be so in July. Long positions in Nordic Semiconductor and Nokia were also positive contributors coupled with our short in Ericsson. Ovzon is a small cap company with their first own satellite launch scheduled for the first half of 2021. The solution is validated, and the prospects look extremely interesting. The company raised capital in the beginning of the year and has performed well since then with new orders coming in which has rewarded the company with higher market capitalisation. Ericsson reported Q2 figures in July which cracked the trend of positive earnings surprises and revisions. The stock dropped 12% on the day of the report and we covered our short position.

Media: +0.3%

The biggest contributors were our long position in Entertainment One and our short in ProSieben. Entertainment One is producing own and others content. It is easy to say that you believe in content, but it is equally hard to create the content which you can monetize for many years. Entertainment One has Peppa the Pig which we believe lives up to those criteria. In June there were rumours that Mark Gordon would leave the company. This has since been denied and we consider that to be a very good outcome even if it is not essential for the company’s future success. ProSieben is one of our favourite shorts together with RTL. Both German companies have been squeezed since they operate with a business model from the 1990’s. Squeezed by content providers and lower demand for advertising in linear television. We continue to be short both companies.

Utilities: +0.1%

This is one of our smallest sectors. The July performance did not qualify as one of the biggest of our sector verticals, but it is one of the better throughout the year. Our only investment currently is in EDP Renovaveis (EDPR), the Portuguese subsidiary to EDP which is producing electricity from wind. This is a segment with structural growth and EDPR is well positioned to capitalize on that trend. The company is active in sourcing, developing and operating the wind farm parks. We find it hard to get exposure to the sector at reasonable valuations as investors are scrambling to fill their ESG funds. Orsted which recently reported Q2 figures where we saw some operational cracks traded down small on the day of the report only to be 5% higher a couple of days later. Whether a valuation of c40 times next year’s earnings is cheap or expensive is in the eye of the beholder when you consider that interest rates for many corporates have gone negative and the company is operating in a segment with structural growth for many years to come. We continue to be invested in EDPR and are looking for other opportunities in the sector.

Capital Goods: -0.9%

We had a very tough reporting season in our capital goods sector. Cargotec and Alfa Laval on the long side disappointed. Our shorts in Assa Abloy and Epiroc reported strong figures and held up well in a weakening market towards the end on the month. We reduced positions in Alfa Laval and Assa Abloy.

Business Service: -0.8%

Biggest negative contributors were long positions in Kindred and Jackpotjoy. Both companies are in the betting market and have suffered from the derating of the entire sector last year. Kindred came out with a very weak Q2 report which made us revise our investment and sell out of our position. Jackpotjoy on the other hand came out with a strong set of number in Q2 but the market clearly disagreed with us. With the sentiment being so negative we held off from increasing our investment and kept our current position unchanged. We are monitoring the position to see if there is something we are missing. Base case is that we will increase our position if our investment thesis is not proven wrong.

We decreased our gross exposure from 156% to 148% in July. We increased our net exposure marginally from 37% to 40%. Our option protection shows the same characteristics as always, i.e. a gap move down 5-10% and we would have zero net exposure to the equity markets.

As always, you are more than welcome to contact us should you have any comments or questions on our investments or the views expressed in this letter.

Lars Frånstedt

Chief Investment Officer