November Comment

Madrague had a disappointing month in November: -0.56% which takes the year to date figure to -5.52%.

Sectors of note in November:

Telecom: +0.6%

This is a sector where we have had a long exposure the entire year. Given the sector weakness throughout the year we are quite happy with an overall flat performance year to date. Not making money but not losing any either. In November the biggest contributors were long positions in KPN, Hellenic Telecom and Telefonica. KPN hosted a capital markets day where they guided for lower OPEX, savings on IT related costs and simplification of their networks where they intend to go from 5 core networks to 1. KPN got an added positive when the Dutch regulator together with European Commission approved the merger between Tele2 and deutsche Telekom. This approval also has some read through to other European markets where the operators would benefit from less competition. Telefonica is one such example. Hellenic Telecom presented their third quarter result in November. Numbers were more or less in line with consensus. We have been invested in Hellenic for many years and continue to view the company shares as way too cheap at an EV/EBITDA of c3.5. We sold out of Telefonica and kept the other investments except for minor adjustments.

Pharma: +0.5%

Our Pharma sector had a second month in a row with very good performance given our small exposure to the sector. Long positions in Ambea and Fresenius Medical made a positive contribution together with short positions in GN Store Nord and Fresenius (the parent company). Ambea made an acquisition of Aleris in October which adds potential to the company when it comes to growth, synergies and market reach. It trades at a discount to closest peers and should also be defensive in the current environment. We do not expect a quick rerating, but rather a slow and steady climb over the next quarters as the company shows progress with the integration of Aleris. Fresenius Medical got a favourable ruling in California with regards to dialysis profits. A very strange motion as our understanding of the proposition would have meant no clinics at all in California if the popular vote had said no. Our long position hinges on extended use of their clinics with basic surveys etc. performed. This would lower overall costs to the government for healthcare. A win-win that should be approved. Our short in Fresenius (the parent company) is based on a negative view on German hospitals with superprofits set to end and the Kabi segment with sterile injectables set to disappoint with increased competition. All positions were still in the fund at end of November.

Oil: -0.3%

The entire weakness was due to our long position in Subsea7. Subsea operates in the oil service segment where it is one of the world leaders in subsea installations and maintenance to the oil industry. The recent weakness in the oil price has caused a massive sell-off in the sector. We find Subsea7to be best in class with very solid financials. The company has a market capitalisation of USD 3.4bn with a net cash position of USD 750mln and trades on an EV/EBITDA of 4.4 times current year. Valuation is not much to hold on to when the market is throwing the baby out with the bathwater, but we know it does once the dust has settled after the current sell-off. Subsea7 managed the last downturn very well with prudence when it comes to balance sheet and razor-sharp cost control to keep the financial flexibility. We continue to hold a long position in the company.

Retail: -0.2%

Long positions in British American Tobacco (BAT) and Byggmax were the biggest detractors of performance. Our long position in Oriflame was the biggest positive contributor. On Friday the 9th of November we started to build a small position in BAT. The intention was to have 3-5% of NAV invested. BAT is a stable company, but operating in a sector where change is coming in terms of vapour cigarettes and flavoured cigarettes. If you really want to extend the potential competitors, cannabis producers could also be included. On the evening of the 9th there were widespread rumours and articles in the press that the FDA would ban menthol in cigarettes. This would be a major blow to BAT as menthol cigarettes accounts for roughly 25% of group profits. The stock was down 11% on the following Monday. We closed the position and consider ourselves lucky that we did not have our intended size of position when this news hit. Another thought that struck us when discussing the issue: are we coming to a world where tobacco will be banned and marijuana legal? My father, who was a policeman, will turn in his grave if this happens.

Gross exposure was increased from 122% to 138% in November. Most of the increase was due to an increase in a few spreads and holding companies with a very low addition to our overall risk level. Net exposure was more or less unchanged at 43%. 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

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