October was another roller coaster with market direction sharply negative in the beginning of the month only to fully reverse and finish with modest gains. Belief in a Brexit deal and signs of thawing US-China relations were the main explanations for the improved sentiment. Madrague had a disappointing month with a negative -0.87% performance. This gives a year to date performance of -1.17%.

Sectors of note in October:

Business Service: +1%

Biggest contributors were the long positions in Gamesys, Kindred and International Airline Group (IAG). The short position in Intertek was also a small positive contributor in absolute terms which gives a good alpha contribution in a positive market. We wrote about Gamesys in our last monthly letter so we will just note here that we believe Gamesys still has further upside and that it is very different from traditional gambling. Kindred was up 22% after very good quarterly figures. The entire gambling sector has been out of favour due to regulatory changes/challenges which has led to harsh earnings cuts and from investors that are applying an ESG filter to the sector. We believe that there is clear value in the sector, and it is up to your conscience whether you want to invest or not. We are no fan per se of the gambling sector, but we do acknowledge that investors we speak to that are not buying gambling stocks are quite happy owning Pernod Ricard. All positions are still in the fund with only minor changes during the month.

Media: +0.5%

Our long positions in Hellofresh and MTG were the main contributors on the long side. Our short position in WPP was also a positive contributor. Hellofresh is a food delivery company that not only delivers whatever we consumers want to eat, but also healthier food at a cheaper cost than its peers. Hellofresh is on track to deliver 260mln meals in 2019 and have just turned EBITDA positive. The message and the product are clearly designed for the world we currently live in; healthy, environmentally friendly, democratizing healthy food to lower income people. In short, less stress on the financials and more comments on the positive external effects that Hellofresh has on the community. A bit refreshing for a traditional investor as Madrague, but we have to say that for the value of the company it can only be the icing on the cake. We still believe that earnings are the ultimate driver of stock prices. In the middle of October Hellofresh raised its guidance which now envisages positive EBITDA and free cash flow for 2020. With the expected growth Hellofresh should continue to perform well. WPP presented a decent set of Q3 numbers but was still down c6% in October. The company is structurally challenged in the age of faster information and internet. It trades on a 30% discount to average p/e multiple over the last 5 years with a c6% dividend yield. This implies that we are not the only ones expecting future trouble for WPP. This makes it very sensitive to even moderately bullish news. On the back of that our position is quite small and we covered one third of our short the day before the Q3 report. All other positions mentioned are still in the fund with only minor changes during October.

Capital Goods: +0.2%

The sector has very little directional exposure, but there were some big swings intra-month: Atlas Copco produced yet another stellar report which caused our short position to be the worst position in the sector. Trelleborg came out with a strong report towards the end of the month and continued to push higher even after some very good performance before reporting date. The long position in Trelleborg was our biggest positive contributor followed by our long position in Sandvik. Also, Sandvik reported good figures in October. We find it quite amazing that the 2019 EPS estimate for Sandvik the last 12 months has been between SEK 10.6-11.2 (i.e. a 5.6% difference high/low) when the stock has gone from SEK 160 to 125 to 180 to 133 and 170 in the last year. So, with fairly little changes in earnings-estimates the stock has erased more than 20% of its value twice only to rally back and print new highs. That is not just change in sentiment when it comes to economic outlook from investors, but just as much a testament to how fierce the rotation between cyclical and defensive stocks has been in the last year. Except for minor adjustments we continue to hold all the stocks mentioned above.

Retail: -0.6%

Our long positions in British American Tobacco (BATS) and Anheuser-Busch Inbev (ABI) did almost all the damage. In Bats it was the request from the Federal Trade Commission (FTC) for more information regarding sales practices for e-cigarettes and vaping. The Food and Drug Administration (FDA) is also considering a ban for flavoured vaping products. The subject is extremely important to the industry as it tries to move away from smoking (i.e. traditional cigarettes) and the negative effects mainly from the tar as it burns. US vaping accounts for c1% of BATS revenue and there is an argument that a slowdown in migration to vaping would arrest the weakness in combustible volumes (i.e. traditional cigarettes). We think the weakness in the shares are unfounded and added small to our long position. ABI, the Budweiser and Corona brewer, issued a profit warning towards the end of the month. The company blamed higher cost to brew, weaker emerging markets and a weak macro environment. We found the report and new guidance just as disappointing as the market and sold out of our position.

We increased our gross exposure marginally from 152% to 171% in October. The increase was mainly in the Technology and Business Service sectors. We increased our net exposure marginally from c39% to 42%. 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