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Sell-Side Mindset

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Stockholm (HedgeNordic) – After 17 years on the sell-side as small-cap-focused equity analyst and strategist – and an additional six years on the buy-side, Fredrik Skoglund launched FE Fonder in October 2020 with the backing of Swedish real estate investor Erik Selin. The Stockholm-based asset manager now manages one long-only and one absolute return fund, both focused on the small-cap space in the Nordic region.

“As a long-only manager, you must always “play the game” and deliver a good relative performance regardless of the market environment,” says Skoglund, who manages long-only FE Småbolag Sverige and absolute return-focused FE Select with co-portfolio manager Mikael Löfdahl. Löfdahl spent almost 16 years as a small-cap-focused analyst and strategist at Carnegie in various roles, including as head of small-cap research. “As a long-only manager, there is no possibility to reduce the net exposure,” Skoglund continues. “FE Select provides greater opportunities to protect the unit holders’ capital if we believe the market is declining.”

“As a long-only manager, there is no possibility to reduce the net exposure. FE Select provides greater opportunities to protect the unit holders’ capital if we believe the market is declining.”

FE Select maintains a portfolio of between 15 to 30 positions in companies with a market capitalization of up to SEK 85 billion, which is accompanied by an equity index swap that pays off as the Carnegie Small Cap Index drops in value. Skoglund has signed a total-return swap agreement with a bank on a group of 50 stocks that replicate the Carnegie Small Cap Index, with the swap acting as a means to adjust FE Select’s net market exposure.

“We are return-focused from a risk-reward perspective. It is more important to create return than to take no risk at all.”

“As an investor in FE Select, one actually gets two positions from the fund manager, the choice of shares and the choice of net exposure,” argues Skoglund. “We might reduce net exposure with short positions on individual companies in the future, but as for now, we believe we use a very efficient hedge on the downside.” Skoglund and his co-portfolio manager mostly rely on the long-only portfolio to generate returns. “We are return-focused from a risk-reward perspective, meaning that we take calculated risks to generate returns for us and our investors. It is more important to create return than to take no risk at all.”

Three-Step Investment Process

Fredrik Skoglund and Mikael Löfdahl follow a three-step investment process to manage FE Select, beginning with a top-down overview, followed by bottom-up analysis, and finnishing with portfolio construction. “In our top-down process, we focus on factors that affect companies from the outside,” explains Skoglund, with some of these factors including interest rate levels, the state of the economy, various themes and external shocks such as the  coronavirus pandemic, among others. “Our top-down process controls where we want to focus on right now, and serves as an important input in how we want to position the net exposure.”

“Our top-down process controls where we want to focus on right now, and serves as an important input in how we want to position the net exposure.”

As “thematic investing has become increasingly important,” according to Skoglund, FE Select’s portfolio currently reflects three main themes: digitalization, sustainability, and transformation. “We have a mindset that the small and midcap space finds it easier to digitalize, embrace sustainability and change vis-à-vis large caps.”

The bottom-up analysis process involves the traditional sell-side research Skoglund and Löfdahl have performed over the course of more than ten years. “I still see myself more as a sell-side person than a buy-side person,” says Skoglund. “I very much behave as a sell-side analyst.” According to Skoglund, fundamentals determine the value of a company’s business and growing earnings is the main value driver.

“I still see myself more as a sell-side person than a buy-side person. I very much behave as a sell-side analyst.”

“We start with fundamentals such as the end-market, capital allocation, management, among others, and continue with an analysis of the company’s ability to create profit growth and the biggest risks facing the company,” explains Skoglund. “Risk is very central to our philosophy, and we put a lot of effort into understanding the most important risks for companies,” he emphasizes. “We work very much on the risk side to know what risks we are taking.”

Although Skoglund and his co-portfolio manager do no see valuation as an important pillar to their investment philosophy, the duo assumes a very high correlation between valuation and risk. “We see the valuation in connection with risk. A higher valuation means, all other things being equal, a higher risk,” says Skoglund. “But we are not selecting shares from a value perspective, we rather select shares from a growth perspective,” he continues. “We then get a balanced picture of the company and can decide whether it is something we should invest in or not.” The last piece of the process involves portfolio construction, which is the daily management of the portfolio to manage risk and opportunities in the short term.

Inception-to-Date Journey

With an average net market exposure of 63 percent, FE Select has generated a cumulative return of 51.5 percent since launching in November of last year after delivering return of about 37 percent in 2021. “Since the start, we have had an average net exposure of 63 percent, and although we do not have a specific target for what the net exposure will be over time, the average so far is probably a pretty good indication of where our net exposure will be in the future,” says Skoglund.

“Although we do not have a specific target for what the net exposure will be over time, the average so far is probably a pretty good indication of where our net exposure will be in the future.”

“We have the opportunity to have a net exposure of 150 percent if we believe the market is undevalued and full of potential, and the opportunity to have -50 percent net exposure if we want to “protect” capital in a downturn,” points out Skoglund. “We are more return-focused, so we don’t have a low net exposure,” says Skoglund. “The stock market goes up more days than it goes down, so we expect more returns to be created by our long names than the hedges.”

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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