Stockholm (HedgeNordic) – Long/short equity fund Origo Quest is celebrating ten years of bargain hunting in the universe of Nordic small-cap stocks. After a decade of successful stock picking on the long and short side, founder and CIO Stefan Roos is looking forward to Origo Quest’s next phase of growth and continued journey in the Nordic small-cap universe.

“I cannot understand how ten years have passed already,” Stefan Roos comments on Origo Quest reaching its 10-year anniversary. “We have good momentum and strong hunger within the team for the next phase in Quest’s and Origo Fonder’s growth story.” The first phase, in the decade of Origo Quest’s operations, did not disappoint.

“We have good momentum and strong hunger within the team for the next phase in Quest’s and Origo Fonder’s growth story.”

Origo Quest is aiming to deliver an equity-like return of close to ten percent per annum over a business cycle with lower volatility than the broader Nordic small-cap segment. And indeed, the long/short equity fund delivered an annualized return of about nine percent and exhibited an annual volatility in returns of 12 percent with a 0.4 percent correlation to the small-cap universe.

“When we started the project, we didn’t expect the stock market to enjoy such tremendous growth, particularly the smaller-cap segment,” acknowledges Roos. Despite a not-so-favorable environment for active long/short equity managers, Origo Quest came close to meeting all its objectives. “We were very close to reaching our annual return target of ten percent and we achieved the risk target. All in all, we are happy with the results,” says Roos.

Reaching the 10-year milestone is a testament to the team’s expertise and well-oiled investment approach. The approach involves investing in smaller-sized businesses in a phase of change. “We look for transformative change in a business, which implies positive or negative change in the operations of the company over a three to five-year period,” explains Roos. The transformative change can stem from structural growth, but also from an M&A deal, spin-off, leadership change, strategy overhaul, or other factors, according to Roos. “We look to identify long-term value drivers that help us understand and capitalize on a firm’s journey of change and transformation. Identifying those value drivers is the key component of our research process.”

The Nordic Small-Cap Universe – Fertile Hunting Ground

The Nordic small-cap space has been and will continue to be Origo Fonder’s hunting ground. “We are a pure small-cap boutique manager, perhaps one of the few in the Nordics. Specialization is key in this space,” says Roos. Due to limited sell-side coverage, identifying hidden opportunities in the Nordic small-cap space takes much time and effort, according to the founder of Origo Fonder. “We travel a lot to meet companies and understand their business operations. We need to be as close as possible to our portfolio companies.”

“We are a pure small-cap boutique manager, perhaps one of the few in the Nordics. Specialization is key in this space.”

Over longer periods of time, small-cap stocks as a group have outperformed their large-cap counterparts. “Small-caps have performed better because smaller businesses have more room to grow, are more dynamic in response to growth opportunities or have more motivated entrepreneurs as owners,” says Roos. Nordic small-caps, in turn, have broadly outperformed their global peers, which makes the Nordics an even more attractive hunting ground for active investors. “Nordic businesses have a small home market, so they tend to develop a global strategy from day one,” Roos identifies one reason for the stronger performance of Nordic small-caps.

The Nordic region is also characterized by a high level of education and innovation, well-developed infrastructure, a relatively stable political landscape, and a strong banking sector, among others. The combination of these characteristics creates a fertile environment for business growth. “With around 80 percent of the small-cap space in the Nordics lacking sell-side coverage, doing your homework with deep research into a company’s operations can always uncover attractive opportunities,” says Roos.

The market environment has become even more fertile for active managers such as Origo Fonder amid rising volatility following the end of the era of low rates. “We are quite optimistic about the environment going forward,” Roos tells HedgeNordic. “The more volatile market in the last two or three years is more attractive for a long/short fund than five years ago, when volatility was suppressed by central bank activity,” he continues. “We are optimistic to grow further within the small-cap space. We want to maintain our long-term vision of being a pure Nordic small-cap boutique.”

Happy Birthday, Origo Quest!