Stockholm (HedgeNordic) – An emerging Swedish investment platform is poised to challenge the two major players in the Swedish digital retail-focused savings sector: Avanza and Nordnet. While both Avanza and Nordnet enjoy capital-light business models, high returns on equity, and promising growth prospects, they face new challenges from emerging competition and the prospect of reduced interest income in a declining interest rate environment. These dynamics, coupled with some notable disparities between the two, present a compelling long/short pairing opportunity for the Protean Funds team.
“Locals love [Avanza and Nordnet] for their long growth runway, capital-light business model, and extreme returns on equity,” says Ramil Koria (pictured), Investment Manager at Protean Funds, which runs the long-biased equity hedge fund Protean Select. “This explains the rather aggressive valuations,” he adds. However, Koria notes that this appeal may be less enticing to international investors due to intensifying competition, restricted addressable markets, and concerns about plateauing revenues and profits.
“Locals love [Avanza and Nordnet] for their long growth runway, capital-light business model, and extreme returns on equity.”
Koria and the founding team at Protean Funds recognize stronger business fundamentals and better value in Nordnet compared to Avanza. Nordnet lagged significantly behind Avanza before its acquisition by Nordic Capital and Öhman Group and the subsequent delisting from the stock exchange in 2017. Nordnet’s return on equity was 20 percentage points lower than Avanza’s in 2015. “Things have turned around completely after a period of Nordnet investing heavily in IT during its unlisted phase,” says Koria.
Currently, Nordnet has a total addressable market three times larger than Avanza’s, encompassing all Nordic countries compared to Avanza’s presence solely in Sweden, according to Koria. “Nordnet has built a more advanced tech stack (evidenced by less downtime); and, perhaps most importantly (but unquantifiable), has a culture that seemingly is an order of magnitude times more forward-leaning,” argues the investment manager. Therefore, Koria finds it surprising that Nordnet has been trading at a 10 percent discount to Avanza on a forward price-to-earnings multiple despite enjoying a nearly 10 percent higher return on equity (difference of three percentage points).
“Nordnet has built a more advanced tech stack (evidenced by less downtime); and, perhaps most importantly (but unquantifiable), has a culture that seemingly is an order of magnitude times more forward-leaning.”
However, Koria and the Protean team recognize a “non-negligible risk” of declining profits. “A conceivable scenario involves a reduction in interest revenues, and commission revenues growing at insufficient clips to help offset, while OpEx growth sits at 10 percent in both (acknowledging that Nordnet’s OpEx growth seems to be more offensive-oriented than Avanza’s),” explains Koria. “Throw the recent announcement of “Montrose by Carnegie” about to launch into the mix,” he elaborates. “If its business plan had the title “how to eat Avanza’s breakfast and lunch” we would not be surprised. Montrose is targeting the semi-rich and online-savvy Swedish customer group, with a team that so far largely consists of ex-Avanza employees.”
“Sounds like a very reasonable market-neutral pair trade to us.”
While Protean has a preferred long position, they are cautious about the risks associated with interest rate movements affecting net interest income, according to Koria. Simultaneously, the team has a preferred short position but remains cautious about the associated risks on the upside as well. “Sounds like a very reasonable market-neutral pair trade to us.” The pair has already moved quite a lot in Protean’s favor, with both Nordnet and Avanza trading at a price-to-earnings multiple of 17x and Nordnet still enjoying a 10 percent higher ROE on 2024 consensus estimates.