Stockholm (HedgeNordic) – After enduring two years of single-digit losses, Chelonia Market Neutral experienced its best monthly return in February since launching in late 2017. Under the stewardship of Magnus Angenfelt, the fundamentally driven market-neutral strategy achieved a 6.0 percent gain in February, primarily driven by strong performance from three core holdings: brand company New Wave, debt collection company Hoist, and defense group Saab.

“February was our best month in terms of returns since the inception of Chelonia, despite unfavorable conditions for smaller companies,” remarks Angenfelt. “While larger companies on the Stockholm Stock Exchange continued to develop strongly with an increase of four percent, smaller companies saw a decline of roughly the same magnitude,” he adds. “Had the fund’s holdings mirrored their respective indices, the fund would have incurred a strong minus in returns for the month.”

“February was our best month in terms of returns since the inception of Chelonia, despite unfavorable conditions for smaller companies.”

Chelonia Market Neutral’s February performance reflects strong gains from its largest long positions. The largest holding in debt collection company Hoist Finance going into February returned 23.7 percent during the month, while Sweden-based New Wave Group, the second-largest position, surged by 36.5 percent to become the fund’s largest holding. The fourth-largest position in the defense group Saab returned 21.3 percent, and the third-largest position in Securitas also contributed positively by gaining close to ten percent.

New Wave-Nike Pair Trade

With New Wave Group, known for its portfolio of sports brands within different areas, emerging as Chelonia Market Neutral’s flagship holding, Magnus Angenfelt made the strategic decision to neutralize some of the fund’s exposure to the sector by increasing its short position in the American sports giant Nike. “It might seem like a bold move. Nike is a fantastic business success and widely mentioned as one of the most well-managed companies in the United States,” notes Angenfelt. Yet, despite slightly trailing behind New Wave in growth and margin metrics, Nike commands an earnings multiple of around 30, more than double that of New Wave’s valuation.

Despite the rich valuation, this pair bet “also requires a trigger to justify a short position,” contends Angenfelt. “We find this rationale in the shifting dynamics of the footwear market, which makes up just over two-thirds of Nike’s turnover.” A decade ago, the landscape was dominated by a stable and highly profitable oligopoly comprising only four major shoe brands: Nike, Adidas, Asics, and Puma. “The supply considerably more multifaceted now. Names like Merrel, Under Armour, Brooks, Saucony, Salomon, New Balance, Skechers, On, and Hoka, to name a few, have grown into large companies,” he continues. “All in all, the market has become more fragmented at the producer level and can translate into lower margins for Nike et al., along with a deceleration in growth.”

Chelonia’s Small-Cap Exposure

Chelonia Market Neutral seeks to maintain market-neutral equity exposure by building a relatively concentrated portfolio of about 25 long positions focusing on attractively valued Nordic small- and medium-sized companies. Conversely, the short side of the portfolio exhibits greater diversification, with around 125 short stock positions, via individual shorts and market indexes. With Magnus Angenfelt’s deliberate emphasis on smaller-sized companies within the long portfolio, he anticipates a robust performance for Chelonia Market Neutral in the future.

“When the sentiment turns, the impact on the fund’s returns is anticipated to be even more pronounced.”

“The current valuation of smaller companies, on an international basis, stands at its lowest point in 20 years relative to larger counterparts,” notes Angenfelt. “While the broader stock market indices are breaking new records, small caps languish more than 40 percent below their peak prices,” he elaborates. “When the sentiment turns, the impact on the fund’s returns is anticipated to be even more pronounced.”