London (HedgeNordic) – The award-winning Sissener Canopus, one of the top five largest equity hedge funds in the Nordic region, has had a strong start to the year, making 3.7 percent. From inception in April 2012 to December 2023, the fund compounded up to 281 percent (NOK share class) with less volatility than long-only equity indices. As a result, the fund has regularly received The Hedge Fund Journal’s UCITS Hedge performance awards, including most recently the 10-year award for the best performing global equity long-short fund.

The strategy has thrived in bull and bear markets. In 2022, Sissener Canopus made 8.5 percent, of which 7.9 percent came from single stock shorts, including Swedish real estate. Style rotation from growth to value, stock-picking, and tactical index shorts were also helpful in 2022, though index hedges ate into returns in 2023, when the return of 5.5 percent was well below the annualized average of 12.1 percent since inception.

“In 2023, we had 95 percent exposure in single name longs and 5 percent in single name shorts. We learned the hard way that shorts need triggers.”

Jan Petter Sissener

In most years Canopus is basically long-only with hedges. “In 2023, we had 95 percent exposure in single name longs and 5 percent in single name shorts. We learned the hard way that shorts need triggers. The index hedges usually detract from returns during a narrowly rising market like 2023,” says founder, Jan Petter Sissener. Selling various option structures contributed about 2 percent gross to returns in 2023. 

Cash Cows

The 2022 increase in value exposure was well-timed, and despite expected rate cuts in the second half of 2024, Canopus has not yet rotated the portfolio from value to growth. “The emphasis is still very much on cash-generative companies paying dividends. The tech weighting has increased somewhat, but mainly in European names on lower valuations,” points out Sissener. 

“The emphasis is still very much on cash-generative companies paying dividends. The tech weighting has increased somewhat, but mainly in European names on lower valuations.”

Cheap Energy Equities

Energy equities are the largest long sector at 30 percent.  Now, in-house energy expert, Andrew Dobbing, likes oil majors and selected oil services names: “Cash returns of 10 percent, from dividends and buybacks, are growing and dividends could increase 5-10 percent per year, even with a flat oil price. We are confident about earnings upgrades in oil services, which could beat consensus based on orders and pricing power. Moreover, earnings visibility is getting better, based on a shortage of subsea vessels and rigs”. He expects that these earnings upgrades are most likely to coincide with valuation multiple expansion: “BP and Shell trade on PE ratios around 4-5, and oil services companies can be on similar EV/EBITDA multiples,” says Dobbing. Elsewhere in energy, the strategy owns two Canadian uranium miners, which benefit from higher uranium prices partly related to the energy transition story.

ESG 

The fund reports under SFDR 8. It is comfortable with carefully selected oil and gas companies. “Energy exposure is in firms with more modern equipment that reduces the risk of oil spills in the drilling and transport of oil. Some oil companies with a poor environmental record could be off limits,” explains energy specialist, Andrew Dobbing. Some miners are ruled out by the ESG policy ruling out coal exposure above 30 percent (in line with the Norges Bank Investment Management policy). The fund has owned Swedish miner, Boliden, but now finds the equity relatively highly valued, partly due to its green energy transition metals exposure – 40 percent copper, 40 percent zinc and some nickel and precious metals. “There is also a premium for Nordic and developed market exposure, but equally it has older lower-grade mines, and older smelters that need more capital spending,” says co-manager, Nicholas Salbu. Global diversified miner Rio Tinto is seen as better value for now.

Shipping and tankers

Oil tankers are also good value thanks to declining supply. “The supply of vessels is near a 25-year low, with only 4 percent of the fleet replaced each year, and a two-to-three-year building lag, while many are being scrapped. This means that supply is not being replaced fast enough. Replacement ratios (ships on order versus the existing fleet) around 5 percent are lowest for tankers and dry bulk, but much higher for LPG, LNG and car carriers. Aging fleets that increasingly do not meet higher environmental standards, including EU emissions rules, also screen out a large share of fleets,” explains Jan Petter Sissener. 

Insurers and financials

Banks and insurers are also generally valued at a discount. Sissener has held Norwegian insurer, Storebrand, from the start in 2012, and remains constructive: “Storebrand is hugely overcapitalized. It has a 45 billion market cap, is 10-12 billion overcapitalized and will generate 6 billion by 2026. A growing pension market, and inflation, are positive for P&C [property and casualty insurance]. It also owns a small bank. It could be taken over by a Swedish buyer, or another acquirer from Germany or Switzerland, any of which would find asset management synergies,” says Sissener.

In general, both the equity fund and the credit fund have moved to selected larger systemically important banks. There can be small exceptions: a contrarian long position has been taken in a Swedish bank with commercial real estate exposure and high short interest. 

Growth 

Novo Nordisk was also exited for valuation reasons, and Canopus is now tackling obesity from a different angle through healthcare technology company, DexCom. “One perception is that treatments such as Novo’s Ozempic reduce the need for continuous glucose monitor (CGM) systems, monitors and sensors, which provide real time monitoring of blood glucose levels. However, we are of the opinion that taking obesity drugs increases awareness and the desire to track glucose levels,” says Steen.

There is however some appetite for richly valued MAG7. Microsoft is currently the main AI play owned. “It is growing share in cloud, working closely with Open AI and launching a 365 Copilot chatbot with Open AI,” says co-manager, Peder Steen. And Canopus has intermittently traded Nvidia since 2016. “Over that period, it has evolved from gaming GPUs to crypto mining and then AI. Most recently, we owned Nvidia between share prices of 250 and 410 and sold because the valuation did not stack up,” adds Steen. 

But generally, European semiconductor makers, such as Norway’s Nordic Semiconductor, the Netherlands’ NXP, and France’s ST Micro, can trade on much lower valuations (e.g. PE of 10 for ST) than US names and the latter two offer strong exposure to industrial consumer IT such as the autos market.

Norwegian Special Situations

More event-driven longs include Oslo-listed classified advertising group, Schibsted, which has for years traded at a discount to its estimated sum of the parts valuation. It has finally divested Adevinta and other units so that news media will be only 10 percent of revenues going forward. Jan Petter Sissener judges that, “The stub of the business, in pure play online advertising, is much easier to analyse, trades at a discount to peers, and we expect a takeover”.

Meanwhile, Norway’s largest salmon farmer, Mowi, has consolidated the sector and benefited from tight supply in the salmon market, which has become much more orderly since the boom/bust days up until 2011/2012. “Though salmon is more expensive than animal meats, it still finds pockets of growth, and has pricing power to pass through grain and wheat costs,” says analyst Nicholas Salbu.

This article is part of HedgeNordic’s Nordic Hedge Fund Industry Report.