At the turn of the year, there was a clear shift at the US Federal Reserve, which increased expectations of interest rate cuts in 2024. So far, there have been no interest rate cuts in the US, due to a strong economy and solid labour market. In the eurozone and Sweden, however, we have already seen interest rate cuts from central banks. Nevertheless, the first half of 2024 has been a strong six months for risk, and we expect market interest rates to fall over time, which will be positive for the funds.
Property bonds
In previous manager letters, we have written about the positions that both funds took in Swedish property. Part of the return this year comes from these investments, where the effective interest rates have gone from 10-12 per cent to around 5-6 per cent on senior loans. For example, Balder recently issued a 5-year bond in SEK with a credit spread of 185 basis points above the risk-free rate, which indicates a fresh market. We have taken the opportunity to reduce our holdings in Balder and sold our positions in Castellum and Sagax.
Heimstaden Bostad / Heimstaden
However, we still retain a large exposure to loans in Heimstaden Bostad and Heimstaden, as we expect the credit spread to be further reduced shortly. Bostad has increased liquidity by selling properties for around SEK 2.5 billion, which is 30 per cent above book price. The company also wrote up property values in the first quarter of this year, and we therefore expect them to manage to retain their Investment Grade rating. A short-term trigger here is that we expect the company to "roll" its subordinated loans into new loans, which will be positive for the funds' exposure.
The way forward
Despite good returns so far this year, we have managed to keep the effective interest rate at the same level as at the beginning of the year. For Kraft Høyrente and Kraft Nordic Bonds it is 12 per cent and 15 per cent respectively. We have managed to maintain this through new investments in high-quality property companies with relatively low loan-to-value ratios, in addition to other exciting new investments. We expect these to contribute to good risk-adjusted returns for unitholders over the next few years. We are now approaching the summer holidays, which has historically been a good time to be exposed to fixed income funds. We wish all unitholders a very good summer holiday and thank you for your cooperation!
All forms of investment involve a degree of risk. Kraft Finans emphasises that investments in the Kraft Funds will always involve uncertainty about future returns. The change in value may be large, small, non-existent or negative and in certain extreme cases virtually worthless. Historical returns are no guarantee of future returns. The effective interest rate may change from day to day and is therefore no guarantee of the return for which it is calculated. The return depends, among other things, on general developments in the securities market, the fund's risk profile, costs in the fund and the manager's general success in selecting shares in the portfolio. The management of the Kraft Funds will be carried out on a discretionary basis and the information in this document is designed accordingly, but must not be understood to provide any form of guarantee or promise of future returns. We recommend all customers to read the prospectus and KIID before investing.
