For unit holders,
Since we are now in a period of extreme volatility, which is affecting absolutely all markets, it is appropriate to publish a new manager's letter in which I provide an update on the status and the time ahead.
In recent months, we have observed that most of the world's equity indices have corrected sharply downwards, and we are now approaching pre-corona crisis levels in 2020. In addition, the global fixed income market has undergone a sharp correction. For example, US High Yield is down 15 per cent so far this year, and European High Yield is not far behind. Fixed income funds (IG funds), which represent the highest credit quality (and therefore the lowest interest rate), are down between 8 and 12 per cent so far this year. These are just a few examples of the extreme volatility that characterises the market.
Of course, we all know this first-hand, but under such conditions, it's important to remind yourself what drives these fluctuations, what the fluctuations really mean - and not least, that sooner or later the volatility will end.
Today's volatility is driven by market risk, but it is the same risk that also creates opportunities. Although today's volatility is high, there is a significant difference between March 2020 and the current situation. Back then, the market was hit by a creeping pandemic that shut down most of the world, while this year it is war that has characterised the market. The correction we are in is largely about inflation and possible recession. The advantage this time, unlike during the corona crisis, is that we know what we're facing and what measures must be used to overcome it. The market is undergoing a major readjustment, and the big question is when will it be finished? I think there are many indications that we are not far away.
In the management of Kraft Høyrente, we are very keen to eliminate various types of risk, such as interest rate and currency risk, minimise operational and financial risk - and focus on credit risk as the most important indicator. This is what ensures that we get our principal and interest back.
We can control most of these elements, but we cannot control market risk. It's out of our control, but it's also the least dangerous risk. Market risk is mainly about day-to-day fluctuations, and without these fluctuations there would be no market - and these are the situations we need to capitalise on, where risk and return have become entangled.
At Kraft Høyrente, we are very well positioned to capitalise on these fluctuations for the benefit of our unitholders. We will focus on utilising the market situation to buy quality bonds, which over time will provide solid risk-adjusted returns.
Finally, I would just like to remind you of the following:
- Kraft Høyrente has a solid portfolio that is well exposed in the right sectors. The portfolio consists of quality companies with solid earnings, strong balance sheets, long contracts and predictable cash flows.
- Approximately 50 per cent of the portfolio will mature by 2024, which means that the portfolio is likely to deliver solid returns during this period.
- No matter how much the market fluctuates, it's very important to never forget that bonds are legally binding agreements, which state that the loan must be repaid on the due date.
- We have a lot of quality bonds in our portfolio. The disadvantage of investing in such bonds is that they are very liquid, which means that during market turbulence they are the first to be sold and thus fall in price - but it is also these bonds that recover fastest when the turbulence is over.
Kraft Høyrente currently has a portfolio with an effective interest rate of 10 per cent and an average price of 95 per cent of the nominal value. The portfolio has a weighted maturity of approximately 3.35 years. This is a unique opportunity that usually disappears very quickly when the correction is over.
As usual, we follow the market closely and will of course update our unitholders if the situation changes.
I wish you all a great summer!
