"It's very pleasing that our high-yield funds are delivering as expected again this year. So far this year, Kraft Høyrente has delivered a return of 10.43 per cent, while Kraft Nordic Bonds has delivered 7.28 per cent.
The year we are about to leave behind can be described as a fascinating year, characterised by a lot of volatility. We've been through banking crises with subsequent bankruptcies, persistent and escalating geopolitics, a sharp decline in inflation, and what looks like a peak in interest rates after 18 long months of rate hikes. The Federal Reserve (Fed) has recently signalled a change in monetary policy, and three to four interest rate cuts are now expected next year. This has had an immediate and strong effect on the markets, even though they had already started to price in interest rate cuts in 2024. This signalling effect will affect absolutely all asset classes, not least risk appetite. This will largely shape the outlook for an exciting 2024!
How are we positioned in relation to the changes in monetary policy?
We currently have two funds that both contain quality bonds with low credit risk, but with an unusually high effective interest rate. For Kraft Nordic Bonds and Kraft Høyrente, the interest rates are currently 15 and 11 per cent respectively. "The reason for the high effective interest rates is that we have bought loans, especially Swedish property loans, at very low prices. In addition, we have added loans with historically high fixed interest rates. A change in monetary policy, which in turn results in lower interest rates, will probably lead to a significant recovery in property bonds and fixed-rate bonds. This combination means that both funds are perfectly positioned to deliver solid risk-adjusted returns over the next three to four years.
Both Kraft Nordic Bonds and Kraft Høyrente have over time positioned themselves in Swedish property, but with a focus on by far the best property companies, such as Heimstaden, Balder, Castellum and Sagax. These investments represent the best risk-adjusted investments our funds have made, as they involve extremely low risk on the principal, with a very low loan-to-value ratio.
All of these companies have demonstrated solid operational and financial performance over the past 18 months. In the same period, they have raised approximately SEK 50bn in new equity, in addition to significant volumes of bank financing. Despite media speculation, these companies have disproved all tabloid claims by easily demonstrating that they have access to capital through equity, bank and bonds.
Home town
For example, Heimstaden has over time become our largest position. This is one of Europe's largest residential landlords, with a unique property portfolio strategically located in a strong rental market in Northern Europe. The company is currently mainly owned by Ivar Tollefsen and Swedish pension funds such as Alecta, Folksam and Ericsson. As of Q3, the company has raised over SEK 20bn in equity and over SEK 40bn in bank financing over the past 18 months, and has sufficient liquidity to handle all debt maturing until 2025. This runway will increase from quarter to quarter as the company plans to sell SEK 20bn of non-core real estate over the next two years and move more bond debt into banks. In addition, the company has a financial policy to maintain a BBB rating, which implies that the owners will inject more equity if needed.
Minimal credit and maturity risk
We have purchased bonds that make us a senior lender (not equity), with effective interest rates from 10-12 per cent, and a very low LTV of approximately 30-40 per cent. Our largest Heimstaden investment (140 MNOK) matures in April 2026, so this is the next maturity in line that will be handled. Considering that the company has hedged all maturities until 2025, we consider this to be an unusually well-priced bond with minimal credit and maturity risk. This investment, together with other smaller positions with different maturities, will add good returns to the funds over the next three to five years.
We also have exposure to Balder, Castellum and Sagax. These bonds have an effective interest rate of 8-10 per cent. What Heimstaden and Sagax have in common is that they have solid owners with close bank connections and strong underlying operations, which gives these companies access to capital. Together with Heimstaden, these are what we consider to be the best risk-adjusted investments in the portfolios right now. We have to go back to 2007 and 2008 to find the equivalent. It should be noted that Balder, Castellum and Sagax shares have all increased by 50-70 per cent recently, which demonstrates the confidence they have in the market.
Finally, we have exposure to solid companies that have issued bonds with historically high fixed interest rates. Interest rate duration is approximately 2.5 in Kraft Nordic Bonds and 1.5 in Kraft Høyrente, which means that one of the drivers will be lower interest rates. In total, this gives the funds all the prerequisites for delivering a solid performance in 2024.
We at Kraft Fondene will soon be taking a long-awaited Christmas holiday, and we would like to take this opportunity to thank all our unitholders for their cooperation in 2024 - and not least for the trust you have shown in our management.
We wish you all a very Merry Christmas.
Regards
Øivind Thorstensen and Simen Aarsland Øgreid
