For most of us, it's probably been a slightly unusual summer. The majority of us have been holidaying in Norway and have probably spent a lot of energy being annoyed by the changeable July weather. In that sense, the summer has been a bit of a wake-up call and a reminder of the storms that have affected world markets over the past six months.
The downturn we experienced in March has been replaced by an equally strong upturn, although the macroeconomy has still not been repaired. I'm thinking in particular of the stock market. The fixed income market has developed well throughout the summer, but I still think it's cheap compared to how high the effective interest rate still is. Particularly in a historical context, but also compared to Europe and the US.
Another interesting observation is that in the second quarter reporting season, companies have reported weaker earnings, while at the same time cutting costs enough to deliver better results than expected. Combined with large financial rescue packages, large amounts of added liquidity and zero interest rates, the outlook has changed significantly. However, Covid-19 will continue to be an issue in the time to come. Therefore, we will continue to pursue our strategy of investing in quality companies that have a solid balance sheet, earnings visibility and that will not be directly affected by Covid-19.
This strategy has proved to be solid. We have recovered more than we lost. Today, the fund is priced at 106.87, giving a return of 3.9 per cent so far this year and 7.1 per cent over the past 12 months. Since bottoming out on 24 March, Kraft Høyrente has risen 31 percent.
The road ahead will be just as exciting. We have constructed a portfolio that will deliver 5-7 per cent on average over the next three to five years. The portfolio includes quality companies such as Intrum, Norsk Hydro, Boreal, Gaslog, AKSO and Ocean Yield. "The portfolio companies have proved to do very well during what has been by far one of the most challenging quarters ever.
There is still a discount in the portfolio. The weighted average loan is trading at approximately 96.5 per cent of nominal value and with an attractive effective interest rate of 6.5-7 per cent. We will continue to add quality companies to the portfolio, but in the coming weeks the issue market will be most attractive, as new issues are carried out at significantly higher interest margins than before the corona crisis.
Some of the highlights from the summer were:
AKSO announced a positive profit forecast and consolidation with Kværner. We bought AKSO at 68-70 per cent of face value. Today it is trading at 95-98 per cent.
Intrum reported a positive profit warning and at the same time raised EUR 600 million in new loans. "We bought Intrum at 77 per cent and today the loan is trading at 96 per cent.
Gaslog announced the refinancing of a USD 1.1 billion bank loan. This means that the next refinancing is the bond maturing in 2022.
As a result, the next refinancing is the bond that matures in 2022. We bought Gaslog at 65 per cent and today it is trading at 99 per cent.
These loans contribute to a strong improvement in the quality of the portfolio and, not least, they provide an attractive discount and effective interest rate in the portfolio.
The main theme for Kraft Høyrente is to think long-term, continuing the strategy of adding quality, while building a portfolio that will deliver solid risk-adjusted returns over the next three to five years.
It's an exciting time ahead of us!
Regards
Øivind Thorstensen
