September was a weak month for the fund and the European high yield market. Geopolitical uncertainty and a significant rise in government bond yields in both the US and Europe have made investors more selective and risk averse, while credit spreads have widened. This has led to negative price movements in both the market and the fund.
The return in September was also negatively affected by selling pressure in Heimstaden and a loss in TalkTalk. The selling pressure in Heimstaden followed media reports that Alecta is looking to sell its stake in Heimstaden Bostad. We believe the market reaction is excessive, as the company has been very clear that any transaction will only take place if it creates value for Heimstaden and supports its creditworthiness. In TalkTalk, the investment was based on an ongoing sale process in which the debt appeared attractively priced. In mid September, several bidders withdrew and the expected sale price fell significantly, which resulted in a loss for the fund. We would have preferred to avoid such a loss, but from time to time this will occur in high yield investing and is part of the risk investors are compensated for.
Apart from TalkTalk, the decline was driven by lower market prices rather than weaker performance in the companies we own. The most important factor for the fund is that the underlying companies continue to perform well operationally and financially. The bonds continue to pay interest and the companies’ current earnings have contributed positively during the month, partly offsetting the decline in prices. During the month, we have also purchased bonds where prices have fallen without any change in the underlying fundamentals of the companies. The portfolio consists of high quality companies with solid balance sheets and good flexibility in their capital structures.
Periods of market uncertainty will occur from time to time in the high yield market, but they can also provide attractive entry points for investors with a long term perspective. We expect market conditions to normalise over time.
At month end, the fund had a weighted average coupon of 9.74% and a yield to maturity of 12.29%.
*Before costs related to management. Will be subject to change from day to day, and is therefore no guarantee of the return in the period for which it is calculated.
Sincerely
Øivind Thorstensen & Simen Aarsland Øgreid
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