Gustav Ekhagen and Niklas Edman manage the Carnegie High Yield credit fund, which focuses primarily on high-yielding Nordic corporate bonds. Since its inception over three years ago, the fund has delivered a 13% return, with a 9% return this year. The goal is to provide “relatively high returns with limited risk and volatility.”
Currently, the average coupon rate in the fund’s bond portfolio is just under 7% annually. Edman states, “In a normal interest rate environment going forward, we should be able to generate around 5-7% per year, making it an interesting complement to an equity portfolio.”
While bonds are generally considered safer investments than stocks, market volatility has been prevalent in recent years. Companies like Heimstaden Bostad and SBB faced challenges in the real estate sector, causing their bond values to plummet in the secondary market. For a fund holding such securities, this poses a temporary setback, with the final return determined by the ability of companies to continue paying coupon rates and repaying the bond when due.
The success story of Heimstaden Bostad highlights the fund managers’ strategic investment decisions. They assessed the risk of missed interest payments in Heimstaden Bostad as low, enabling them to take a contrarian position in the market. In 2022, they purchased hybrid bonds in the company at around 75% of the repayment amount. The following year, they acquired more bonds at nearly 40% of the nominal value, resulting in over 100% returns.
Edman emphasizes the potential for lucrative investment opportunities when foreign investors panic-sell without understanding local conditions. The managers stress that successful investments like Heimstaden are rare and should be viewed as enhancements to the portfolio, rather than the norm. Their focus lies in identifying discrepancies in returns offered by companies with similar creditworthiness.
The fund’s strategy revolves around limiting risk exposure, favoring companies with strong finances and potential for early bond redemption. Avoiding firms with underlying issues like SBB, the fund managers remain cautious about the real estate giant’s refinancing challenges, likening the bond market to a musical instrument where confidence fuels opportunities for borrowing.
Despite the challenges faced by some real estate companies in issuing new bonds, the credit market is now open to companies, with a surge in bond offerings. The increased risk appetite has led to expensive credit papers for real estate companies, prompting the fund managers to reduce their exposure to the sector.
In periods of market turmoil, high-yielding bonds may appear attractive, but the managers prefer a stable environment. Edman explains, “The best scenario for us is stability. Companies should fare well without getting any wild ideas. The status quo provides predictability where we receive the coupon payments consistently.”
In conclusion, Gustav Ekhagen and Niklas Edman’s strategic approach to credit fund management showcases their ability to navigate market challenges, identify lucrative opportunities, and prioritize risk management. Their success with Heimstaden Bostad exemplifies their expertise in analyzing bond investments and underscores the importance of a disciplined investment strategy in achieving favorable returns.