HALF YEAR REPORT - IF THE PRICE IS RIGHT DISRUPTIVE INNOVATION
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HALF YEAR REPORT
DISRUPTIVE
INNOVATION
IF THE PRICE IS RIGHT
JULY 2014 | www.skagenfunds.com
LEADER
Sit tight and
enjoy the ride DISRUPTIVE
INNOVATION
At the time of writing, under the Norwegian midsummer’s night sun, our equity
funds are setting unit price records, the bond funds are delivering very strong
results and most of the global economic indicators are pointing upwards. This
is a moment one should allow oneself to enjoy, since just three months ago
we were asking clients to sit tight.
It is also important to remember that we have do not necessarily create value for sharehold- IF THE PRICE
not done anything differently from before. But ers. The market constantly seems to forget this, IS RIGHT
it is during times like these that we are better with the outcome that hot listed stocks are often
rewarded for our investment philosophy. The overpriced. Moreover, it is also interesting to see We like to invest in creative,
global equity markets continued their upward that a lot of innovation is happening within well good quality companies, but
trajectory in the second quarter delivering a return established businesses. not if we have to pay too much
of 5.7 percent in euro terms. Unlike the previ- for them. We are currently living
ous quarters, and contrary to what newspaper in exciting times of rapid tech-
headlines had predicted at the start of the year, Picking corporate bonds from the global orchard nological development and no
emerging markets have performed equally well The new bond fund SKAGEN Credit is our latest one yet knows where this will
so far this year (+6.8% in euro) having made up innovative contribution, where we offer our cli- lead us. But as was the case
a lot of the ground lost in the second quarter. ents the opportunity to invest in global corpo- during the Internet bubble at
The second quarter was also eventful on the rate bonds. Since capital requirements for the the beginning of the 2000s,
political front. The most significant occurrence world’s banks have increased over the last couple we must keep a cool head and
was the election victory of Narendra Modi and of years, we have seen that the bond market has know that we are investing in
his BJP party in India. The Indian stock market is changed. It has become more common for compa- real and affordable innovation.
up 25 percent so far this year, so expectations nies to prefer to lend money directly in the capital
of reform and economic development have left markets instead of going through banks, which
their mark on the market. Now it is up to Modi and has led to more investment opportunities. To
his government to deliver. Further to the east in benefit from these opportunities, SKAGEN Credit
Thailand, the military took power, but the stock offers easy access to a well-diversified portfolio
market continued its rise. This was the twelfth across sectors and regions. The fund follows the
coup d’état since the establishment of a consti- same investment philosophy as our other funds
tutional monarchy in 1932, so in a sense, it was and selects the best bonds irrespective of credit
business as usual. Read more about the general quality, sector or country. Since companies are
markets and their impact on our portfolios from at the heart of the investments, the managers
page 16 onwards. are also able to take advantage of the combined
experience and analysis of SKAGEN’s equity fund
Real and affordable innovation managers. Read more about the fund on pages
The theme of this market report is “disruptive 12 and 13.
innovation - if the price is right.” This chimes well
with our value-based investment philosophy. We Wishing you a great summer!
typically like to invest in creative, good quality
companies, but not if we have to pay too much for
them. We are currently living in exciting times of
rapid technological development and no one yet
knows where this will lead us. But as was the case
during the Internet bubble at the beginning of the
2000s, we must keep a cool head and know that
we are investing in real and affordable innovation,
and not in just more ‘emperor’s new clothes’. We – Casper Meussen
have seen that companies that change the world Head of International
2 SKAGEN FU NDS HALF Y EA R REPORT | JULY 2014
CONTENT
LEADER DISRUPTIVE PORTFOLIO
Sit tight and enjoy the ride >2 INNOVATION MANAGERS´
Casper Meussen
Some solar stocks will shine
Comment by Søren M. Christensen
>5 REPORT
SKAGEN NEWS Technological quantum leap
creates hopes and dreams >6
INTRODUCTION
SKAGEN funds’ performance >4 Trends in the digital era An eventful quarter > 16
Fund returns 2Q 2014
Creating value through destruction > 8
He who works hardest wins > 11 Investing in breakthrough companies EQUITY FUNDS
Interview with Johan Swahn – only if the price is right SKAGEN Vekst > 20
A record quarter
Who would you lend your money to?> 12 More than communication > 10
New corporate bond fund, Design and technology in SKAGEN Global > 23
SKAGEN Credit emerging markets A good quarter
Notices > 14 SKAGEN Kon-Tiki > 26
New year’s conference 2015
and people moves
FINANCIAL Best in almost 4 years
STATEMENT SKAGEN m² > 29
Half year accounts > 43 Adjustment paid off
FIXED INCOME
FUNDS
Fixed income report > 32
SKAGEN seeks to the best of its ability to ensure that The report should not be perceived as an offer or Stronger measures needed
all information given in this report is correct, how- recommendation to buy or sell financial instru-
ever, makes reservations regarding possible errors ments. SKAGEN does not assume responsibility SKAGEN Tellus > 33
and omissions. Statements in the report reflect the for direct or indirect loss or expenses incurred
Good performance, good outlook
portfolio managers’ viewpoint at a given time, and through use or understanding of the report. SKA-
this viewpoint may be changed without notice. GEN recommends that anyone wishing to invest in
our funds contacts a qualified customer adviser
by telephone on +47 51 80 38 58 or by email at
contact@skagenfunds.com.
6 20
Serial founder Elon Musk is one of the foremost exponents The second quarter was an eventful one on the political front. The election victory of Indian prime minister Narendra
of disruptive innovation. Pictured here in front of a model of Modi brings hope of less bureaucracy and economic growth. The Indian market is up 25 percent year to date.
his Space Taxi.
S K A G E N F U NDS H A LF Y E A R RE PORT | J U LY 2 0 1 4
3
SKAGEN FUNDS
SKAGEN FONDER
Returns
The following tables show the returns for SKAGEN’s funds
versus their respective benchmarks in euro. The figures are
updated as of 30.06.2014
Equity Fund Fixed Income Fund
SKAGEN GLOBAL SKAGEN VEKST
Manager: Kristian Falnes Start: 7 August 1997 Managers: Ole Søeberg och Geir Tjetland Start: 1 December 1993
Return past 12 months Average annual return since start Return past 12 months Average annual return since start
30 30 30 30
19.7% 18.9%
20 16.9% 20 20 20
16.4% 15.5% 14.9%
9.9%
10 10 10 10
3.2%
0 0 0 0
-10 -10 -10 -10
* The benchmark index prior to 1/1/2010 was the MSCI World Index * The benchmark index prior to 1/1/2010 was OSEBX and prior to 1/1/2014 it was
OSEBX / MSCI AC (50/50).
SKAGEN KON-TIKI SKAGEN m²
Manager: Kristoffer Stensrud Start: 5 April 2002 Managers: Michael Gobitscheck and Harald Haukås Start: 31 October 2012
Return past 12 months Average annual return since start Return past 12 months Average annual return since start
30 30 30 30
20 20 20 20
15.9% 15.9%
10 8.9% 10 8.0% 10 10 7.5%
5.7%
2.8%
0.1%
0 0 0 0
-10 -10 -10 -10
SKAGEN TELLUS Unless otherwise stated, all perfor- The half year financial statement was
mance data in this report relates to originally prepared in Norwegian. The
Manager: Torgeir Høien Start: 29 September 2006 class A units and is net of fees. translated version is published with
reservations regarding possible errors
Return past 12 months Average annual return since start
Unless otherwise stated all figures and omissions as well as erroneous
10 10 quoted in this report are in euro, except translation. In case of conflict between
for the half year financial statement, the Norwegian accounts and the En-
5.81% which is in Norwegian kroner. glish translation, the former shall pre-
5 3.39% 5 3.91% vail. The Norwegian version of the half
1.57% SKAGEN Funds only has authorisation year financial statement is available at
0 0 to market its money market funds SKA- www.skagenfondene.no
Institusjon in Norway and SKAGEN
-5 -5 Krona in Sweden. SKAGEN Avkastning
has a limited market area. Information
regarding these funds is included in
-10 -10
the official accounts but is excluded
elsewhere.
* The benchmark index prior to 1/1/2013 was Barclay’s
Capital Global Treasury Index 3-5 years.
4 SKAGEN FU NDS HALF Y EA R REPORT | JULY 2014
COMMENT
Some solar stocks will shine
On the whole, solar energy stocks have performed well over the past 12 months, and there
are good indications that this development will continue.
– Søren Milo Christensen
Portfolio Manager
The costs associated with producing solar energy have fallen Sun on sale
sharply and will continue to fall. At the same time, the number The enthusiasm for solar shares abated faster than share prices
of markets where this type of energy is competitive is growing fell. The consensus in the market was that the industry would
rapidly – without subsidies. Solar energy is still an extremely forever be dependent on subsidies and would never create value
small part of the overall energy market, however, which presents for shareholders. This pessimism pushed the valuation of solar
opportunities for significant growth. stocks right down, while at the same time creating opportunities
As value investors we are undeniably tempted when we see for those of us who maintained a value-based philosophy. Solar
that opportunities for substantial growth among manufacturers stocks started selling at sales prices in 2013.
with a sustainable cost advantage do not appear to be fully priced The interesting thing about solar stocks is, of course, that after
in to the current share price. That is when these stocks can be several years of extremely strong growth, solar energy continues
perceived as being undervalued. to remain a negligible proportion of global energy consumption.
Production costs for solar energy continue to fall, driven by tech-
Value calculator nological developments – this has been precisely the case for
Strong growth is rarely synonymous with high equity returns. other products such as IT. At the same time, efficiency continues
For investors equipped with a value-based calculator it is seldom to rise. Oil, which is often used as a frame of reference for energy
attractive to invest in shares with extremely high growth reinforced sources, is its polar opposite as it becomes increasingly more
by a good story. The reason is not that there is anything wrong with expensive to extract new resources.
high growth per se, just that the market generally has a tendency This dynamic is very interesting given that solar energy is
to over-price this type of stock. already competitive in a number of regions –entirely without the
The most classic mistake the market makes is to forget what it need for subsidies.
costs companies to produce growth. Companies with a low return
on investment and high growth will – sooner or later – be forced Starting to see the light
to obtain new capital to finance future growth. This in turn dilutes Although many stocks in the sector have already increased in
existing shareholders. value, there is still a great deal of scepticism priced in. There are
still interesting opportunities to be found as long as one steers
Cloudy skies clear of the parts of the value chain where new capacity takes time
High growth was also the norm among solar-related companies and where it is possible to have a cost advantage. It is worthwhile
prior to 2011. Profitability was unnaturally high, driven by sub- remembering that the pricing of individual stocks varies greatly
sidies which lifted demand quicker than new production could and many companies have high risk as a result of high debt levels.
appear. As expected the high profitability eventually led to new One example of a company where the opposite is true is OCI,
capacity. The result was a drop in the price of polysilicon, for a Korean polysilicon manufacturer. The company appears to be
example, which is a central component in solar panels. in the right part of the value chain, has the right cost structure
The same thing happened to earnings, share prices and thereby and manageable debt. Not bad when seen alongside its attrac-
the valuation of a large number of polysilicon manufacturers. One tive valuation.
such example is the Korean company, OCI.
POLYSILICON PRICE ($/KG) SHARE PRICE VERSUS BOOK EQUITY FOR OCI
80 80
60 60
40 40
20 20
0 0
Jan. 11 Jan. 12 Jan. 13 Jan. 14 Apr. 14 Jan. 11 Jan. 12 Jan. 13 Jan. 14 Apr. 14
Source: Bloomberg Source: Bloomberg
S K A G E N F U NDS H A LF Y E A R RE PORT | J U LY 2 0 1 4
5
DISRUPTIVE INNOVATION
Technological quantum leap
creates hopes and dreams
Technological breakthroughs and successful digital products give rise to the conviction that companies
will need to operate in an entirely new way in future.
– Christian Jessen
Communication Manager
Experts in the digital economy properties. By way of comparison, it has taken Hilton 93 years to
are again emphasising that the accrue similar capacity in the hotel market.
growth of the internet is lead- Some companies look upon marketing as something only weak
ing to radically different busi- companies do. WhatsApp, for example, profiles itself as never
nesses which are closer to the having spent a penny on marketing. According to David Rowan,
customer, faster to market and WhatsApp maintains that if you have the right product at the right
without any suffocating ties to time, it can be sold on the web without the need for crutches and
the past. support.
SKAGEN is following the The cult of the entrepreneur as the genius innovator who
developments closely. Still, our exceeds all set boundaries has once again taken off. According
perception is slightly different to Rowan many of the tech millionaires he knows have a number
from that of the most fervent of things in common.
David Rowan interviewed about advocates, which you can read “Dyslexia and a certain degree of Asperger’s are often involved.
trends in the digital era.
more about on the next page. They don’t see rules, but rather opportunities,” says Rowan.
David Rowan is editor of the Possibly infected by the enthusiastic mood in his domain,
most influential British technology magazine, Wired. During a he emphasises that Google also pays for exceptionally talented
recent visit to SKAGEN, he spoke about the successes, failures engineers and designers when they buy technology companies.
and what it is that drives successful global entrepreneurs both Sceptical equity analysts from the ‘old’ world can already start
directly and indirectly. to calculate the exorbitant price tag on each and every engineer
“The rug is being pulled out from under the feet of the compa- in companies like Nest Lab and Deepmind.
nies that you are invested in,” states Rowan. “There is exponential The ultimate example is serial founder, Elon Musk, who always
growth in technology. Reality and truths are changing much more starts by setting himself high and extremely visionary goals. He
quickly than previously.” earned a fortune on the payment service PayPal and is currently
A company like Airbnb, which rents out private homes to trav- revolutionising the world with the electric car, Tesla, and cutting
ellers, claims that in just four years it has secured 650,000 rental edge battery technology.
According to Christensen it is a more precise term than Dis-
disruptive notoriously difficult for estab- ruptive Technology.
investing lished companies to reinvent It is only once a new tech-
themselves radically. They are nology has been converted
The terms Disruptive Tech- created to develop and opti- into one or more commercial
nology, Disruptive Innovation mize the market in which they innovations that the actual shift
and Disruptive Investing are are already present, focusing on occurs. Many of the most highly
used interchangeably and have the coming year’s results. regarded companies have not
gained a footing in business “Institutions try to preserve invented the technology, but
and technology literature. The a problem where they are the they use the new technology
term disruptive technology was solution,” says David Rowan. for commercial breakthroughs.
coined in 1995 by Professor The term Disruptive Invest- The invention of the car occurred
Clayton M. Christensen from ing is used about investments gradually before the year 1900.
the Harvard Business School. that are made to be part of the But it wasn’t until Henry Ford
Disruptive in this context latest trends and to be ahead mass produced the lower priced
stands for something new, of the game when entirely new Ford Model T in 1908 that the
which suddenly and wholly puts industries emerge. Disruptive market for horse drawn vehicles
a stop to something else. Innovation is considered to be was disrupted.
6 SKAGEN FU NDS HALF Y EA R REPORT | JULY 2014
Photo: Courtesy of Airbnb
The rise of the room-letting website Airbnb is testament to the growing
popularity of ‘collaborative consumption’ – sharing, swapping and renting
your possessions. They got headquarters to match.
In January Nest Labs was sold The background for the numer- It actually feels like 1999
the exorbitant to Google for USD 3.2 billion ous transactions is the faith when you read newspapers
price of company dollars. The company man- and knowledge that an abun- and follow these markets in
ufactures self-learning ther- dance of innovations and tech- 2014. However, as always,
acquisitions mostats and was founded by nological quantum leaps, par- something real is happening
There has been news almost two former Apple engineers, ticularly within mobile internet, behind the headlines. This was
daily this year regarding yet one of whom, Tony Fadell, is is creating entirely new mar- the case in 1999 too; Amazon,
another mobile technology known as one of the fathers of kets and gives consumers pos- for example, has proved to be
company bought for a mil- the iPod. The company is cur- sibilities that were previously extremely adept at surviving.
lion-dollar, billion-dollar or rently in the process of find- unthinkable. Many spectators are point-
even multi-billion dollar sum. ing an intelligent way to link Does all this sound famil- ing out that the unthought-of
Below are three of the larg- homes and the digital world. iar? If we look back 15 years possibilities that the internet
est transactions that have During its spending spree to 1999, for example, recently created are finally becoming a
occurred this year, as selected in January, Google also bought established internet compa- reality, which the most vision-
by David Rowan from Wired British company Deepmind, nies with an operating loss ar y investors were already
Magazine: which does not yet have any were trading at astronomical seeing back in 1999. All this
In Februar y, Facebook products. The company’s sums. Established companies is occurring via mobile broad-
bought WhatsApp for USD 19 founder and figurehead is were merging left, right and band, tablets and GPS-based
billion. The company’s turn- genius Demis Hassabis who is centre in order to survive in the services.
over is just a fraction of this, counted among the world’s 50 new business world and the
but it has 450 million users, best researchers within arti- ingenious entrepreneurs were
particularly in emerging mar- ficial intelligence and neuro hailed in glossy magazines.
kets. The app provides mobile research. Google allegedly Subsequently the bubble in the
messages and is the most pop- paid USD 400 million for the stock markets burst entirely
ular service in the world. company. from April 2000 onwards.
NOKIA 2007 TOUCHSCREEN
BLOCKBUSTER 1999 STREAMING
KODAK 1975 DIGITAL IMAGE
An engineer employed by Kodak In 1999, the US provider of Nokia had the technology to make
3 dead companies invented the world’s first digi- home movie rental services touchscreen phones, but accord-
tal camera in 1975. This did not Blockbuster was contacted by ing to Rowan they were more con-
History is full of companies that suit the company which made the development department cerned about producing robust
have been wiped out because its living from manufacturing of another company which sug- phones that could tolerate being
they did not exploit technolog- film. Last year Kodak went out gested that Blockbuster start to dropped from a height of two
ical opportunities sufficiently of business after a long and stream films for rent. This would meters. The rest is history.
to create commercially viable painful struggle. prove costly initially, so Block-
goods. David Rowan highlights buster declined. Several years
three well-known examples: later, Netflix took over the mar-
ket and later a number of other
suppliers.
S K A G E N F U NDS H A LF Y E A R RE PORT | J U LY 2 0 1 4
7
NEW INNOVATIONS
CRISIS AS USUAL Something new. Often with worse
performance than existing prod-
ucts but with new functions. Exam-
ple: Tablet computers are replacing
personal computers.
DEVELOPING
INNOVATIONS
Develop existing innovations, such
as curved flat-screen televisions,
which build upon existing flat-
screen televisions.
EFFICIENCY
INNOVATIONS
Challenge established players by
organising more efficiently by, for
example, creating central logistics,
new low-cost alternatives, etc.
Creating value
through destruction
DISRUPTIVE
Companies that change the world do not necessarily create value for sharehold-
INNOVATION
ers. The market constantly forgets this and the outcome is that hot listed compa-
nies are often overpriced. However, sometimes breakthrough companies do make
it through the sluices into SKAGEN’s equity fund portfolios – if the price is right.
– Jonas A. Erikson
Communication Manager
From an investor’s perspective, it is often prob- Yes to change and growth – if the price is right IF THE PRICE IS RIGHT
lematic that listed companies that turn the You do not find many disruptive companies in
industry upside-down become so popular that SKAGEN’s equity funds. Most often, the risk is Corporate history is paved with
their valuation can no longer be recouped. For too high and potential returns too low. SKAGEN disruptive events. These include
example, many regarded the Japanese mobile focuses on identifying undervalued and often innovations such as the tablet
operator NTT DoCoMo, the world’s first broad- slightly misunderstood companies in unpop- computer which replaces the
band operator, as a pioneer in its industry ular sectors and regions with the potential to clunkier personal computer.
segment around the turn of the millennium. increase in value. But there are exceptions. Or it might be the refinement
Why was the company valued at 18 times its “We like investing in fast-growing companies of existing products, such as
book value in the early 2000s? Well, that was and navigating changing environments. But the curved flat screen TVs based
pretty difficult to explain. Especially because price tag must be right and there must be good on traditional flat screen TVs.
the company was operating in a market with low arguments that back up the company narrative,” But it might also be a company
entry barriers for competitors. When the market says Søren Milo Christensen, portfolio manager that makes products or provides
realised this, the stock price fell sharply. Today of SKAGEN Global. services less expensively and
that particular company is valued at a more rea- more efficiently, such as low-
sonable 1.3 times its book value. cost airlines that challenge the
traditional carriers.
8 SKAGEN FU NDS HALF Y EA R REPORT | JULY 2014
disrupting the becoming less popular in the GEN’s portfolios when the stock transformative process with their
automotive US, private car use is exploding was on sale at the height of the intelligent technology solutions,
industry in fast-growing Asia with China financial crisis in 2009. such as speed control, collision
and India leading the way. That The dream of self-propelled safety and traffic sign recogni-
Carmaker Hyundai Motors and is something that South Korean cars is fast becoming a reality. tion.
tyre manufacturer Continental carmaker Hyundai Motors is By 2015, the German tyre man- “Many see Continental as a
are SKAGEN holdings in industry benefitting from. The company ufacturer Continental estimates tyre company. I see it as a hi-tech
segments and markets undergo- has followed Toyota’s lead: They that we will see fully automated company. A stock that still has a
ing rapid changes. began in the discount segment automobiles on the roads. About long way to go and that trades
In two decades, the number of and have since moved upwards. 90 percent of all car accidents are at a relatively modest 13 times
19 year olds with a driver’s licence With competitive prices, good fuel a result of human error. Self-pro- expected earnings,” says Geir
fell from nearly 90 to c.70 percent economy and excellent warranties pelled cars are therefore expected Tjetland, portfolio manager of
in the US – a country that lives for new vehicles, the company has to reduce the number of automo- SKAGEN Vekst.
and breathes cars. In big cities become the world’s fourth largest bile accidents drastically. This In the same way that micropro-
like Boston, New York and Wash- automaker. It is not just show- will change not only the general cessor manufacturer Intel is asso-
ington, one third of all residents ing high growth sales figures in insurance industry and health ciated with “Intel inside”, Conti-
no longer have a household car fast-growing emerging markets services, but also the entire trans- nental wants you to associate it
and carpooling is booming. but also in countries like the US. portation industry. Continental is with cars of the future—”Conti
While travelling by car is Hyundai Motors first entered SKA- determined to be a leader in this inside”.
high-flying low- However, if the price is right, economy and no expensive leg- Another similar airline company
priced companies there is no reason not to invest acy structures and bureaucracy. in SKAGEN’s portfolios is Malay-
in airline stocks. The Norwegian An efficient Internet-based book- sian Air Asia. Like Norwegian,
Investing in airline stocks has airline Norwegian is featured in ing service, inexpensive tickets, the company is led by a visionary
generally been notoriously bad several SKAGEN equity funds. In and a ‘you get what you pay for’ CEO, Tony Fernandes, who owns a
for investors. But that does not 2001, the company, founded by attitude have also been import- quarter of the company. Together
mean that all investments in the former fighter pilot and lawyer ant factors in challenging SAS’s with Irish Ryanair, Air Asia has the
industry are poor. Bjørn Kjos, consisted of a fleet de facto monopoly. So far, Nor- lowest costs in the world among
Investment guru Warren Buf- of Fokker aircraft without pas- wegian seems to be winning. airlines and is expected to grow
fett is known for his aversion sengers. This was after the airline “You can find winners – also its market share significantly
to airlines. He is said to have a Braathens terminated its service in the airline industry. Compa- when the ASEAN countries open
Post-It note in his breast pocket agreement with Norwegian when nies with good cost structure up the aviation market to com-
reminding him never to invest in it was acquired by SAS. Thirteen and focus, like Norwegian. Nor- petition in 2015. The company
airlines. Virgin Atlantic’s eccen- years later, Norwegian is far more wegian’s shares have generated will also benefit from increased
tric founder Richard Branson profitable than SAS - and on its an average annual return of 24 travel from China. More than
perhaps put it best: “The fastest way to becoming just as big. percent since the company went 100 million Chinese people went
way to become a millionaire is to Norwegian’s recipe for suc- public in 2003,” says Knut-Har- abroad on vacation in 2013 and
start out as a billionaire and then cess includes a fleet of modern ald Nilsson, portfolio manager that number is expected to dou-
invest in an airline.” aircraft which provides better fuel of SKAGEN Kon-Tiki. ble by 2020.
transformational took over as the company’s head two years, the stock price has is active within the media and
e-commerce and now chairs Kinnevik’s board. doubled. Still, SKAGEN Kon-Tiki e-commerce is the South African
She recently noted that Kinnevik manager Kristoffer Stensrud media company Naspers. The
The Swedish investment com- should be seen as an opportu- believes that the company is company’s focus, like Kinnevik’s,
pany Kinnevik is a typical exam- nistic and flexible investment undervalued. is entrepreneurial acquisitions
ple of a company that thrives in company; one that does not seek “If you look at Kinnevik as a with good market positions in
disruptive environments. With a balanced portfolio regardless traditional Swedish investment several emerging markets. One
super-entrepreneur Jan Stenbeck of industry or region. company, it is not undervalued. advantage of operating primarily
at the helm, Kinnevik challenged The transformation of Kinne- However, if you look at it as an in emerging markets is that you
and defeated several institu- vik into a leading online player, investment company with a put your products and services
tions, including the Swedish tele- with holdings in e-commerce diversified portfolio of e-com- directly on mobile without mak-
vision and telephone monopo- company Zalando and busi- merce businesses, it is signifi- ing a detour through personal
lies with TV3 and Comviq/Tele2. ness incubator Rocket Internet, cantly less expensive,” says computers as is the case in many
After Stenbeck’s death in 2003, amongst others, has proved to Stensrud. more developed countries (read
his daughter Christina Stenbeck be successful. Over the past Another SKAGEN holding that more about Naspers on page 10)
S K A G E N F U NDS H A LF Y E A R RE PORT | J U LY 2 0 1 4
9
During a trip to the island of Zanzibar off the coast of Tan-
zania a few years ago, a fisherman enthusiastically
explained to me how much his life had changed. Thanks
to his mobile phone, he was now able to keep track of
weather forecasts and locate fish stocks. Not least, he
could receive price inquiries from buyers in different ports
while at sea and thereby optimise his sales price, catch
and margins
New business models
The trend ever since has been developing at a furious pace. Since
the turn of the millennium the number of mobile subscribers
south of the Sahara has grown fortyfold from 16.5 million to
650 million in 2013, something that has opened the eyes of
foreign investors.* The US software giant Microsoft, for exam-
ple, (2.12 percent of the SKAGEN Global portfolio) which has
offices in fourteen African countries, launched a mobile phone
specifically designed for the African market last year. For many
Africans their mobile phone is also their first computer and thus
the world has shrunk yet a few more sizes. Using their phone’s
internet connection, for example, African students can suddenly
take advantage of free lectures from leading US universities or
speeches from world-leading entrepreneurs.
Africa’s mobile revolution has given rise to a range of new
services and businesses. One SKAGEN holding that has not been
slow to capitalise on the developments is South African media
Photo: Shutterstock
and e-commerce company, Naspers (1.47 percent of SKAGEN
Kon-Tiki).
Naspers is a company with an entrepreneurial acquisition
focus and good market positions in Africa, Brazil, China, Russia
and other parts of Eastern Europe. The company owns several
More than
internet businesses and has a strong position in the fast-growing
pay-tv segment in a number of African countries. One benefit of
primarily operating in emerging markets with high mobile pene-
communication
tration is that Naspers can operate directly on mobile services
without having to detour via personal computers.
Phones that shrink the world
While in the Western world we look forward to the Financial services too have developed rapidly. Instead of bank
latest design and technology from companies like accounts and plastic cards, a lack of cash and few local bank
branches have fuelled demand for mobile bank services or e-wal-
Samsung and LG, the perspective is often different
lets. Innovations have not come from the financial sector, how-
for those living in the world’s emerging markets. ever. The Kenyan mobile operator Safaricom (a former holding
– David Reiser in SKAGEN Kon-Tiki) is a world leader in mobile banking with
Client Advisor its M-Pesa service. Similarly, the Indian mobile operator Bharti
Airtel (2.50 percent in SKAGEN Kon-Tiki), with a large presence
Innovation and technology have been rapidly changing every- in Africa, launched a cooperation for mobile payment services
day life for people in several African countries over the past 15 with West African Ecobank in the autumn of 2013.
years. Africa’s telecommunications network, for example, was What started out as a communications medium has therefore
chronically dysfunctional for decades. But following great strides quickly become so much more. During a trip to the island of Zanzi-
and cost efficiency within mobile technology, the continent has bar off the coast of Tanzania a few years ago, a fisherman enthusi-
gradually been catching up since the turn of the millennium and astically explained to me how much his life had changed. Thanks
in some cases has even overtaken the West. Investments in fixed to his mobile phone, he was now able to keep track of weather
line telephony have been rejected in favour of cost-effective and forecasts and locate fish stocks. Not least, he could receive price
flexible base stations for mobile telephony. As a result, not only inquiries from buyers in different ports while at sea and thereby
do they have coverage, but Africa has also stepped right into the optimise his sales price, catch and margins. Naturally he was
internet-based mobile era with all the possibilities it has to offer. able to manage payments via mobile, much to the bank’s chagrin.
*Source: World Bank
10 SKAGEN FU NDS HALF Y EA R REPORT | JULY 2014PLACEHOLDER TEXT
”Working in Stavanger is not all that different
from working in Gothenburg. In both places,
the noise of the ocean and rain drowns out
the noise of the financial world. There are
fewer distractions and it is simpler to pursue
your own path.”
Photo: David Reiser
He who works
hardest wins
With an abundance of investment ideas has managed to turn around sales and is now
and an iron-clad faith in facts and hard expanding the company’s footprint in several about johan
emerging market countries.
work, SKAGEN Global’s new Swedish – Started reading economics almost
team member has already left his mark. Quiet knowledge in secret, after abandoning his
‘actual’ majors in journalism and
– Anna Marcus “As an investor, I am extremely facts driven. For technology at Chalmers and trans-
Communication Manager example, it’s easy to be blinded by analysts’ ferred to University of Gothenburg
earnings forecasts but, most often, these fre- School of Business, Economics and
Law. “I realised that finance was the
In order to illustrate SKAGEN’s value-based quently fail miserably when you look a couple world’s most fun job.”
investment philosophy, we usually sum up our of years into the future. For that kind of horizon,
goal as buying companies for 50 cents on the it’s far more interesting to look at what the com- – About the position at SKAGEN:
“A colleague at my previous job at
dollar. SKAGEN Global’s new portfolio manager panies have actually delivered and gather the
Stena spotted an ad for the posi-
Johan Swahn would add ‘… and sometimes it data yourself,” he notes. tion of senior portfolio manager in
makes sense to buy three-dollar companies for He believes that, in order to be a skilled Dagens Industri.”
two dollars.’ In other words, some quality com- investor, you need to be aware of your own
– Why SKAGEN? “I’ve always liked
panies that might seem expensive right now are prejudices and also of human psychology. Our
SKAGEN’s approach and already had
likely to become even more expensive over time. brains play tricks on us. For example, we tend my own retirement account invested
Borrowing a term from the investment god to be more afraid of losing ten dollars than we in SKAGEN’s funds. Of course, we
Warren Buffet, Johan Swahn calls these compa- are grateful when we earn the same amount. also have a phenomenal track
record.”
nies compounders. They are enterprises that, for Facts and a certain distance are what work
long periods of time, provide exceptional return best in the analysis phase. However, during the –On commuting to Stavanger: “It
on capital and shareholders with cumulative idea process, it is intuition – or one’s aggregate works out great thanks to good
value over time – a kind of interest-on-interest ’quiet’ knowledge based on years of experience flight connections from Gothen-
burg. I work incredibly intensively
effect. – that is in control. for the three days of the week I’m
As an example of this, he mentions the US “Well, there’s no shortage of ideas. The in Stavanger. The other two days I
medical technology company Varian, whose more you read, the more hunches you get. The work out of SKAGEN’s Gothenburg
stock has long been traded at high valuations. trick is to have the energy to follow up on those offices and can be closer to my wife
and three boys (aged 8, 4 and 2).”
However, the company has excellent products hunches. It’s a matter of verifying, reading up
that will likely continue to generate income far on the company’s cash flows, checking what –Started working at SKAGEN in
into the future. The US clothing chain, Gap, is management is doing, calling your contacts. March 2014.
another of Johan Swahn’s investment ideas. For, in the end, it is he who works hardest who
He believes it has a bright future; the new CEO wins,” he says with a wink.
S K A G E N F U NDS H A LF Y E A R RE PORT | J U LY 2 0 1 4
11CORPORATE BOND FUND
SKAGEN Credit – who would
you lend money to?
Who would you lend your money to? That is the question that the portfolio managers of
SKAGEN Credit must ask themselves every day when selecting investments for the newly
launched corporate bond fund. The answer isn’t as simple as some may think.
– Trygve Meyer
Communications Advisor, Portfolio
SKAGEN Credit follows the same investment philosophy as our risk profile, or a real change in the same company’s risk profile, will
other funds and selects the best bonds irrespective of credit qual- therefore result in excess return in the fund. The fund’s primary
ity, sector or country. Since companies are at the heart of the source of return will derive from taking company-specific credit risk
investments, the managers are also able to take advantage of by selecting corporate bonds that have the potential for a price
the combined experience and analysis of SKAGEN’s equity fund change or those that have a high stable running yield relative to
managers. the risk entailed.
Drawing on their own experience and knowledge, the portfolio The aim in selecting the bonds is, of course, to deliver the best
managers of SKAGEN Credit identify companies where the mar- possible risk adjusted returns to unit holders in the fund.
ket price of the debt is disproportionate to the risk we believe is During the first month, the fund has invested in around 30 dif-
involved when lending money to a specific company. The result ferent companies from countries as diverse as the US and Asia, and
may either be a mispricing of the loan or that one gets yield on from sectors ranging from transport to energy. The following are
the money one lends. two examples of corporate bonds the fund has invested in so far.
An improvement in the market’s understanding of the company’s For more information about the fund, please visit our web pages.
operating as one company under ments are wholly independent
Indian Tata Motors. of the ownership structure. The
Jaguar Land Rover has a solid company has a moderate debt
market position and is well burden and a good cash flow,
diversified in terms of existing which is important for debt
and new models. This is a good investors as this reflects the
basis for delivering margins. company’s ability to be able
For Tata Motors, Jaguar Land to service outstanding debt.
Rover constitutes almost 90 Based on current results
percent of its profits and three and the debt situation in Jaguar
quarters of its sales, indicating Land Rover, the company
that the company has a strong should have an investment
position both as a global brand grade rating (BBB from S&P).
and within its parent company. However, due to the fact that
Photo: Bloomberg
Tata Motors is planning on the British car manufacturer
further expanding Jaguar Land is owned by Indian Tata, they
Rover, including by increasing have a high yield rating (BB
production in order to take from S&P). Jaguar Land Rover
advantage of demand in devel- cannot have a higher rating
investment case 1 oping markets such as China than its parent company and
british pride and spice and Brazil. There is a great deal Tata is being pulled down due
of growth potential for luxury to country risk.
Not many products are deemed From the 1940s right up to the cars in these markets. In short, a bond holder gets
to be more typically British than present day, the two companies better paid than the compa-
cars from Jaguar or Land Rover. have been through a myriad of Mother, did it need to be so ny’s risk might indicate. This
Both car brands have a long his- changes and mergers, includ- high? in itself should be a good eno-
tory, something that piqued the ing being subsidiaries of Ford Jaguar Land Rover is an inde- ugh reason to invest.
interest of the portfolio manag- and BMW. Since the financial pendent company whereby the
ers of SKAGEN Credit. crisis in 2008, they have been interest rates and debt pay-
12 SKAGEN FU NDS HALF Y EA R REPORT | JULY 2014sive and with lower margins bonds in a Brazilian company
than is the case for more easily and benefit from attractive inter-
accessible production. est rates.
As a result of its activities, “It is not unusual for large
Petrobras has a significant companies from emerging
investment program that is markets to want international
financed amongst other things financing,” says Tomas Nordbø
by borrowed money, including Middelthon, who manages SKA-
bonds. The company is regarded GEN Credit. “This provides us
as extremely creditwor thy with opportunities. Particularly
locally and has a national AAA when the market price does
rating (S&P). not correlate with the risk we
At the same time the inter- believe we take with an invest-
Photo: Bloomberg
national rating is lower, but it ment.”
is still investment grade (BBB Petrobras has said that it
from S&P). The reason for the aims to increase production and
lower international rating is reduce net debt over the next
simply because the company is few years. This will reduce the
investment case 2 domiciled in Brazil, which is an risk level, which is favourable
brazilian oil debt emerging market. for bond owners.
The conclusion is therefore
“O petroleo e nosso!” (the oil international oil company. Samba at waltz tempo that lending money to Petro-
is ours), was the slogan coined Around 90 percent of the Petrobras has numerous bonds bras bodes well for good yield
when Brazil’s largest company reserves are in Brazil at a depth issued in the US in dollars. This relative to the risk of default.
was launched in 1953. Since of as much as 6-7000 metres. is favourable since as an inves- A reduction in debt will reduce
then, Petroleo Brasileiro SA, The company has good current tor you are thereby subject to the risk further, to the benefit of
or Petrobras as it is commonly earnings, but the extraction of US law. At the same time you bond owners.
known, has grown into a large, reserves is fairly capital inten- have the possibility to purchase
portfolio
managers
The SKAGEN Credit portfolio
managers draw on their own
expertise in the fixed income
markets, as well as SKAGEN’s
equity fund managers’ long-
standing experience of suc-
cessful stock-picking. They
have complementary experience
Photo: SKAGEN
ranging from fixed income man-
agement, corporate analysis,
risk management and trading.
TOMAS NORDBØ MIDDELTHON OLA SJÖSTRAND
Tomas Nordbø Middelthon has worked in SKAGEN since 2010, both Ola Sjöstrand has worked in SKAGEN since 2006 as portfolio man-
as a risk manager and more recently as portfolio manager of SKA- ager of SKAGEN’s fixed income funds. He launched and has been
GEN’s fixed income funds. Before that Tomas worked within financial responsible for running the SKAGEN Krona fund amongst others.
services in Statoil implementing financial risk management tools Before joining SKAGEN Ola worked as portfolio manager at the
worldwide. Tomas holds an MBA within Finance and is a Certified Swedish Soya Group. A combination of strong analytical skills and
Financial Analyst. He has strong analytical skills and a background investment experience applying SKAGEN’s investment philosophy
from financial risk management. The combination of risk manage- puts Ola in a strong position to find good investment cases for the
ment and technical expertise is valuable in the screening and anal- fund. Ola holds a BSc in Business Administration and Economics.
ysis of corporate bonds and portfolio construction.
SKAGEN Credit has a master feeder fund structure and SKAGEN Credit EUR, SKAGEN Credit GBP,
SKAGEN Credit SEK and SKAGEN Credit NOK are feeder funds. The feeder funds are currency hedged
in the currencies indicated and place at least 85% of their assets in the master fund. More information
about the master feeder structure can be found in the funds’ prospectuses. S K A G E N F U NDS H A LF Y E A R RE PORT | J U LY 2 0 1 4
13NOTICES
people
moves
SK AGEN is plea sed to
announce the strengthening
of its SK AGEN Vekst team
with the appointment of Erik
Bergöö as a new portfolio
manager from 1 September
2014.
Erik will join SKAGEN from
Danske Bank Markets (equity
research) in Copenhagen
where he has been a senior
analyst covering transporta-
tion and industrials. He has
received rapid recognition
among top Danish mutual
funds.
New challenges
At the same time, Peter Alm-
ström has decided to leave
From top: Erik Bergöö and SKAGEN to seek new chal-
Peter Almström. lenges. His last day will be
30 June 2014. During his two
years at SKAGEN, Peter has
new year´s been part of the team which
conference 2015 established and now manages
SKAGEN m2, a global fund
Please save the date for SKAGEN’s New Year’s Conference 2015. which invests in listed prop-
SKAGEN will be holding its New Year’s Conference for interna- erty companies.
tional clients in three European cities in January 2015. The con- SKAGEN m2 is led by Michael
ference will take place on 8 January in Copenhagen, Denmark; Gobit schek and Har ald
on 14 January in London, UK and on 22 January in Amsterdam, Haukås, both SKAGEN veter-
the Netherlands. ans of a combined 17 years.
Further information about speakers and the full conference
program will be available on our webpages from September.
Please visit our website to find information about previous years’
conferences.
skagen launches corporate
bond fund
On 30 May 2014, SKAGEN launched SKAGEN Credit, a global cor- The fund is managed by Ola Sjöstrand, who has been managing
porate bond fund. The fund’s objective is to deliver the best pos- SKAGEN’s money market funds since he joined SKAGEN in 2006. It
sible risk-adjusted return by investing in the growing corporate is co-managed by Tomas Middelthon, who has also been a portfolio
debt market. manager of the money market funds for the past 2 and a half years.
Building upon SKAGEN’s successful investment philosophy and For further information about the fund, please read pages 12-13
combining our global company understanding with our proven of this report, or visit our webpages: www.skagenfunds.com/
bond market experience, SKAGEN Credit is actively managed and SKAGEN-Credit.
invests in undervalued, under-researched and unpopular corporate
bonds from around the world.
14 SKAGEN FU NDS HALF Y EA R REPORT | JULY 2014Photo: Jiri Havran
SEPTEMBER
Save the date!
On 17 September 2014, SKAGEN will be holding an extraordinary electoral
meeting and a unit holder meeting at the Stavanger Concert Hall.
Notice of extraordinary electoral meeting Proposal for new deputy director/board member
We would like to welcome unit holders in SKAGEN Funds to an The election committee is seeking candidates for the board to
extraordinary electoral meeting on 17 September 2014 at 6pm. be nominated at the election which will take place at the unit
holder electoral meeting at the Stavanger Concert Hall on 17
Agenda September 2014. The main criteria for candidates are as follows:
• Election of one chairperson and two unit holders to sign the
minutes – for discussion • Experienced person of good standing
• Election of one board member to the board of SKAGEN AS – • Insight into and understanding of the savings and capital markets
for discussion • Managerial experience and market orientation, with an under-
• Election of one deputy director to the board of SKAGEN AS – standing of the need for competence development as a pre-
for discussion requisite to success
• International knowledge and preferably international experience
The recommendation of the election committee and other nec- • Prior board experience an advantage
essary information will be published on our webpages www. • Committed individual who can and wants to contribute to
skagenfunds.com ahead of the meeting for advance voting. board work in SKAGEN
Advance voting We seek a good balance between genders on the board. While we
Unit holders may cast votes in advance via My Page (login from are seeking female candidates in particular, all applications will be
www.skagenfunds.com) after 1 September. Alternatively you may treated equally. High demands are placed since SKAGEN’s board of
send in your votes by email to contact@skagenfunds.com or by directors should act both as a driving force as well as fulfil a good
post to SKAGEN, P.O. Box 160, 4001 Stavanger, Norway. Advance control function in a company which is extremely active interna-
votes must reach SKAGEN by 12 September at the latest. Your tionally. Suggestions should be sent to the head of the election
units as of 12 September will constitute the basis for the calcu- committee, Sigve Erland, by email sigve.erland@norsco.no, or
lation of the number of votes. If you have voted in advance, you by phone +47 906 02 873. Suggestions may also be sent to Tone
do not need to register on arrival at the meeting. Willoch Rettedal, email twr@skagenfondene.no, by 10 August.
Unit holder meetings: estab- unit holders meeting on 17 SKAGEN Tellus. The new unit Provided that the unit holder
lishment of institutional unit September. classes will replace the dis- meetings approve the estab-
classes The establishment of insti- count models currently applica- lishment of unit classes, the
tutional unit classes was ble for institutional investors in proposal for the change will be
SKAGEN wishes to establish approved by SKAGEN’s board SKAGEN Kon-Tiki and SKAGEN sent to the Norwegian Financial
unit classes for institutional of directors on 12 June 2014. Tellus. Supervisory Authority for final
investors, by changing the The change relates to the equity Notice of a unit holders approval. Information will be
funds’ articles of association. funds SKAGEN Vekst, SKAGEN meeting will be sent out to published on SKAGEN’s web-
Changes to the articles of asso- Global, SKAGEN Kon-Tiki and unit holders in the above-men- pages with regard to when the
ciation will be dealt with at the SKAGEN m2 and the bond fund tioned funds. changes are to take effect.
S K A G E N F U NDS H A LF Y E A R RE PORT | J U LY 2 0 1 4
15Portfolio Managers’ report
Introduction
> GLOBAL ECONOMIC INDICATORS
are pointing upwards, but there are speed
bumps along the way
> THE SECOND QUARTER was character-
ised by major political events, most notably
in India
> WIDESPREAD POLITICAL UNCERTAINTY
Photo : Bloomberg
often gives rise to attractive valuations
The election of Narendra Modi continued to push India’s stock markets
> T HERE ARE FEWER cheap companies,
upwards on the hope of needed reforms.
but opportunities can still be found
16 SKAGEN FU NDS HALF Y EA R REPORT | JULY 2014An eventful quarter
Low volatility in the global financial markets in the second quarter may have
given the impression that summer had come early. On the contrary, the
past few months have been very eventful, particularly on the political front.
The global equity markets continued their market, lower corporate tax and better economic arrows are pointing upwards,
upward trajectory in the second quarter corporate governance are all important but we do not want to end up seeing wil-
delivering a return of 5.7 percent in euro factors for improvement. lingness to reform dulled by less pressure
terms. Unlike the previous quarters, and From an investor viewpoint, sentiment on government finances.
contrary to what newspaper headlines is an important factor in the Japanese In Africa there was official clarifica-
had predicted at the start of the year, equity market. It has been almost 25 tion that South Africa is no longer Africa’s
emerging markets delivered higher years since the market peaked in a specu- largest economy. Now that calculation
returns (+7.5 percent) than developed lative bubble. The subsequent crash left methods have changed, Nigeria’s gross
markets (+5.5 percent). deep marks, and allocation to equities is domestic product rose 89 percent over-
still low both among private and institu- night to USD 510 billion.
Speed bumps tional investors. However, this situation
During the second quarter we found out appears to be changing. Political movements
that US GDP had fallen by 2.9 percent The second quarter was eventful on the
from the year before. The figure was a Low interest rate climate political front. The most important event
downwards adjustment of previous esti- The European Central Bank (ECB) was the was the election victory of Narendra Modi
mates, but was mainly attributed to the first major central bank to introduce nega- and his BJP party in India. As former Chief
extreme winter weather conditions in the tive deposit rates. The aim is to stimulate Minister of Gujarat, Modi had worked
US. Subsequent industry, property mar- the loan market, and to reach its inflation hard to remove bureaucracy and pave
ket and consumer indicators suggest that target of “around two percent”. In order to the way for economic growth. His ambi-
activity levels are continuing to pick up. succeed, the ECB will likely have to follow tion is to do the same at national level.
In Japan consumption fell sharply up with stronger measures (see the fixed The landslide election victory gave him a
after value added tax was increased income comment on page 32). strong mandate, but he will need this in a
for the first time in 17 years (from 5 to In peripheral Europe, Greece issued its culturally and religiously heterogeneous
8 percent). The increase is part of Prime first long-term government bond in four society with a population of more than
Minister Abe’s plan to improve central years, and this was positively received 1.2 billion.
government finances; and herein lies one by investors. The yield on the ten-year The Indian stock market is up 25 per-
of his greatest challenges. Greek government bond has now fallen cent so far this year, so expectations of
Japan must get its government finan- from almost 40 percent when the crisis reform and economic development have
ces in order at the same time as it speeds was at its worst in the autumn of 2011 to left their mark on the market. Now it is up
up economic growth. Measures that may below 6 percent currently. to Modi and his government to deliver.
be favourable for one objective – for We see similar developments in other It was less positive that the ANC party
example, higher taxes – are not neces- peripheral European governments, and won yet another victory in South Africa. Whi-
sarily good for the other. So far there this has been favourable for unit holders le society and the economy struggles with
are grounds for careful optimism since in SKAGEN Tellus, which has investments high unemployment and large economic
consumption increased in May and the in Greek, Italian, Portuguese and Slove- differences, president Jacob Zuma has
government is continuing its work on nian government bonds. It is positive been involved in corruption scandals and
structural reforms. A more open labour that the pressure is diminishing and the accusations relating to the use of public
S K A G E N F U NDS H A LF Y E A R RE PORT | J U LY 2 0 1 4
17You can also read
