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Emerging market type yields with considerably less risk, Storm’s Bond Fund

David Stevenson, 23/02/2021

As part of Fundeye’s series on SharingAlpha fund picks and top selectors, Norwegian asset manager Storm takes centre stage with its Bond Fund.

The world of Nordic high yield is not a market many are aware of but with Storm’s fund yielding around 8 percent a year, this level of income is akin to the murkier parts of emerging market debt.

Speaking to the fund’s manager Morten Venold, some of the top holdings may seem odd in today’s climate. Its top holding Stockmann is a Finnish retailer which owns a number of shopping centres. Given the decline of physical retail in most of the developed world it may seem strange to have over 5 percent of the portfolio invested in the company.

However, the company owns prime located shopping malls in Helsinki and Eastern Europe, with the local property covering most of the secured bonds alone (even in a scenario when applying a COVID related discount). Another reason for holding the company’s paper (which the manager has bought a lot more of as yields pushed out, value dropped given Covid) is that Stockmann owns a profitable retailer/e-commerce company (Lindex).

The fund is high conviction with 60 percent of the portfolio being in the top 20 holdings. However, Mr Venold and Marcus Mohr, who works on the business development/operations side of the firm, stress that part of the company’s ethos is going to see firms before investing.

The pair said that there were concerns about the portfolio when Covid broke out due to the supply chain of consumer goods among other worries. One of the funds top holdings is MPC Container Ships which would obviously suffer if world trade slowed especially goods coming from China.

Mr Venold described container shipping rates as being ‘substantial higher due to bottlenecks and capacity constrains' during Covid so while there was some genuine fear in the markets, he also mentioned that the actions of central banks had strengthened the mechanics of the bond market therefore defaults were averted. Norway reduced its central banking rate from 1.5 percent down to almost zero, established a State Corporate Bond fund to support the secondary and refinancing markets.

“Norway does have one advantage in times of a crisis, it has one of the largest sovereign wealth funds in the world,” said Mr Venold. It’s often said that Norway would be fine without any tax receipts for an entire year given the amount of reserves it has but luckily this concept has yet to be tested.

Its second largest holding is Siccar Point Energy which has large oil reserves and have applied a prudent hedging program securing future cash flows. Despite the proliferation of ESG products, Mr Venold doesn’t think the desire for oil will suddenly disappear in the next couple of years so is happy to hold this type of paper when the cash flow visibility and corresponding deleveraging profile representing an attractive risk/reward.

Regarding the turnover rate of the fund, given the weighted maturity of bonds is two and a half years this would naturally mean a rate of around a third per annum but given the manager is active this can rise to over 40 percent per annum.

As mentioned above, Mr Venold and Mr Mohr are keen to meet the companies the fund is invested in and the portfolio managers try to meet them around four times a year.

Given there’s no ETFs for Nordic high yield, there is no cheap and easy passive way to play this market. However, looking at the state of dividends in the equities markets, trying to build an income product using bond proxies is expensive and given the fragile state of the big dividend paying sectors fraught with danger.The good news is for a market without ETFs is that there is not such large flows of capital which would dampened yields. Also as Mr Venold points out, one aspect that is creating the spread premiums is the lack of sell side coverage.

Comparisons of high yield markets tend to usually be between the US and Europe, with the latter made up moreover of fallen angel companies and the latter being highly geared from the beginning. The diversification in the Nordic high yield market has improved considerably over the last 10 years. Back then, more than 50 percent of the market was related to oil and gas, whereas today it is less than 20 percent. Given that the majority of the bonds issued in the market are floating rate notes, the modified duration (measuring the interest rate sensitivity) is very short at 0.7 years.

While this part of the market may not be as familiar with European investors as certain areas, the secret is out in the Scandinavian region so perhaps asset allocators need to get in on the action before there’s a spread compression in Nordic high yield.

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