Semi-annual Report 2012

Semi-annual Report 2012 ODIN Equity Mutual Funds - Institutional August 2012 Semi-annual Report 2012 I1I Content Frontpage photo: ”Ek i odlingdlan...
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Semi-annual Report 2012 ODIN Equity Mutual Funds - Institutional August 2012

Semi-annual Report 2012

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Content Frontpage photo: ”Ek i odlingdland” Photographer: Hans Strand

3-4 Marknadskommentar ODIN Norge II 5-9 10-13 ODIN Sverige II 14-18 ODIN Norden II 19-23 ODIN Europa II 24-27 ODIN Finland II 28-32 ODIN Global II 33-36 ODIN Eiendom (Real Estate)

This semi-annual report was originally prepared in Norwegian. This is an unofficial translated version and no liability is assumed for any errors or ambiguities that may have arisen in connection with the translation. The original version of this semi-annual report is available in Norwegian and can be ordered from ODIN Fund Management. Statements in this semi-annual report reflect ODIN’s views on the market at the time when the semi-annual report was published. This report shows past performance. Past performance is no guarantee for future performance. Future performance will depend on things suchas movements in the market, the manager’s skills, the fund’s risk level and the costs of managing the funds. The value of the fund may decrease as a result of a fall in share prices. All return figures are stated in NOK, unless otherwise stated.

The Company is a fully owned subsidiary of SpareBank 1 Gruppen AS Company registration number: SpareBank 1 Gruppen AS 975 966 372 ODIN Forvaltning AS 957 486 657 ODIN Fonder, branch to ODIN Forvaltning AS, Norway 516402-8044 ODIN Rahastot 1628289-0

ODIN Forvaltning AS Fjordalléen 16, N-0250 Oslo, P.O. Box 1771 Vika, N-0122 Oslo Telephone: +47 24 00 48 00 Fax: +47 24 00 24 01 E-mail: [email protected]  www.odinfond.no

ODIN Fonder Stureplan 13, S-111 45 Stockholm. Box 238, S-101 24 Stockholm Telephone: +46 8 407 14 00 Fax: +46 8 407 14 66 E-mail: [email protected]  www.odinfonder.se 

ODIN Rahastot Mannerheimintie 14 A, 8. krs FIN-00100 Helsinki Telephone: +358 (0) 9 4735 5100 Fax: +358 (0) 9 4735 5101 E-mail: [email protected] www.odin.fi

Market comment We must say that, during these circumstances, the first halfyear went well for ODIN. All institutional funds had a positive return and five out of seven funds produced a better return than their respective benchmarks. Developments The return over five years is still not satisfactory for most of the funds. We believe the last half-year shows we are on the right track. We can partially attribute the shortfall in return over the five-year period to the fact that value shares have not done nearly as well as growth shares. This is usually the case in very difficult periods - and ODIN is a value manager. However, what is more important is that our investment process now places emphasis on more concentrated portfolios, where a reduction in the number of shareholdings allows us to spend more time on fewer companies. At the same time, we are in the process of implementing a deeper, more rigorous and proprietary investment process that, among other things, will have more of a focus on the companies’ return on invested capital. It takes time to once again achieve an additional return in periods of, for example, five years, but we hope and strongly believe that the processes we are now implementing will lead to this year’s additional return continuing. The funds we have managed for more than 10 years continue to produce an additional return. Management comments Risk Off/Risk On are the buzzwords in finance these days. As a shipping man, they remind me of Ro-Ro (Roll On/Roll Off) ships, where the cargo is rolled on and off easily. During the past six months, investors have rolled risk in and out of their portfolios. Mainly the latter. However, 2012 started with “risk on”, i.e. on an optimistic note. The European Central Bank (ECB) gave the banks a mind-blowing Euro 1 billion as a cheap, three-year loan. That saved the eurozone from a growing credit squeeze. The markets hoped that European companies and consumers could and would borrow, invest and consume again, but most of the money just went back to the ECB as the banks’ liquidity reserves. Companies, on their part, continued to increase their cash holdings, while households, frightened by the high level of unSemi-annual Report 2012

employment and public cutbacks, reduced their consumption by as much as they could. The effects of this became apparent during the spring, other regions that we normally put our trust in, the USA and China, also experienced weaker growth. Such weaker growth results in lower tax revenues, which then causes problems for countries with a lot of national debt to service. Investors therefore rolled their capital into government bonds in countries that print their own bank notes (the USA, UK) or countries with strong government finances (Germany, the Nordic region) and thus just made things worse for those countries experiencing a flight of capital. So what is this escape from risk about? The simple answer is that investors are more concerned about maintaining their money (“return of capital”) than about the return on their money (“return on capital”). The answer is really rather more complex than that and depends on the type of investor we are talking about. For some investors, regulatory factors have forced them to take less risk even though risk is very attractively priced right now. Investors that are subject to strict capital adequacy requirements, such as pension funds, banks and life insurance companies, have to take less risk the more risk they should have taken. They have to transfer their funds to safe bonds, which are now primarily only some countries’ government bonds. These are rising in price and producing an even lower return (interest). Lower interest rates in turn result in higher values of future liabilities, which lead to less buffer capital - forcing the life insurance companies to even more “Risk Off” – and so on... For other investors, the move into government bonds may be due to a desire for less risk in their portfolio. As a Danish professor recently illustrated at a conference arranged by the Government Pension Fund of Norway, a so-called paradigm shift has been identified in the financial market during the past decade. Up to the turn of the century, there seemed to be a correlation between the return on bonds (bond yield) and return on shares (earnings yield), a correlation that was pointed out in 1997, in a footnote, by the US Federal Reserve (central bank), and was thus nick named the Fed Model. If the return on government bonds (measured as interest) was higher than that on shares (measured by the reverse price/earnings ratio, I3I

Market comment i.e. E/P), bonds would be more attractive. Investors alternated between the two asset classes depending on what seemed to produce the best estimated return.

buying, i.e. to maintain Risk Off. A lot can still go wrong in resolving the economic and political challenges in many countries and regions.

However, shortly after the Fed Model was identified, a shift took place. Experience gained from the Asia crisis in 1998 led investors to look on government bonds as an excellent hedging. The more shares fell (i.e. the higher the earnings yield), the better the return on government bonds. Instead of looking at the relative returns of these two, investors preferred to look at the relative variance, the covariance. Even though shares and government bonds individually fluctuate widely in value, a portfolio of these will produce a low overall risk as long as they fluctuate in the opposite direction to each other. The correlation between all other risky asset classes has risen, so that Risk Off/Risk On has become the new way to invest. This is why investors want to buy government bonds even though they produce more or less no return.

Instead of focusing on the price fluctuations, investors should be interested in whether the capital that they invest produces a return in the companies. That is where the return over time comes from. The share price will follow this over time. Sometimes far too many people have invested in shares just because shares were producing a high return. They were not looking at the price they paid for the shares.

Outlook So where does this take us? With such a high aversion to risk, we should no doubt expect the stock market to have fallen or to fall further. But here we can actually take out the Fed Model again, despite all its theoretical and empirical inadequacies.

Nonetheless, a word of warning – the massive optimism regarding the Norwegian economy and Norwegian housing prices worries us. Not only on purely contrary grounds, but also because of the slightly simplified picture of the Norwegian economy.

Take a look at the graph below. This shows the relationship between the curves in the graph and is based on US data because this is where the longest and best series of data come from. Other markets, including the Norwegian one, show the same picture. Companies are now producing a much better return than government bonds. Although the earnings yield is not the same as the dividend level, it does provide a measurement of how much the companies are earning compared to the price of the capital you are contributing in order to obtain some of the profits. In Norway, the level is twice this, namely 10 per cent, while the actual current dividend level is all of 4-5 per cent.

The fact is that foreigners do not look on the Norwegian economy in the same way as we do. Danish government bonds, for example, are more popular investment objects than Norwegian ones, even though our state finances are better. This is because we have a considerable currency risk linked to our economy, which is very closely tied to the price of oil.

Now the situation is in many respects the same, but opposite. The return on shares has been low, but companies are now on average producing a return that is much higher than that from banks or bonds, and the rest of the profits which are not being paid out are hopefully being invested to provide additional dividends in the future.

With European shares at historically cheap levels – some people believe these shares are traded on average at below book equity – it may be wise to be positioned for an upturn here too, because the EU politicians will come to their senses and agree one day. At the time of writing, we may perhaps have already seen the first signs of this.

Naturally, we are not the only ones to see that shares are valued low, but as we pointed out in last month’s comments, it may be rational and necessary for many players to postpone Fig 1

Jarle Sjo, CIO ODIN Forvaltning AS

Fig 2 The Fed Model 10-year government bond yield compared to E/P in the S&P 500

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The Fed Model 4,0

10-years government bond yield in the USA compared to the E/P in the S&P 500

3,5

10

3,0

8

2,5

6

2,0

4

1,5 Earningsyield (E/P)

Government bond yield

1982,01 1983,04 1984,07 1985,1 1987,01 1988,04 1989,07 1990,1 1992,01 1993,04 1994,07 1995,1 1997,01 1998,04 1999,07 2000,1 2002,01 2003,04 2004,07 2005,1 2007,01 2008,04 2009,07 2010,1 2012,01

0

Source: R: Shille/ODIN Research

Fig 1: The relationship between the return on US shares (earnings yield, E/P) and the return on 10-year US government bonds. Note the change which took place at the turn of the century.

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1,0 0,5 0,0 1992,01 1992,11 1993,09 1994,07 1995,05 1996,03 1997,01 1997,11 1998,09 1999,07 2000,05 2001,03 2002,01 2002,11 2003,09 2004,07 2005,05 2006,03 2007,01 2007,11 2008,09 2009,07 2010,05 2011,03 2012,01

2

Fig 2: The earnings yield (E/P) divided by the bond yield (10-year interest on US government bonds) since 1982.

Semi-annual Report 2012

ODIN Norge II

Fund comments The fund ended the first half-year up 5.2 per cent. The fund’s benchmark rose by 8.8 per cent during the same period. Carl Erik Sando, Portfolio manager

The Norwegian stock market started the year well. The Oslo Stock Exchange All-Share Index was up 13 per cent at its peak. However, the turbulence in the eurozone and corresponding weakening of economic activity led to the markets falling again during the spring and early summer. In Norway, it was the consumption-based companies that did best. This was because the Norwegian economy is strong in an uncertain world. With record-low borrowing rates and a good pay settlement, that is perhaps not so surprising. However, the oil price fell from around USD 100 a barrel to around USD 90 at the end of the half-year. Portfolio comments Although oil producers and the supplier industry are still making a lot of money at these price levels – and are attractively priced compared to their earnings – the stock market has obviously assumed a further fall in the oil price. This had a particularly negative effect on supply ship companies Farstad and DOF in June – even though the contract coverage and rate levels are improving. Car-carrier Wilhelmsen Holding also made a negative contribution. Nordic Semiconductor (NOD) shares did not do too well in June either. Most smartphones and tablet computers are now equipped with Bluetooth Smart technology. However, some analysts are uncertain about whether the growth in additional apps will be fast enough to give the company sufficient earn-

Semi-annual Report 2012

ings to justify the relatively high expectations contained in the estimates of this year’s results. The share price of one our large shareholdings, Kongsberg, rose after the company won a long-term contract to deliver rockets to the new US JSF fighter plane. The value of this contract is estimated to be NOK 10-15 per share – even though the deliveries will not start until well into the future. Outlook A lot of attention has been paid to the increase in the landbased production of shale oil in the USA. Depending on technological developments and the cost level, the USA may be self-sufficient in oil in not too many years. This alone may have a negative effect on the oil price and thus the outlook for the Norwegian economy and Norwegian shares. However, it is very uncertain how important shale oil will be in the big picture. The Norwegian stock market, measured by the OSEBX benchmark, is now trading at a price/earnings (P/E) ratio of 9.4 and a P/B of 1.4. These are definitely attractive levels in a historical context. It is true that the interest rates in Norway are unnaturally low as a result of the international debt crisis, but even with much higher interest rates it could be argued that the Norwegian stock market has a strong upside compared to its current level.

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Semi-annual Report 2012

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   

   

   















 























































Fund returns include dividend

                                  











  

 

 











 

 

 

 

 

     



     





Semi-annual Report 2012



I7I





































































































































































































































































































































































































































































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



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



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





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

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



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







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I8I

Semi-annual Report 2012

ODIN Sverige II

Fund comments The fund ended the first half-year up 6.8 per cent. The fund’s benchmark rose by 5.6 per cent during the same period. Tomas Ramsälv, Portfolio manager

The Swedish stock market ended the half-year at about the same level as when the year started. The optimism at the beginning of the year was gradually replaced by scepticism about the EU’s handling of the debt crisis in Southern Europe and worries about the weaker global growth signals. Many large Swedish companies are exposed to the global markets. Portfolio comments Consultancy companies Sweco and ÅF, as well as Unibet, made the largest positive contributions during the first half-year. We sold our entire shareholding in Gunnebo, a security company, following a sharp rise in its share price recently. This company mainly sells security equipment to the European market and is in a restructuring phase that has made its additional value visible. However, following the sharp rise in the share price, we believed the share had a limited upside and our decision made a positive contribution in relation to the benchmark. We increased our shareholding in Boliden following a drop in its share price. We think the company is very attractively priced – especially taking into account the macro trend towards an increasing need for metals in Asia and other emerging markets. Signs of slightly weaker growth in China have affected companies in the sector to which Boliden belongs, so our shareholding in Boliden did not make a positive contribution during the first half-year.

Our shareholding in Nordea also made a very positive contribution to the first half-year return. We sold all our shares in Husqvarna following a sharp rise in the share price in 2012, and that also made a positive contribution to the return. One of the most negative contributors to the relative return of the fund was a share we did not own, namely Hennes & Mauritz, whose share rose sharply in June following good secondquarter results. This company may be a winner in the priceconscious European consumer market. Weaker international economic conditions put pressure on the Volvo share, which we own. Both the European and American truck fleets are quite old and need to be renewed. The management has launched measures to improve the margins and, in our opinion, Volvo has a 25-30 per cent upside compared to its current share price level. However, its competitor Scania made a positive additional contribution to the portfolio’s return. Utsikter Naturally, a lot depends on the solution to the governmentfinance challenges in the EU. At the end of the half-year, there were positive movements relating to this and the portfolio is well positioned for increased global growth during the second half-year. If the global economic growth rate ends up at 3 per cent this year, as the IMF believes, the large Swedish companies’ earnings per share will increase in 2012.

We also strengthened our shareholding in Nordea, the only pan-Nordic bank. Taking into consideration the bank’s low financing costs, attractive share price and ambitious costcutting programme, we can see a considerable upside here.

Semi-annual Report 2012

I9I

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Fund returns include dividend

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      

                                                                                                                                                                                      I 10 I

Semi-annual Report 2012



                                                

   

   

   

   















 























































Fund returns include dividend

                                  











  

 

 











 

 

 

 

 



     

     





Semi-annual Report 2012



I 11 I











  































































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

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

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

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









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

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

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



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





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

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







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











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











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

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



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



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

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

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

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





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

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



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

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

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 

I 12 I

Semi-annual Report 2012

ODIN Norden II

Fund comments ODIN Norden II ended the first half-year up 3.7 per cent. The fund’s benchmark rose by 4.7 per cent during the same period. Truls Haugen, Portfolio manager

The stock market started the year on a positive note. Up to mid-March, the atmosphere was positive after the European Central Bank had given European banks enormous liquidity reserves. This relieved the pressure on the government bond yields in Southern Europe and the growth outlooks seemed to be all right. During the spring, the problems in the banking sectors and government finances became visible again and in May there were also signs that the growth in emerging economies such as India and China was slowing down. Portfolio comments The best contributions to the portfolio’s return have come from Huhtamäki, Wilhelmsen ASA, Husqvarna, Hennes & Mauritz and Austevoll. We are very pleased about the developments in Huhtamäki, which has good operating margins, a positive cash flow and increasing sales in emerging economies, from which almost 30 per cent of its sales now come. Wilhelmsen reported its best quarterly result ever in the first quarter, to which both pure car-carrying operations and high & heavy cargos contributed a lot due to the company’s first-rate utilisation of its fleet and good composition of cargos. Husqvarna did very well at the beginning of the year due to expectations that its USA exposure would produce good results and that the manufacturing problems in its US factory were about to be resolved. All the fund’s shareholdings were sold at a very good price before the market fell again. Hennes & Mauritz has surprised the market with good sales figures for several months in a row, and also referred to commendable gross margins and cost control when it presented its second-quarter results in mid-June. The share rose well-deserved on the back of these results. The Austevoll share price has been on a rollercoaster during the past six months, but the company reported good results for its meal/oil business operations. The share price has lately also risen due to greater optimism in the salmon fishing sector, where it can be seen that the demand in the market is good and the market balance is expected to improve in the second half-year. Another fishfarming company, Marine Harvest, was included in the fund in April and May. The fund was thus well positioned in this share, which rose by 40 per cent in June.

Semi-annual Report 2012

Relatively speaking, the absence of Nokia in the portfolio has been positive for the relative return, since this share fell by 55 per cent during the first half-year. The company is struggling with stiff competition from especially Asian smartphone manufacturers. During the half-year, Nokia lost its leading position to Samsung. On the other hand, the fund suffered from not having a shareholding in Danish pharmaceutical company Novo Nordisk, and from some Norwegian shipping/oil services companies not doing very well. BW Offshore has struggled to execute projects as well as with cost increases and a subsequent reduction in its dividend. Det norske Oljeselskap has suffered from the sharp fall in the oil price but we believe there are large additional values in the company and view the fall in share price as in part a reaction to last year’s sharp rise in share price. StoltNielsen has also struggled with weak rates in the chemicalcarrier segment and more general fears relating to the global macro picture. Outlook The fear of what will happen in the EU dominated the stock market during the first half-year. This pushed up investors’ required rate of return (risk premium) to such a high level that many shares are now very favourably priced. According to some brokers’ estimates, European shares are on average traded at below book equity. This is very rare and very low. Many European companies are sound, global enterprises. There is a difference between doing badly and doing terribly. The companies are still producing good results and, given the fall in their share prices during the second quarter, it should have been taken into account that the earnings estimates might decline. Any positive news regarding a solution to the challenges facing Europe may thus trigger a rise in stock market prices.

I 13 I

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Fund returns include dividend

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

        

                                                                                                                                                                                      I 14 I

Semi-annual Report 2012



                                                     

   

   

   

   

































































                                











  

 

 











 

 

 

 

 



Fund returns include dividend      

     





Semi-annual Report 2012



I 15 I

















































































































































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







































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





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







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



































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











































































































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





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





















































































































 































































































































































































































































































































  



I 16 I

Semi-annual Report 2012











  





















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

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Semi-annual Report 2012

I 17 I

ODIN Europa II

Fund comments Despite all the turbulence, ODIN Europa II achieved a positive return for the first half-year, ending the period up 9.3 per cent. The fund’s benchmark rose by 1.9 per cent during the same period. Alexandra Morris, Portfolio manager

We think this is due to our search for companies that we believe have strong brands and exposure to growth markets, that pay dividend and have historically produced a good return on invested capital. We have chosen to be overweight in sectors that are more sensitive to changes in growth expectations. These type of companies have proven to produce a good return over time but will have higher short-term fluctuations. Portfolio comments During the first half-year, we reduced our exposure to cyclical companies, such as steel and paper ones, and have sold all our shareholdings in Smurfit Kappa (cardboard) and Thyssen (steel). We also chose to sell all our shares in the following manufacturing companies: Andritz (hydropower), GEA (food industry) and Sulzer (pumps). These had all given us a good return. Last, but not least, we sold our shareholding in cruise company Carnival in June. We have reinvested the capital in IMI (control of fluids and gases) and Weir (pumps), both of which are manufacturing companies with strong growth and a high return on capital. We have also bought shares in Bunzl, a British distributor of non-critical goods to the manufacturing industry (cleaning articles, disposable gloves, office supplies, etc). In addition, we have bought some oil-sector shares through BG Group and BP. ODIN Europa II currently has 34 companies with the following sector exposure: 32 per cent are aimed at consumption (food, beverages and durable consumer goods), 22 per cent represent manufacturing companies (pumps, valves, facilities and service companies), while 10 per cent are equally divided between health- and oil-related companies. Information technology accounts for 7 per cent, while the last few percentages are divided among telecoms, chemical, power supply, banking and insurance companies. We have deliberately chosen to keep our exposure to the banking sector low since we are very uncertain about the size of the losses still on the banks’ balance sheets. As long as this uncertainty prevails, banks will have problems in increasing the loans they make and thus their earnings.

these was Telefonica, a large Spanish telephone company whose share price has plummeted despite the fact that only 35 per cent of its earnings come from Spain. On the other hand, more than 30 of the portfolio companies contributed to the positive excess return. Some even made a very positive contribution, such as IT companies AMS and SAP, consumer companies ABI and Adidas and manufacturing companies Leoni (car), PGS (seismic), Prysmian (high-voltage cables), Rolls Royce (aircraft and marine) and Sulzer (pumps). AMS was by far the biggest contributor, with a return of all of 70 per cent during the first half-year. One of our new exciting portfolio companies, Britain’s Weir, has strong positions in growth markets. It manufactures pumps and valves for mining operations and shale oil and shale gas extraction. As a technology leader, it has the largest market shares in its niches. Such pumps have a short lifetime as they pump stones, gravel and mud and must therefore continuously be serviced and in the end replaced. We therefore look on Weir as an attractive exposure to the strong growth in both shale gas/oil and mining operations at the same time as its earnings are not directly dependent on the prevailing price of oil, gas or metals. Outlook The EU is facing major important decisions for the future. This particularly applies to countries in the eurozone. At the time of writing, the heads of the eurozone countries have agreed that the permanent stabilisation fund, the ESM, is to be able to recapitalise banks directly. This is the first step towards constructive solutions to the problems in the EU and may provide hope for the coming six months. European shares are cheap in a historical context, so we believe there is a low downside at today’s levels, but we need to have political clarifications and thus more predictability in order for there to be large rises in share prices. ODIN Europa II is a fund that invests in quality companies which we believe can create value throughout an economic cycle.

During the first six months, only 10 of the portfolio companies made a negative contribution to the return and none of them made a particularly negative contribution. The worst of I 18 I

Semi-annual Report 2012



Fund returns include dividend

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        

                                                                                                                                                                                      Semi-annual Report 2012

I 19 I



                                                   

   

   

   

   

























































                                     











  

 

 

 











 

 

 

 



     

     

Fund returns include dividend





I 20 I



Semi-annual Report 2012



































































































































































































































































































































































































































































































































































Semi-annual Report 2012

I 21 I

















































































































































   

I 22 I

Semi-annual Report 2012

ODIN Finland II

Fund comments ODIN Finland II’s return rose by 7.5 per cent during the first halfyear. The fund’s benchmark fell by 1.8 per cent during the same period. The fund has thus produced a considerable excess return during the period. Truls Haugen, Portfolio manager

The stock market started the year on a positive note. Up to mid-March, the atmosphere was positive after the European Central Bank had given European banks enormous liquidity reserves. This relieved the pressure on the government bond yields in Southern Europe and the growth outlooks seemed to be all right. During the spring, the problems in the banking sectors and government finances became visible again and in May there were also signs that the growth in emerging economies such as India and China was slowing down. The Finnish stock market was heavily affected by the weak developments in Nokia. Portfolio comments From a portfolio point of view, the absence of Nokia in the portfolio has been clearly the best decision made during the past six months. This company is struggling terribly with its weak position in the smartphone market, and is in reality under pressure from all sides. This has led to profit warnings and the announcement of major restructuring, with associated downsizing. The share fell by 55 per cent during the first half-year. The fund’s major shareholding in packaging company Huhtamäki has been a profitable investment. This company delivers on margins and is growing strongly in emerging economies, which will soon comprise 30 per cent of its sales. Its cash flow is also good. The share prices of Cramo and Ram-

Semi-annual Report 2012

irent both recovered after last year’s weak developments. These made a good contribution to the portfolio. The same is true of Konecranes, in which ODIN Finland II reduced its shareholding due to higher prices earlier this year. During the period, the fund increased its shareholding in Sampo, an insurance company, and TeliaSonera, a telecoms company. Both have commendable, stable business models with a good direct return that creates stability in the portfolio. The latter has also reached an agreement with its coshareholders regarding its position in Russian mobile-phone operator Megafon, according to which it will now receive dividend from the company that can then be passed on to TeliaSonera’s shareholders. Outlook The fear of what will happen in the EU dominated movements of the stock market during the first half-year. This pushed up investors’ required rate of return (risk premium) to such a high level that many shares are now very favourably priced. There is a difference between doing badly and doing terribly. We can see that the companies are still producing good results. Given the fall in their share prices during the second quarter, it should have been taken into account that the earnings estimates might decline without share prices necessarily reacting to this. Any positive news relating to a solution to the challenges facing Europe may thus trigger a rise in stock market prices during the second half-year.

I 23 I































       

                                                                                                                                                                                      I 24 I

Semi-annual Report 2012



                                                 

 

 

 

 







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





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







                                  

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

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  

 

 

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

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

 

 

 

 

 

     



     





Semi-annual Report 2012



I 25 I



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

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 

I 26 I

Semi-annual Report 2012

ODIN Global II

Fund comments The first half of 2012 ended with a rise of 5.8 per cent for ODIN Global II. The fund’s benchmark rose by 5.4 per cent during the same period. Vegard Søraunet, Portfolio manager Oddbjørn Dybvad, Portfolio manager Even in a world with lower growth, it is possible to find companies that are priced too low priced compared to their underlying assets. Our concentrated portfolio consists of 35 companies worldwide. It comprises companies that demonstrate good underlying developments despite a slightly lower growth outlook. In addition, the portfolio has some niche companies whose products are experiencing structural growth. In our opinion, many shares are wrongly priced during times such as those we are in right now. One of the reasons for this is that investors’ investment horizons vary. The average period for which a share is owned in the USA is now as little as six months. In the short term, share prices are affected by news and turbulence concerning the macroeconomic outlook. In the long term, a company’s share price follows the company’s fundamental developments, creating opportunities for investors with a longer time horizon, such as ODIN Global II. Portfolio comments Our best contributors so far this year have been Coca Cola Femsa, a Mexican brewery, CEMIG, a Brazilian power-supply company, and the Kerry Group, an Irish food-ingredients company. This is despite the fact that neither Brazil nor Ireland have been among the better markets so far this year. Coca Cola Femsa has been a portfolio holding and strong contributor to the fund’s excess return for a long time. However, we have now reduced our holding from seven per cent of the fund to the current three per cent. We still believe this is a fantastic company but the price of the share is no longer as attractive. Fundamentally, the company is facing blue skies, with strong growth in volume and prospects of continued expansion of its margins and the potential for a higher return on invested capital. At the end of last year, we bought shares in Brazil’s CEMIG. This is one of Brazil’s largest power-supply companies. Although CEMIG is partly state-owned, we regard it as one of the best in the business at finding good, profitable projects. This is unlike many of the other state-owned power-supply companies, which often seem to control their project execution according to state needs rather than the shareholders’ wishes.

Semi-annual Report 2012

At the beginning of the year, our analysis revealed that the company had a large outstanding claim that was not reflected in its balance sheet. The market focused increasingly on this during the spring and the share price has risen by 95 per cent this year. So far in 2012, our negative contributors have been Banco do Brasil, a bank, Japan’s Yamaha Motors and Walgreens, a US pharmacy chain. Banco do Brasil is affected by the weaker macroeconomic climate in Brazil, where economic growth is weaker than it has been for a long time. This leads to the banks’ provisions for loan losses increasing. We have sold our holdings in both Japan’s Yamaha Motor and America’s Walgreens. Walgreens is buying up the Boots pharmacy chain in Europe. We consider the investment case of improved operating margins and a higher return on capital to be a long-term one following the strategic turn the company is taking. The Yamaha Motor investment case has not developed as planned. We suspect that Yamaha, unlike its main competitor Honda, has underinvested in new models. This is inhibiting the company in an otherwise tough market for motorbikes in the West and for scooters in emerging economies. The fund’s exciting new holdings include the London-listed Weir Group, Germany’s BASF and the Nordson Corporation in the USA. The latter is a niche manufacturer of glue products. An operating margin percentage in the mid-20s reflects its unique position in the market. The company has produced a strong return on invested capital and is attractively priced. This shareholding strengthens our exposure to this niche segment in which we also have positions through Germany’s Henkel and America’s 3M. Outlook From a sector viewpoint, we have slightly increased our shareholdings in more cyclical companies to the detriment of more defensive consumer-goods companies. We believe the time has come to increase our exposure to more cyclical investments despite the fact that the summer in Europe may be turbulent.

I 27 I

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       

                                                                                                                                                                                      I 28 I

Semi-annual Report 2012



                

                 

                     

                  

 

 

 

 



























  

 

 

 











 

 

 

 



     

     





Semi-annual Report 2012



I 29 I







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

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

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



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



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

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















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



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





















































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



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







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







































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































































































































































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















































I 30 I



Semi-annual Report 2012































































































































































































































































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

















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

















 

Semi-annual Report 2012

I 31 I

ODIN Eiendom (Real Estate)

Fund comments The fund ended the first half-year up 8.7 per cent. The fund’s benchmark rose by 1.9 per cent during the same period. Tomas Ramsälv, Portfolio manager

Nordic real estate shares followed other shares quite closely during the first half-year. ODIN Eiendom had a strong first quarter, but in May the stock markets started to be concerned about European and global growth. Nordic real estate shares did not avoid investors’ declining appetite for shares. This continued in June and the prices of Nordic real estate shares therefore ended the halfyear, on average, at around the same level at the beginning the year. Individually, of course, there were huge differences. Falling government bond yields in the Nordic nations have not produced correspondingly lower borrowing rates since the credit margin has increased. Portfolio comments During the first half-year, we increased our shareholding in Klövern, most of whose real estate is located in 10 regional towns in Sweden. We believe that its low valuation and relatively high net asset discount gives the share a solid potential upside in the future. During the first half-year, this share was unfortunately our largest negative contributor. Two Finnish companies also made a negative contribution. Technopolis announced a new share issue to increase its number of acquisitions and extensions. Sponda also made a negative contribution to the return compared to the benchmark.’ Fortunately, several of our Norwegian shares did well. We have invested in JM Bygg, one of the largest real-estate developers in the Nordic region. This share was one of many positive contributors to ODIN Eiendom’s excess return. The Norwegian ownership positions – including Norwegian Property and Olav Thon Eiendomsselskap - produced the best return in total. The best return we achieved was when we sold all our shareholding in Fornebu Utvikling, which was bought on the stock exchange

I 32 I

following a bid that was 40 per cent higher than the market price. We sold our entire shareholding in Neas, a company that does not own any real estate but which is involved in facility management – the management of real estate for other property owners. The company’s bad results in 2011 and the share’s poor liquidity led to us selling this holding. ODIN Eiendom subscribed for shares when Norwegian housebuilder Selvaag Eiendom was listed on the stock exchange before the summer. Selvaag is a company with long traditions and a very experienced housebuilder. As one of very few stock market flotations in an extremely turbulent market, the share price was set at the lower part of the indicated price interval. We think the share is attractively priced at that level. Outlook Despite considerable fluctuations in share prices, the changes in the real estate companies’ balance-sheet values have in general been small. The second and fourth quarters are normally those in which the values are adjusted the most. We believe any write-downs will be small and in any case discounted in the share prices. The Nordic banks are still restrictive when it comes to financing transactions in commercial property. Higher margins and lower debt-to-asset ratios may limit the number of transactions in the market and thus the increase in value in the real estate market. Some companies have started to issue their own debentures to show that they are not entirely dependent on bank financing. We will monitor developments in the credit market carefully. In the real estate sector, the percentage of the dividend from the real estate that the lender is to receive is extremely important.

Semi-annual Report 2012

 ODIN Eiendom (Real Estate) - Semi-Annual Report 2012

Fund returns include dividend













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

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



                

                                                                                                                                                                                      Semi-annual Report 2012

I 33 I

ODIN Eiendom (Real Estate) - Semi-Annual Report 2012 

                 

                                      

                   

                      

    

    

    

    

























































































Fund returns include dividend

          











  

 

 











 

 

 

 

 



     

     





I 34 I

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Semi-annual Report 2012

 ODIN Eiendom (Real Estate) - Semi-Annual Report 2012

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Semi-annual Report 2012

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