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A beach with palm trees in Hawaii.
Hawaiian Holdings, the owner of Hawaiin Airlines, is a new holding in the portfolio. Hawaiian Airlines is the tenth largest domestic airline in the US but also specialises in routes to Asia.

There was clearly great demand for this type of fund when SKAGEN was launched as just a few months after inception on 26 May 2015, the high concentration global equity fund SKAGEN Focus had assets under management of NOK one billion (around EUR 100 million). Three years later, that figure has almost tripled.

Those who invested in the fund at launch have seen their investments grow by 4.13 percent annualised as measured in euro (as of 04 June 2018).

The first few months were characterised by a broad drop in commodity and oil prices as well as uncertainty about a weaker Chinese economy. To add insult to injury, in a climate of extremely low interest rates, investors were fleeing to “safer” growth stocks, primarily in large companies.

Undervalued commodities

SKAGEN Focus chose to steer clear of what were, in the portfolio managers’ view, overvalued stocks. Rather, the portfolio managers found several undervalued and highly unpopular commodity companies with healthy business models and a high likelihood of performing as soon as commodity prices returned to normal. The Canadian silver manufacturer Pan America Silver and South32, a spin-off of the Australian mining giant BHP Billiton, as well as the Canadian copper manufacturer First Quantum were among the first holdings. First Quantum’s share price doubled in a short space of time, generating a solid profit for the fund.

“Our core philosophy is to find undervalued stocks that we think have a highly likelihood of increasing in value over a two to three year period. We took advantage of all the volatility in 2015 to construct a diversified portfolio consisting of stocks that were trading far below a reasonable price level relative to the fundamental risk,” says Jonas Edholm, portfolio manager of SKAGEN Focus.

Turbulent, but with bright spots

One of the bright spots in 2015 was the US-based protein manufacturer Omega Protein, whose share price increased more than 70 percent in USD terms during the course of the year. The fund’s largest holding at the time, the US insurance giant AIG also provided a good return after pressure from shareholders who believed that the company should be split into three divisions. The flash memory producer SanDisk also contributed to the fund’s return.

The Volkswagen diesel scandal dragged down all stocks with any auto exposure without exception. It was at this point that SKAGEN Focus chose to buy into the German semiconductor manufacturer Infineon. The share price had been unduly pulled down, despite the fact that the company actually benefited from a shift away from diesel engines.

“This is an excellent example of how we, as a smaller fund, can use the inefficiency of the market to our advantage. Infineon was one of the best contributors in 2016-2017; the share price more than doubled from EUR 9 to 19,” explains portfolio manager David Harris.

Trump, German banks and Brexit

In 2016, news headlines were dominated by Donald Trump, remarkable central bank decisions, wavering German banks, nuclear missile testing in North Korea, an oil price rally initiated by OPEC, and not least Brexit. Despite all this, the global stock markets recovered towards the end of the year and emerging markets performed even more strongly. SKAGEN Focus had increased its exposure to emerging markets in the first half of 2016.

A new position in 2016 was Philips Lighting, which was listed at a price that the portfolio managers considered extremely low.

“There was only lukewarm interest around the listing of Philips Lighting due to the exaggerated focus on the structural downturn in traditional lighting. The share price was very attractive. The market undervalued the other parts of the company which were growing and which more than compensated for the shrinking division,” explains Jonas Edholm.

Profitable mining companies

Central to SKAGEN Focus’ investment process is remaining disciplined about setting a price target and trading accordingly. As such, several of the winning positions in 2016, such as Pan American Silver, AirAsia and Haitai, were phased out of the portfolio. The two former companies got off to a poor start, but all three gained more than 100 percent in the course of the year.

At the same time, we shifted exposure from Pan American Silver to the Australian mining company South32. This turned out to be a profitable decision. When SKAGEN Focus first bought into South32, the company was not on many investors’ radars and initially it had a sub-optimal cost structure. They managed to lower costs and started to pay a dividend.

Dynamic cement holdings

2016 was also the year SKAGEN Focus began to take an interest in cement. Japanese Taiheiyo Cement had long been plagued by low demand, but the portfolio managers saw opportunities. This was amongst other things due to a normalisation in demand for building materials, supported by the company’s growing presence in the US and the upcoming Olympics in Tokyo in 2020.

When we exited the company in November 2017, the share price had risen from 2800 to 4700 yen. At the same time, an interesting and similar situation emerged in South Korea and SKAGEN Focus bought into the dynamic duo Hanil Cement and Asia Cement. The meeting that took place between the leaders of South and North Korea in April 2018 led to an uplift in the building sector in South Korea. The portfolio managers sold most of their positions in the two companies following strong share price performance.

Big in Japan

The fund’s active journey continued in 2017 and 14 new companies entered the portfolio while just as many were sold out.

Over 20 percent of the fund’s assets were invested in the Japanese stock market, spread between areas as diverse as cement, domestic banks, disaster equipment and telecoms. The Japanese financial conglomerate SBI Holdings – the world’s largest investor in blockchain technology – was one of the fund’s best contributors in absolute terms.

In 2017, Samsung SDI reached the price target that the portfolio managers had set for it and they exited the company. The Polish beverage manufacturer Stock Spirits demonstrated surprisingly good results and a more stable market share, which had a positive effect on the share price.

The global pharmaceuticals company Teva detracted from the fund’s performance despite an impressive recovery towards the end of the year. In 2018, Teva has reported improved results and there are signs of further recovery.

Excellent results in 2018

So far in 2018, SKAGEN Focus has generated very good results. After the volatility in the first quarter, the fund is now 1.07 percentage points* ahead of its benchmark index. The sports brand Fila Korea is one of the fund’s best contributors, in addition to last year’s find SBI Holdings.

A new and exciting name in the portfolio is Hawaiian Holdings, which owns Hawaiian Airlines. The company reported stable earnings for the first quarter and was recently proclaimed the best domestic airline in the US. The company trades at a substantial discount to global competitors and its own intrinsic value.

 

* as of 29 May 2018, as measured in EUR.

 

Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager's skill, the fund's risk profile and management fees. The return may become negative as a result of negative price developments.