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The focus is not on past performance, but rather on the future, says manager Kristoffer Stensrud about ten years of SKAGEN Kon-Tiki. Read MORE ABOUT THE ANNIVERSARY ON PAGES 12-13 and the portfolio managers' report from page 19.
The focus is not on past performance, but rather on the future, says manager Kristoffer Stensrud about ten years of SKAGEN Kon-Tiki. Read MORE ABOUT THE ANNIVERSARY ON PAGES 12-13 and the portfolio managers' report from page 19.
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The focus is not on past performance, but rather on the future, says manager Kristoffer Stensrud about ten years of SKAGEN Kon-Tiki. Read MORE ABOUT THE ANNIVERSARY ON PAGES 12-13 and the portfolio managers' report from page 19.
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The focus is not on past performance, but rather on the future, says manager Kristoffer Stensrud about ten years of SKAGEN Kon-Tiki. Read more about the anniversary on pages 12-13 and the portfolio managers report from page 19. T HE ART OF COMMON SE NSE 6 The value of short-termism The short-term view can work to the benefit of long- term investors 8 Set to release its triggers How did Oracle become one of the largest hol- dings in SKAGEN Global? 14 Quality at a discount The commodity sector is a good place to look for undervalued companies these days. A new and better world 5 Kristoffer Stensrud Market Report NUMBE R 1 4 A P R I L 2012 4 SK AGE NF UNDS. COM 2 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 SKAGEN Kon-Tiki heads for new shores The focus is not on past performance, but rather on future returns, says manager Kristoffer Stensrud about ten years of SKAGEN Kon-Tiki. READ MORE ABOUT THE ANNIVERSARY ON PAGES 12-13 AND IN THE PORTFOLIO MANAGERS REPORT FROM PAGE 19. Market Report T HE ART OF COMMON SE NSE NUMBE R 1 4 A P R I L 2012 4 SK AGE NF UNDS. COM 6 The value of short-termism The short-termviewcan work to the benefit of long- terminvestors 8 Set to release its triggers How did Oracle become one of the largest hol- dings in SKAGEN Global? 14 Quality at a discount The commodity sector is a good place to look for undervalued companies these days. A newand better world 5 Kristoffer Stensrud Photo: Carl Christian Raabe / Nordisk Film Distribusjon AS SKAGEN FUNDS MARKET REPORT NO. 1 2012 Contents 3 SKAGEN Funds Returns 4 Leader and Comment 5 A new and better world 6 The value of short-termism 8 Oracle all set to release its triggers 10 The Long Good Buy 12 Ten years on the raft 14 Quality at a discount 16 Coming home to roost 17 Keep up to date 18 New information document 19 Portfolio managers report 32 Fixed income commentary 34
Portfolios 41 Quarterly accounts 42 Risk and return measurements CONTENTS SKAGEN Funds invests in Under valued, Under-researched and Unpopular compa- nies all over the world. SKAGEN AS was established in Stavanger in 1993 and is one of Norways leading fund managers. Postal address: SKAGEN AS Postbox 160 4001 Stavanger, Norway www.skagenfunds.com Telephone no.: +47 51 21 38 58 Editorial team: Parisa Lemaire, news editor Tore Bang, technical editor Nick Henderson, journalist Mark Houben, journalist SKAGEN seeks to the best of its ability to ensure that all information given in this report is cor- rect, however, makes reservations regarding possible errors and omissions. Statements in the report reflect the portfolio managers view- point at a given time, and this viewpoint may be changed without notice. The report should not be perceived as an offer or recommendation to buy or sell financial instru- ments. SKAGEN does not assume responsibility for direct or indirect loss or expenses incurred through use or understanding of the report. SKAGEN recommends that anyone wishing to invest in our funds contacts a qualified custo- mer adviser by telephone on +47 51 21 38 58 or by email at contact@skagenfunds.com. Oil not paper: As a large or small shareholder in Heine- ken, you dont just own a security, you have ownership in a company. New holding in SKAGEN Kon-Tiki, Eurasian Natural Resources, is a Kazakh mining company which produces ferrochrome amongst other things P h o t o :
B l o o m b e r g P h o t o :
B l o o m b e r g P h o t o :
B l o o m b e r g Samsung Electronics, a holding in all three equity funds, is now more frequently compared to Apple, rather than to components suppliers. 6 29 26 3 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 SKAGEN Funds - Returns The following tables show the returns for SKAGENs funds versus their respective benchmarks in euro. The figures are updated as of 31 March 2012. EQUITY FUND SKAGEN KON-TIKI EQUITY FUND SKAGEN GLOBAL EQUITY FUND SKAGEN VEKST BOND FUND SKAGEN TELLUS Portfolio manager: Kristoffer Stensrud Start: 5 April 2002 Portfolio manager: Kristian Falnes Start: 7 August 1997 Portfolio manager: Beate Bredesen Start: 1 December 1993 Portfolio manager: Torgeir Hien Start: 29 September 2006 SKAGEN Vekst OSEBX/MSCI AC (50/50) Return past 12 months Average annual return since start -10 -5 0 5 10 15 20 -10 -5 0 5 10 15 20 -9,3 % 2,2 % 15,6 % 9,6 % SKAGEN Kon-Tiki MSCI Emerging Markets Index (Daily Traded Net Total Return) Return past 12 months Average annual return since start -4,5 % -2,9 % -20 -10 0 10 20 -20 -10 0 10 20 18,2 % 9,4 % -10 -5 0 5 10 15 20 SKAGEN Global MSCI World Linked Index Return past 12 months Average annual return since start 2,1 % 5,3 % 16,0% 1,8% -10 -5 0 5 10 15 20 -10 -5 0 5 10 SKAGEN Tellus Barclays Capital Global Treasury Index 3 - 5 years (euro) Return past 12 months -10 -5 0 5 10 5,80 % 6,58 % Average annual return since start 5,74 % 9,80 % OUR F UNDS
Unless otherwise stated all figures quoted in this report are in euro, except for the quarterly financial statement, which is in Norwegian kroner. SKAGEN Funds only has authorisation to market its money market funds SKAGEN Hyrente and SKAGEN Hyrente Institusjon in Norway and SKAGEN Krona in Sweden. SKAGEN Avkastning has a limited market area. Information regarding these funds is included in the official accounts but is excluded elsewhere. The quarterly financial statement was originally prepared in Norwegian. The translated version is published with reservations regarding possible errors and omissions as well as erroneous translation. In case of conflict between the Norwegian accounts and the English translation, the former shall prevail. The Norwegian version of the quarterly financial statement is available at www.skagenfondene.no. 4 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 LE ADER At the risk of repeating myself, I must record that the year thus far has seen initial opti- mism give way to another bout of risk off. The shadow of Eurozone mismanagement looms large over the financial markets once more, and stocks are temporarily in retreat. Here in the Nordics one could be forgiven for thinking that this was all someone elses problem. In Norway, in particular, the economy moves from strength to strength. Net public debt at the end of 2011 was about 160% of GDP that is minus 160% of GDP. And the public surplus is forecast to be about 9% of GDP in 2012. And of course the whole endeavour is underwritten by an active and well-regulated oil sector mani- fest in the form of one of the worlds largest sovereign wealth funds. This is not just the result of good luck and geography. The Nordic region suffered its ban- king crisis in the early 1990s. In the aftermath many countries adopted reforms to make the labour market more flexible, and to place the banking sector on a sounder footing. The net result here in Norway has been an increasingly efficient economy that remains somewhat untouched by recent events. Safe havens and their (unforeseen) benets What then are the benefits to our investors of SKAGENs domicile in this Nordic safe haven? Aside from the opportunity in the local capital markets best accessed through our equity fund SKAGEN Vekst, the reforms of 20 years ago have led to a focus on sound governance, transparency, and a lack of corruption. Our funds, and our operations, are therefore subject to uncommon levels of scrutiny, and transparency. After all, this is a country where personal tax details are a matter of open public record. The co-investor risk, or rather lack of it, is a positive factor also. SKAGEN still draws a little less than half its investor base from Norway alone. A prosperous and well run export-based economy, that rails against complacency and inefficiency, continues to ensure that our local investors can plan and invest for the long-term. And as a recent survey by investment bank Goldman Sachs demonstrates (repeated on page 8), there is distinct advantage in investing for the long term, as SKAGEN does. Good absolute performance Despite recent corrections, the markets have largely started the year well, the S&P 500 retur- ning 18% as at the end of the first quarter. Year to date, absolute return in our equity funds is encouraging 12.4% for SKAGEN Vekst, 10.6% for SKAGEN Global, and 9.8% for SKAGEN Kon-Tiki, measured in euro. And our global bond fund SKAGEN Tellus has returned 2.60%, some 5.53% clear of its benchmark. Read the portfolio manager reports from page 19. Hip hip hurrah Finally a note of celebration. This month marks a banner year for our emerging market fund SKAGEN Kon-Tiki with its 10 years anni- versary. This wonderful balsa raft has sailed through generally choppy waters to deliver performance in excess of its benchmark every single calendar year, to an accumulated total of 433.4% for the 10 years since inception. The founding portfolio manager, Kristoffer Stensrud, writes of his 10 years overleaf. Its a great story. Safe havens and champagne LEADER Timothy Warrington, Head of International, SKAGEN Funds tcsw skagenf unds.com In our last market report published in Octo- ber a few months after a substantial price drop in the stock markets we wrote about the benefits of maintaining a long-term per- spective. As the global stock markets had not mana- ged to generate any returns in 12 years, many people were starting to question whether there was any point owning shares at all. Regardless of how long-sighted one is. Although our actively managed funds have generated satisfactory returns over a 12-year period, the past five have not given us much to write home about. Nevertheless, as we have pointed out before, it is all about prices. At the turn of the millennium the price of the global stock market had reached a record high. Even though share prices in general have not gone up since then, companies have been earning money. In some cases a lot of money. The price tag for these earnings has fallen and they have done so significantly for the most popular companies; from P/E levels of 40 and 50, they have come down to around a quarter of that figure today. Thanks to the good earnings, companies bank accounts have swelled and debt levels dropped. It is estimated that US and Euro- pean companies now have a combined cash holding of a formidable USD 4000 billion (see portfolio managers report). When bank accounts are too thick, com- panies have historically had an unfortunate tendency to buy back their own shares at near peak prices. It is, after all, when times are good that earnings and share prices are at their highest and cash reserves at their fullest. The last time we saw this phenome- non was in 2007/08. Share buybacks have a dilutive effect on shareholders. Given the lack of competitive investment opportunities or risk aversion compa- nies have been smarter this time. Some of the cash holdings were used during the turbulence last year to buy back shares, at attractive prices, and this had a concen- trating effect on shareholders. Many have also increased dividend payments which for many companies provide shareholders with a direct yield that is well over what investors get in the (government) bond market. The fact that the stock market turned just after the previous market report came out was not something we could have predicted. We merely pointed out that the pricing in our equity funds was not far off the trough levels of 2008/09. Once again we have witnessed that when the stock market turns back up after a period dominated by fear, the upturn is both good and strong. As equity investors with eternity as our investment horizon, we are forced to remain in the stock market in both good times and bad. Much of our excess return has been generated in bad times, when investors behave irrationally and unpopu- lar and undervalued companies abound. This will (hopefully) continue to hold true in the future. Smart stock purchase COMMENT Tore Bang Technical editor, tb skagenfunds.com 5 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 COMMENT Our humble starting point was not to make predictions about the greatest change in the worlds economic structure since 1914. Our focus was on the exceedingly good selec- tion of undervalued, unpopular and under- researched companies in the worlds emer- ging markets. Companies that despite the glo- bal recession, collapse in technology stocks and suspension of payments in Argentina, were operating healthy, good and profitable businesses. What has happened since is history. Our presence in these markets has, to put it modestly, provided a nice contribution to unit holders assets this decade. Just prior to the launch of SKAGEN Kon-Tiki, China became a member of the World Trade Organisation. Goldman Sachs Jim ONeill had coined the term BRIC, which later became synonymous with the new economic world order. From the crisis in the autumn 2008, we got the term G20, which includes many of the worlds emerging markets countries. These are expected to take over the role of industrialised countries (G7) shortly. The emerging markets share of the worlds stock value has increased from 5-6 to almost 25 percent. China has gone from being the worlds eighth largest economy to the second largest. It is the signals from the countrys various economic indicators that cause the stock exchange dog to wag its tail or not, as the case may be. The relative size of emerging markets in world trade has more than tripled. What is most edifying is that this growth has lifted hundreds of millions of people out of poverty. Life expectancy has risen while child morta- lity has fallen substantially. In other words, the world has become a considerably better place to live in. The very fact of witnessing such furious development, and in such a short time, has been a privilege in itself. The world has perhaps changed even more for active value based investors such as our- selves. By way of example there are currently 32 analysts following US Citibank, while 61 follow State Bank of India! In 2002 no one was interested in Grupo Mexico. Today the company is the worlds third largest copper producer and is followed by 20 analysts. Ten years ago you could find markets and companies that led their own independent lives. The belief that financial markets could continue to live such a decoupled life died away with the financial crisis. Despite the fact that the fundamental decoupling is extre- mely present, an absurd logic among market participants has resulted in global emerging markets fluctuating more than developed markets, during upturns and downturns alike. The big question is what will happen in future. The largest companies will most likely continue to be highly dependent on the gene- ral mood among participants in the global financial markets. Among the medium-sized companies we are however starting to see a trend that analysts are increasingly con- centrating their efforts on companies that are slightly off the radar. The development of local institutions, which were in short supply a decade ago, is also generating local interest in stocks. Looking at the big picture, the marginal demand for securities, and likewise price fluc- tuations, have been driven by global money. It appears that the effects are now starting to be diluted, as is the case in Norway. But perhaps the most important thing for investors like us is the flourishing of genuine, value-oriented investors. They will help improve the pricing of good companies, as well as reduce the focus on momentum and trend fluctuations. Many people ask us whether we see as many investment opportunities in emerging markets now as we did at the beginning of this millennium. The planets of mars and the moon are closed to investors for the time being, but there is something called frontier markets. A number of people have already cast their eyes over these markets, us inclu- ded. With the possible exception of the Afri- can continent, where investable listed compa- nies are unfortunately in short supply, we still do not see anything resembling the paradigm shift we have seen in the past decade. This article first appeared as a guest commen- tary by Kristoffer Stensrud in the Norwegian financial daily, Dagens Nringsliv. A new and better world The emerging markets fund SKAGEN Kon-Tiki has just celebrated its tenth anniversary. The birthday-fund is in good shape, and like its portfolio managers, grows lovelier by the day. With EUR 6 billion under management, the fund has grown to quite a size. But that is peanuts in light of the changes that have taken place in the world these past years. Kristoffer Stensrud, portfolio manager of SKAGEN Kon-Tiki 6 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 THEME The survey by Goldman Sachs underlines a trend that has long been apparent in global stock markets; investors hold their selected companies for increasingly shorter periods of time. The reasons for this are manifold. The collapse of IT stocks at the turn of the millennium is the key starting point. It repre- sents the beginning of the end of the theory that long-term savings in stocks is a sure path to riches. The 1990s an extremely good decade for equity investors were the heyday for this theory (see graph). Creative nance industry As the 2000s became less and less share- holder friendly, the large investment banks rapidly started to turn to other more lucrative savings alternatives. Property, bonds and commodities were marketed as the best long- term investments. Equities were reclassified as a savings class only suitable for tactical and sector- specific allocations. A range of instruments adapted to this short-term approach were created. One good example is exchange- traded funds (ETFs), which are funds traded on a stock exchange, and thus impacted by investors mood swings. The investors hunt for alternatives to stocks also led to renewed growth for hedge funds. When two of the biggest personalities in the industry, Julian Robertson and George Soros, decided to restructure their funds in 2000, many people predicted that the golden age in the industry was over. That was not how things panned out. Growth took off and an increasing number of new participants entered the arena. High frequency equity trading dominates The new participants were possibly more aggressive and more short sighted than their predecessors. Quantitative hedge funds, which are characterised by extremely high frequency trading using computer-based models, sprang up as a new power in global finance. The hedge fund industry currently has around USD 2000 billion under management. In addition there is a not insignificant level of loan financing. High frequency stock tra- ding, which is on the whole driven by hedge funds, constitutes around 50 percent of the volumes in the US stock market. It is thought that the larger hedge funds, such as Citadel, D.E. Shaw and SAC Capital Advisors, each represent as much as a couple of percent of the daily global stock trading. The vast trading volumes of hedge funds have made them one of the most important contributors to equity analysts and brokers pay checks. Consequently the products offe- red by brokers are increasingly short term in nature. Analysts focus on quarterly earnings now overshadows a comprehensive valua- tion of the long term value creation that takes place in companies. This can be substantia- ted by hard facts. A recent analysis by Goldman Sachs demonstrates that while analysts ability to predict a companys earnings development over the next 12 months improved conside- rably in the period between 2006 and 2010, their ability to predict changes in earnings three years hence has taken a turn for the worse. In other words Pavlovs broker dog increasingly wags its short-term tail, thanks to commissions from hedge funds. More joy than fear From our office in Stavanger we observe the increased short-termism in the stock markets with cautious delight. The caution is due to the fact that the inex- plicable volatility at times causes significant short-term fluctuations in the pricing of indi- vidual stocks that can cause feelings of dis- comfort. The delight is down to the fact that the increased short termism is most likely one of the main drivers behind investors having become increasingly irrational, and stock markets increasingly less efficient, over the past few years. On the whole our delight far outweighs our caution. In other words, the more robot The value of short-termism A survey by investment bank Goldman Sachs demonstrates that on average a US equity fund holds a stock for a period of ten months only. That is a good starting point for long term investors like SKAGEN to create good returns for unit holders. Source: Bloomberg 0 200 400 600 800 1000 1200 1400 1600 1800 0 1 . 9 7 1 1 . 9 7 0 9 . 8 0 0 7 . 8 1 0 5 . 8 2 0 3 . 8 3 0 1 . 8 4 1 1 . 8 4 0 9 . 8 5 0 7 . 8 6 0 5 . 8 7 0 3 . 8 8 0 1 . 8 9 1 1 . 8 9 0 9 . 9 0 0 7 . 9 1 0 5 . 9 2 0 3 . 9 3 0 1 . 9 4 1 1 . 9 4 0 9 . 9 5 0 7 . 9 6 0 5 . 9 7 0 3 . 9 8 0 1 . 9 9 1 1 . 9 9 0 9 . 0 0 0 7 . 0 1 0 5 . 0 2 0 3 . 0 3 0 1 . 0 4 1 1 . 0 4 0 9 . 0 5 0 7 . 0 6 0 5 . 0 7 0 3 . 0 8 0 1 . 0 9 1 1 . 0 9 0 9 . 1 0 0 7 . 1 1 MSCI World NO RETURNS SINCE THE START OF THE MILLENIUM Blown up by IT: The 1990s were good for investors in the global stock market (index). Share prices were blown up to historic proportions, aided by the IT sector. The necessary price corrections subsequently resulted in a historically weak decade for stocks. Many lost the belief that the long-term view pays off and the stock market has become increasingly short-sighted since. 7 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 THEME traders and quantitative based funds there are, the greater the opportunities for active value based investors such as ourselves to find cheap, wrongly priced companies.
The stock market uctuates more than the values Why is it that we still have such an unshakea- ble faith in our own long-term perspective in a world which increasingly gravitates towards the short term? First and foremost because we focus on a companys ability to earn money over time. When we buy stocks we do not become owners of paper, but own a stake in a com- pany. Most people follow this logic when they own 50 or 100 percent of a privately owned company, such as a local restaurant or brewery. For some reason, one loses this perspective when it is a question of owning just a small part of McDonalds or Heineken, through listed stocks. The underlying values can be found in and are managed in the companies, not on the stock markets. The values crystallize and are created over years, not in the course of a few minutes or quarters. A brewery owner would hardly say that his brewery had lost ten per- cent in value even though a cold spring meant lower sales of beer for a couple of months. The stock market on the other hand is more than willing to draw such a conclusion. Not done overnight When, as part of our analysis, we go down to a companys engine room to see how the values are created, we see assets, strate- gies, processes and products that it has taken decades to create. We also see that compa- nies are continuously sowing new seeds of value creation, and it will take years before they will (eventually) bloom. The Swiss company Roche will not earn money on the drugs it is researching today for several years (and hopefully then). It will take three years for the full effects of the new products that the US company Tyco Interna- tional is rolling out within home alarms today to be felt. That is because it takes years, not days, to crystallize values in a company and our conclusion is that an investor also ought to have a corresponding time horizon for his holdings. The empirical data and our own experience support our long-term perspective on equities and value creation. Estimates from Goldman Sachs show that if one owns shares for 12 months, around 45 percent of the value deve- lopment can be explained by changes in the expected value creation. The rest is owing to changes in the multiples the company is priced at. The fact that these are coloured by investors mood swings means that they are extremely difficult to predict. If on the other hand one owns stocks with a four-year perspective, around 70 percent of the price development is calculated to be based on change in the expected value creation. Chimes with our experience Our own experience fully supports the empi- rical data. A good example is our largest and most long-term investment, Samsung Elec- tronics. Our hypothesis when we bought our first large bulk of shares in the autumn of 1998 was twofold. First, we considered the price we paid relative to earnings to be unreasonably low compared with similar companies in the US and Europe. Second, we believed Samsung Electronics capacity for future growth and value creation to be undervalued. Twelve years later it turns out we were only half right. The stock market has not been wil- ling to increase the price on earnings (EV/ EBITDA), which is about as low today as it was in 1998. On the other hand, we did better than we had reason to hope or believe when it came to the companys capacity to grow and create value. The strong earnings growth alone has given us an annual return on shares of over 20 percent since that time.
Opportunities from short-termism A long-term focus on values and value creation in notoriously short-term focused markets gives us the opportunity to invest in regions, sectors and companies others wish to sell out of. We see the same disappointments and challenges that companies are exposed to in the short term, but we process the information through our long-term lenses. Our first question is always whether we are dealing with short-term disruption or whether the fundamental value creation in the company over a five-year perspective has changed. When the UK supermarket chain Tesco states that they have structural problems in their core market, the announcement may also have a negative impact on the long-term value creation. That is when we choose to sell down in the company along with many others. When the Goldman Sachs share price drops several percent in one day as a result of a dis- gruntled employee handing in his notice in the form of a letter to the editor in the New York Times, we shake our heads. Derivatives trader and ping pong player Greg Smith will be forgot- ten in five years time. When the Akzo Nobel share price is pushed down ten percent as a result of short term fluc- tuations in commodity prices, we buy. In an ever more short-term market, at times characterised by irrational, fearful and short- term participants, it has become increasingly important for us to use more common sense, be a little bit braver and take the longer term view. Thanks to the support from an investor base in our funds who understand the importance of this, we should have a good basis for creating good long-term returns in future also. P h o t o :
B l o o m b e r g Patience is a virtue: Drugs that Swiss Roche is researching today may not yield results for several years. Torkell Eide PORTFOLIO MANAGER SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 8 THEME The HP board just made the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago, said Oracle chief executive Larry Ellison shortly after the sacking of Hewlett-Packards chairman Mark Hurd in August 2010. Those who have followed Ellison over the past two decades were not surprised by the Americans tough talk. Ellison, who founded software company Oracle in 1977, is not exactly known for his diplomacy. Ellison brought IT veteran Hurd to the Ora- cle board in September 2010 after the latter was axed by HP in a sexual harassment and expenses scandal. Since then Ellison, Hurd and Chief Financial Officer Safra Catz have been the driving force behind Oracle, the mar- ket leader in database management systems. Almost every organisation of any size has an Oracle database. Companies place high demands on this sort of software, which often lies at the heart of key corporate processes. Banks and insurance companies, large online retailers and industrial companies all use databases for processes such as customer control and delivery. It is a little known fact that Google, for example, uses Oracle data- base software. The fact that this type of software is essen- tial gives companies like Oracle attractive ear- nings potential. In addition to annual licence fees, programmes need maintenance requi- ring maintenance contracts all of which is a source of steady repeat income with high margins. Customer loyalty is high. Whoever chooses Oracle as database supplier is not going to risk changing to another company. Once a customer has been hooked, they are in for good. Oracle, which listed on the stock exchange in 1986, has always had a strong cash flow and obvious earnings potential. Ellison may not be much of a diplomat, but he is a good strategist. Now 67, he thinks like a chess player, whose pawns are com- petitors and takeover targets. He has a nose for future software developments. Over the past seven years, Oracle has made 79 acqui- sitions, transforming the company, which has a workforce of 108,000, from a pure database system supplier to an all-round IT company. And with that, Oracle the name stems from the database Ellison developed for the CIA when he worked for a software company many years ago has manoeuvred Oracle all set to release its triggers Software company Oracle has been a top 10 holding in SKAGEN Global since September last year. The company has been followed by the portfolio managers for some time and after initially buying a relatively small number of shares it is now one of the funds most important holdings. Why did SKAGEN Global choose Oracle? Source: Bloomberg 0 5 10 15 20 25 30 35 Oracle reached its highest stock price at the height of the internet boom. On 1 September 2000 it topped at USD 46.3. In September 2010 SKAGEN Global bought its initial stake in Oracle. In 2005 Oracle buys two big software companies: Peoplesoft and Siebel. This signals its transformation from pure database supplier to all-round software company. 40 45 50 0 3 . 0 1 . 9 5 0 3 . 0 1 . 9 6 0 3 . 0 1 . 9 7 0 3 . 0 1 . 9 8 0 3 . 0 1 . 9 9 0 3 . 0 1 . 0 0 0 3 . 0 1 . 0 1 0 3 . 0 1 . 0 2 0 3 . 0 1 . 0 3 0 3 . 0 1 . 0 4 0 3 . 0 1 . 0 5 0 3 . 0 1 . 0 6 0 3 . 0 1 . 0 7 0 3 . 0 1 . 0 8 0 3 . 0 1 . 0 9 0 3 . 0 1 . 1 0 0 3 . 0 1 . 1 1 0 3 . 0 1 . 1 2 ORACLE, ON ITS WAY BACK UP TO PEAK LEVELS? 9 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 THEME itself into the same sphere as the global IT players; IBM, SAP and Microsofts database SQL are its main rivals. Yet despite its profitability, strong balance sheet, good market position and string of acquisitions, Oracles fundamental value has remained below that of the IT sector aver- age for years. The sectors historical price earnings ratio is around 24 while Oracles is around 12 the relatively high sector valua- tion is due to the internet boom around the turn of the century. This low valuation had placed Oracle firmly on the radar of the portfolio team at SKAGEN Global for some time. Close monitoring and analysis later determined that the company was indeed undervalued. Oracle has clear growth perspectives, in particular due to the position it has built up in emerging markets. It does not have any serious rivals in the region there are no Chinese or Japanese players of any significance. Oracles profitability is largely anchored in the high margin on its maintenance contracts and new licences. The company has built up a strong track record in terms of acquisitions to keep its innovative processes on the up thereby acknowledging its weaknesses in time to make changes. As undervalued is a part of SKAGENs three Us philosophy undervalued, unpo- pular and under-researched it is interesting to see how Oracle measures up against the other two Us. Oracle is not very popular among investors just like the whole IT sector. Investors are worried about the outlook of these types of companies because the economic slowdown is hurting software spending. Also, there is uncertainty about how cloud computing the new big thing in computer land - will develop and influence the sector. However, Oracle has proven over the last decade to be in tune with when innovations will take off by acquisitions or by its own research & development. At first sight it does not look as though Oracle is under- researched, the final U. The company claims it is currently followed by some 46 analysts in line with the average for a large cap company. But the vast majo- rity of those analysts are short sighted in the eyes of Torkell Eide, portfolio manager of SKAGEN Global: Those analysts are focused on the coming quarters. Oracle is a story for the coming years, when the triggers will be released. Eide believes there are sufficient trig- gers to realise Oracles fundamental value through an increase in the share price. There is enough financial scope to increase the divi- dend - the yield is currently around 1 percent. The company can also buy back shares to increase earnings per share. In addition, the development pipeline is well-filled with soft- ware innovations to ensure substantial impro- vements over the next two years. Further- more, the digital revolution called Big Data is not yet over and companies will continue to gather an enormous amount of information for database analysis, allowing them to follow and predict customer movements. In short, there are enough arguments to make Oracle an attractive investment. In Sep- tember 2010, SKAGEN Global first bought a small number of shares some 0.3% of the total portfolio. At that time, the share price was around $25. It was very clear to us that the share price was not one which would double in price within a short space of time, said portfolio manager Eide, large caps dont have such triggers. But we were convinced there was enough value in the shares for an attractive return. Over the six months that followed, the share price rose to just over $30, without really drawing on the potential triggers to release hidden value. In July 2011, SKAGEN Global decided to buy a bigger stake. This was based mainly on Oracles attractive enterprise value to EBITDA multiple of 6.9. You are not paying for growth but you are getting it for free, says Eide. The purchase was financed by stepping out of IT service provider Accen- ture, which in the eyes of the portfolio team had reached its share price target. Oracle then became one of SKAGEN Globals 10 big- gest investments, accounting for just over 3 percent of the fund total. A share price target of $45 was set. At first it appeared to be an unhappy move. Oracle came out with disappointing second quarter figures in December of that year. Reve- nue growth in particular was below expec- tations. That month, the share price fell by 18 percent. There is no reason for panic, said SKAGEN Globals Eide at the time. The management team is strong and disciplined. We are convinced this was a one-off incident but if that turns out not to be the case, then it will be time to discuss our position. The third quarter figures, awaited with some trepida- tion, surpassed all expectations. Neverthe- less, the $45 target is still a way off. SKAGEN Global has the time to wait. Oracle has been part of the portfolio for 18 months and the investment horizon is at least three years. Chief executive Larry Ellison is still bursting with ambition for Oracle. The billionaire told the Financial Times recently: I love my job. I dont need the money. Mark Houben mho skagenf unds.com Larry Ellison, founder of software company Oracle, thinks like a chess player whose pawns are competitors and takeover targets. ORACLE AT A GLANCE Uracle ls actlve ln buslness scftware Feadquarters ln kedwccd Clty, California Fcunded ln 1977, llsted cn NASDAQ in 1986 kevenue (2011) uSu 35.6 bllllcn, workforce of 108,000 Fcunder and CFU ls Larry Flllscn, 67 years old Maln ccmpetltcrs: l8M, SAP, partly Microsoft P h o t o :
B l o o m b e r g 10 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 Together with other institutional investors and selected media, in March this year we recei- ved our copy of the Goldman Sachs report The Long Good Buy; the Case for Equities, written by strategists Peter Oppenheimer and Matthieu Walterspiler with assistance from an army of analysts. Thankfully our own investment director Harald Espedal had managed to accurately communicate our strong faith in equities for the coming decade in this feature beforehand, otherwise people might have thought that we had plagiarised the Goldman analysts. The Long Good Buy; the Case for Equi- ties is a dry, 40-page theoretical and empi- rical review of the historically low pricing of equities. The title is a twist on a Raymond Chandler novel. Its relevance is not comple- tely clear, but that is often the way with finan- cial headlines: You try to inject a bit of life into something which is matter-of-fact and technical to interest your readers. The message is that equities are histori- cally cheap, especially for patient investors. In relation to earnings in the companies and in relation to the interest on bonds, buying equities has hardly ever been more attractive. At least thats how it looks from a historical perspective if you analyse the figures for the past few decades. However, since 1999 equities have been in decline. They were priced too highly, and since then reality checks have knocked the stock markets again and again, culminating in the financial crisis in 2008. But at some point the situation has to change. If you are a long-term investor in SKAGEN, you may not have discovered this trend, but, put simply, the growth in the value of your assets is due to greater returns from the funds rather than general increases in the stock markets. Frightened of losses The investment guru Warren E. Buffet takes the same positive attitude to equities com- pared with bonds and gold. In this years newsletter to the Berkshire Hathaway sha- reholders, Buffett and his team explain that equities are, basically, the most productive The Long Good Buy Even though we make a virtue of going against the flow and taking an independent approach at SKAGEN Funds, far removed from the worlds financial centres in Stavanger in Norway, every so often it is nice to feel that some people agree with us on a qualified basis. On a P/E basis, stock prices are close to their lowest in modern times Source: MSCI, Morgan Stanley Research. Data as of 30 December 2011 10x 5x 15x 20x 25x 30x 35x 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 MSCI World MSCI EM HISTORY HAS SHOWN THAT STOCK MARKETS FLUCTUATE 11 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 asset you can invest in. Gold on the other hand has limited uses, while government bonds depend on other peoples determina- tion to keep inflation down. Buffetts newsletter has led to interesting debates in the media and on the Internet. However, while Buffett is treated respect- fully by the media, the same is not true for the investment bank Goldman Sachs. Google the title The Long Good Buy; the Case for Equities, and you will discover that the net is awash with analyses and comments, many of them rather critical. If you search long enough, you will undoubtedly also find a copy of the report which we do not have the rights to distribute. Warren E. Buffett emphasises a fact which cannot be repeated often enough: In the short-term, risk can be measured by the expected price fluctuations which are bigger for equities than for bonds. In the long-term however which is what is relevant for most of us the risk is the fear of losing purcha- sing power, if your investment doesnt create value. And in the long-term it is especially important that you carry out your stock invest- ments when the markets are priced low and fear is prevalent in the markets. However, equities have been cheap for some time, and if it is so obviously wrong, why dont the financial markets correct it? Irrelevant in the short-term One of the main explanations is, quite simply, that it is easy to find many arguments that the developed countries will limp along for many years to come, burdened by debt and unem- ployment, especially southern Europe. This will continue to drag down the stock markets, while the process of paying off the debt will take decades. We do not necessarily agree, but it influences the markets. Another explanation is that so many pri- vate investors and institutions have had their fingers burned by the stock markets since 2000/2001. Each time they have risked their necks and increased their equity invest- ments, they have lost money. Now, they can- not take any more, and dare not believe that the biggest potential is actually in the stock market rather than in gold, bonds, commo- dities, property and all the other investment vehicles. A third explanation is that pricing equities is meaningless in the short, six-month term, as shown by calculations from the Goldman analysts. Over the short-term, there is no clear correlation between pricing and returns. High multiple equities continue to be high multi- ple, while cheap stocks remain cheap. For the short-term speculative investors who dominate the market and who strongly influ- ence the financial analysts it is the marginal changes that create value. Better than expec- ted financial statements, a movement in the relative prices between companies etc. or a negative management change. For SKAGEN it means, among other things, that even in an era of abundant information, we can find incorrectly priced businesses because so many other investors think and act short-term. We continue to believe that real values will win in the long-term, and that the next ten years will be better for the stock markets than the past decade. Christian Jessen cje skagenf unds.com A Long Good Buy: are we about to see a sustained period of positive equity returns? P h o t o :
B l o o m b e r g 12 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 THEME The emerging markets equity fund SKAGEN Kon-Tiki celebrated its ten year anniversary on 5 April 2012. Exactly ten years later, the fund has returned 18.2 percent annually, while the benchmark index has increased by 9.4 percent in the same period, measured in euro. The objective focuses on future performance, however, rather than historical returns. When SKAGEN Kon-Tiki was launched, global emerging markets were a neglected investment area. The crisis in the 1990s and the subsequent IT bubble had curbed interest in emerging markets and generated risk aver- sion. Our investment experience in these areas, through SKAGEN Vekst and SKAGEN Global, was nonetheless positive. We the- refore believed the time was right to launch SKAGEN Kon-Tiki as a fund focused on, but not limited to, global emerging markets, says portfolio manager Kristoffer Stensrud. The scant interest in emerging markets had led to generally underpriced emer- ging market shares. Good crisis awareness had also increased the robustness of the countries economies after the crisis hand- ling measures in the 1990s. SKAGEN Kon-Tiki was thus launched with what was considered to be excellent timing. Tough maiden voyage Unfortunately, the funds first voyage was anything but successful. After 13 trading days the fund units began to fall below the initial price of NOK 100. SKAGEN Kon-Tiki bottomed out at NOK 62 on 30 September 2002 a drop of 38 percent. Patient investors then had to wait until 14 August 2003 before the price regained its starting price of NOK 100. During this stressful period Kristoffer Stensrud made a bet that gave him a ponytail. Im not going to cut my hair until SKAGEN Kon-Tiki is back at NOK 100, I said, and when we flew past 100 I thought how the ponytail was a source of strength. Since then, things have progres- sed so well that I couldnt risk cutting it off, says Stensrud. Named after a balsa raft The SKAGEN Kon-Tiki fund is named after the raft made of balsa logs that the Norwegian explorer Thor Heyerdahl sailed on from Peru to the Raroia atoll in Polynesia in April 1947. When asked why he named the fund after the famous raft Kristoffer Stensrud explains that he saw the SKAGEN Kon-Tiki voyage as a journey into the unknown. Initially, it felt as though the fund was also at the mercy of the elements. Sailing a balsa raft in a headwind was almost as difficult as managing SKAGEN Kon-Tiki in the autumn of 2008. Yet it is also possible to influence the journey by plan- ning, staying alert and going about things the right way. Despite the storms it has encountered, over time SKAGEN Kon-Tikis voyage has been a unique success. The fund has been awarded a number of prizes in the Nordic region and in Europe, and has achieved the highest rating from fund analysts such as Morningstar and Standard & Poors. Recipe for success Chinas joining the WTO in 2001 was in many ways a catalyst for the subsequent develop- ments. Emerging markets now account for around 80 percent of global economic growth and have become the clear leaders in the accelerating globalisation race. SKAGENs market report from March 2002, before SKAGEN Kon-Tiki was launched, refer- red to the democratisation processes and improved economic conditions among other things via clear inflation targets and counter- inflationary measures as factors that were considered to be positive for investments in emerging markets. These processes have not lost their momentum during the past decade. Above all, SKAGENs portfolio managers focus on the key elements of SKAGENs investment philosophy undervalued, unpo- pular, and under-researched companies. The unique aspect that sets us apart from our competitors is that we focus on companies, and not, like others, on macroeconomic con- ditions. This is probably the main reason for the very sound risk-adjusted results we have achieved, says Stensrud. Few limitations When SKAGEN Kon-Tiki was launched there was a well-developed understanding of both the risks and return potential in these markets, thanks to experience gained mana- ging the SKAGEN Vekst and SKAGEN Global funds. Emerging markets did not hit the radar screens of many investors until long after us, and we therefore had a first mover advantage, says Stensrud. The number of emerging markets funds has increased and the so-called BRIC funds (Brazil, Russia, India and China funds) have become more and more common. But as these markets have become more popular it is also harder to find obviously undervalued companies in these countries. SKAGEN Kon-Tiki, on the other hand, is a global emerging markets fund with a broad mandate. When the Russian share market increased tenfold in the 2000s, for example, it became more and more difficult to find under- valued Russian shares. Instead, it became easier to find investments in countries such as Korea, Turkey and Hungary. After the stock exchange plummeted between June 2008 and January 2009, when approximately 80 percent of the value of the Russian RTX index was Ten years on the raft It began as a journey into the unknown, says portfolio manager Kristoffer Stensrud. Ten years later, there is plenty to celebrate. 13 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 13 13 THEME wiped out, it was once again possible to find inexpensive Russian shares. The Russian tele- com-oriented conglomerate, Sistema, and the energy company, Gazprom, are now among the ten largest Kon-Tiki holdings. SKAGEN Kon-Tikis broader mandate has overall provided opportunities that would not exist if the fund was limited to investing in a more geographically contained area, or in a particular industry. In a world that is sub- ject to the need to categorise investments by industry and geography we generalists have few limitations, says Stensrud. A broad mandate means that SKAGEN Kon- Tiki does not have to make all of its invest- ments directly in emerging markets. The fund may also invest in companies in more mature markets that profit indirectly from develop- ments in emerging markets. If SKAGEN finds companies in Norway, Sweden, or the US, for example, that benefit from trading with countries like China, the fund may invest in them. Solid team Besides the funds mandate and investment philosophy coupled with the political chan- ges in several emerging markets, contribu- ting to globalisation and global growth a skilled crew is also needed to navigate the right course. Today the fund has four portfolio managers. Kristoffer Stensrud steered the vessel as lone captain until Knut Harald Nilsson came onboard in November 2006. Cathrine Gether joined as portfolio manager of the fund in October 2009. Ross Porter had been part of SKAGENs portfolio team since 2000 and joi- ned the SKAGEN Kon-Tiki team in 2011. Ross has actually been part of the team from the start. He took care of the fund when I was on the road, so SKAGEN Kon-Tiki is close to Rosss heart. Overall, we have a sound team with a good mix of skilled analysts and deci- sion-makers, as someone has to do the deci- ding sometimes, Kristoffer Stensrud laughs. What is the latest investment decision you have taken? In a Chinese company that manufactures solar energy products. Five years ago, when SKAGEN Kon-Tiki celebrated its fifth anniversary, you stated that the focus was on the next five-year period, rather than the historical results. Now five years have passed and the funds mana- ged capital has more than doubled. Does the funds size make it harder to steer? The fund has grown to a substantial size. But considering how the stock market value of emerging markets overall has increased expo- nentially, the fund is quite small by compari- son. When SKAGEN Kon-Tiki was launched, the emerging markets ratio of the worlds total stock market value was approximately five percent. Today, this is closer to 25 per- cent, a figure that is likely to increase far into the future, as SKAGEN Kon-Tiki continues its voyage, says Kristoffer Stensrud. Michael Met zler mm skagenfonder.se SKAGEN Kon-Tiki Emerging markets Index 6 12 24 48 05.04.02 05.04.03 05.04.04 05.04.05 05.04.06 05.04.07 05.04.08 05.04.09 05.04.10 05.04.11 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 The commodity sector is a good place to look for undervalued companies these days; valuations are low and the market does not distinguish sufficiently between high-risk and sound players. This is the opinion of the portfolio mana- gers of SKAGENs equity funds, who have made several new investments in recent months. We give prominence to companies with low debt and high equity, which means that they can weather major shifts in commodity prices without struggling for survival. These commodity companies will normally be priced higher than the more risk-prone players in the sector, but currently many companies are cheap, says Ross Porter, portfolio manager of SKAGEN Kon-Tiki. This gives growth-oriented investors like us the opportunity to invest in assets of high quality at a good price, he adds. Equity investments in the commodity sec- tor notoriously entail a higher risk. Commo- dity prices fluctuate from year to year, and the bottom line of any heavily indebted company is more susceptible to price changes. Earnings are extremely sensitive to fluc- tuating commodity prices, and there is also a tendency for the companies valuations to fluctuate even more. In good times, the com- panies are often priced too highly, and when the outlook is bleaker they are under-priced. This gives opportunities for investors like us, but we need to take a prudent approach and do our homework before we invest, says Chris-Tommy Simonsen, portfolio manager and trader for SKAGEN Global. Often companies in the commodities sec- tor have to invest in new exploration over many years before funds start flowing back to shareholders, so both lenders and share- holders need to take a long-term approach. Once exploration and extraction are success- ful, however, this can be highly lucrative for shareholders. Emerging markets dominated by commodities Traditionally, emerging markets have been dominated by many commodity companies that have been part of the traditional econo- mic world order. The less developed countries extracted and exported commodities for pro- duction companies in the developed econo- mies in the US, Europe and Japan. This world order has changed completely over the past ten years. China is now the lar- gest global purchaser of commodities such as steel, aluminium and copper. The Chinese use these metals in their manufacturing industry and in their own fast-paced infrastructure investments. No less than 15 percent of the emerging market index comprises commodity compa- nies. This is more than twice the ratio for the ordinary global index. For many years, the SKAGEN Kon-Tiki equity fund has included a portfolio of com- modity companies that are priced far below the index. Portfolio managers have selected companies in less cyclically sensitive sectors and to a greater extent invested in emerging markets that would develop in the future; economies with expanding private consump- tion and extensive trade links. Despite the relatively low ratio of commo- dity companies, the portfolio managers are currently finding new, under-valued compa- nies, just as the existing companies in the equity funds have performed well this year. Good quality iron ore Cliffs Natural Resources, previously Cleve- land Cliffs, has been part of SKAGEN Global since the summer of 2006 and has trebled in value during that time. There have been price fluctuations along the way, and the portfolio managers have adjusted the position with some success. The company is often compared with state-controlled Vale in Brazil, which is the largest position in the commodity sector in SKAGEN Kon-Tiki. Both companies produce iron ore and are priced at five to six times their Commodity companies Quality at a discount Eurasian Natural Resources is a newcomer in the SKAGEN Kon-Tiki portfolio. Open mining is well suited to the landscape in Kazakhstan. NEWS 14
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R e s o u r c e s 15 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 NEWS current earnings. Vales shares are cheaper and it has lower production costs than Cliffs but it also has more debt, which increases the fluctuations to which equity investors are exposed. Cliffs has extremely sound core resour- ces. Mining companies are currently cheap but there are concerns regarding activities in China and the price of iron ore. We do not think these concerns are justified. There has not been much investment in the sector since 2008 and there will be a capacity shortfall, which will support prices, says Chris Tommy Simonsen. The market feared that Cliffs would make acquisitions that would erode its value. It has financial clout and has grown over the last ten years, including through acquisitions most recently in 2011 when it bought Thompson Consolidated in Canada for USD 5 billion. Cliffs presentation of its accounts in mid- March put paid to these fears, however, as it announced a solid dividend, which the market rewarded with a higher share price. Besides its other merits, the company is a candidate for acquisition at a premium by a major player in the industry. All of its assets are also held in developed, politically stable countries, which clearly reduces the risk of assets being confiscated in an unclear poli- tical process, says Chris-Tommy Simonsen. Some investments have been less suc- cessful. One example is Apex Silver Mines, in which we invested substantial amounts in 2006. The company was searching for sil- ver and zinc and suspended its payments in 2009. The court in Delaware was persuaded to approve a dubious manoeuvre whereby the company reappeared in a new incarnation ins- tead of filing for bankruptcy and the original shareholders were left with empty pockets. South African coal In 2011 a number of changes were made to the SKAGEN Kon-Tiki equity funds commodity sector investments, as described in the 2011 Annual Report. Vale of Brazil remains by far the largest investment in this sector with the South African coal producer Exxaro Resources now an undisputed second. Several other companies are on their way into the portfo- lio, including Eurasian Natural Resources of Kazakhstan. There is a shortage of power in South Africa and the country wants to build coal- fired power stations. Exxaro supplies this coal. It is a low-priced, recession-resilient company. Its production also shows good potential, says Ross Porter. Exxaros second major business area is the extraction of mineral sands. This activity currently only makes a minor contribution to earnings but within a few years this will be a major revenue source for the company. Titanium dioxide, used as a pigment in paint, is produced from mineral sands. This com- modity is in short supply all over the world, even though the Chinese may have a need to paint a lot more new buildings. We expect adjustments to the corporate structure which will generate value and incre- asing dividends when the company has paid off its debt in the short-term. The company includes a lot of the elements we typically want to see in an undervalued, under-resear- ched SKAGEN company in an unpopular indu- stry, says Ross Porter. Christian Jessen cje skagenf unds.com VALUATION OF MINING COMPANIES Some experienced investors dub mining companies a big black hole with a liar on the top. There is a certain element of truth in this as it is obvious that the companys resources should represent signicant value but it is hard to pinpoint the potential. The answer is not known until the holes have been quarried and the ore extracted. Investors may deem the companies liars because at different stages management teams tend to both exaggerate and play down a mines potential. First, the land has to be acquired and permits gained from the authorities. If the potential is exaggerated, the start-up costs will be excessive. Then the initial investors must be brought on board, which is when the potential has to be promoted. Yet the returns from a mine should not be too lavish, since there is then a risk of taxation. The simplest policy is to adhere strictly to the truth from start to nish, but this is not always the course taken. Finally, there is naturally the risk of being wiped out completely by investing in worthless shares. Mining companies are also difcult to price because investors are forced to form an opinion on the expected value of the commodities 10, 20 and 30 years into the future, and this is obviously a tough proposition. SKAGENs portfolio managers nonetheless believe they have found a few areas where the markets pricing of commodity companies may be inaccurate. Projects are often under-priced. For the reasons stated above, investors often want to see tangible results before pricing accelerates. Last year, SKAGEN Kon-Tiki sold its shares in Equinox of Canada because the company was acquired at a substantial premium even after its share price rose signicantly. Equinox developed and operated the Lumwana mine in Zambia, a world-class copper mine that the giant Barrick Gold paid a high price to acquire. It took ten years to develop the mine, to the tune of USD 1 billion, and mostly according to plan, yet the share price stagnated for many years. Prices do not start to rise until the late stages of a project. The costs of developing new mining facilities are also higher than 10-20 years ago, because society makes higher demands, even in less developed countries. This increases the relative value of existing mines, but is not always reected in the valuation of mining companies. 16 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 If you think that there is something fami- liar about Geir Tjetland (47) you have pro- bably been following SKAGEN for several years. His interest in stocks can be traced right back to the mid-1980s, and in 1986 he joined the brokerage house, Stavanger Fondsmeglerforretning. After a few years of studying and working in Oslo, he returned to Stavanger and helped found SKAGEN in 1993. Most people who are familiar with the SKAGEN story will remember Geir Tjetland. Three years after SKAGEN was founded, Geir moved back to Oslo with his partner. There he embarked on a long career as a stockbroker in Handelsbanken and ABG Sundal Collier. Now he is back in Stavanger and back with SKAGEN, with all the expe- rience the past 19 years have afforded. What is the most important lesson so many years in the stock market has taught you? I think that the main thing I have learnt is that as an investor, one should be extremely careful with financial leverage, or gearing. Over the years I have also learnt to focus on balance sheets, cash flow, business models and levels of ambition. My understanding and assessment of these will contribute to all aspects of SKAGEN Vekst. What do you bring with you from your pre- vious position as stockbroker? I have acquired pretty broad experience from the Nor wegian and Scandinavian stock markets over the past 19 years, which means Ive gained a good insight into a broad group of companies in the region. This will hopefully contribute positively to the processes and investment choices in SKAGEN Vekst. Even though you have long experience from the stock market, you are not an ex- perienced portfolio manager? That is correct. But Im lucky enough to be surrounded by a number of people with long experience managing portfolios which gives me the opportunity to turn my stock market experience into portfolio experience. They are also good discussion partners, enabling me to sound out some of my perceptions. What drew you back to SKAGEN as portfo- lio manager, so many years after you hel- ped found the company? Was it deance? Not at all. It was without a doubt the oppor- tunity to work alongside Kristoffer Stensrud and the other portfolio managers in SKAGEN. Even though Ive been living in Oslo, I have always stayed in touch with my old friends in Stavanger. You could say Ive been attending the school of Kristoffer all these years, even though I wasnt working at SKAGEN. When the opportunity arose, and the timing was right, I wont hide the fact that I was very pleased to have the chance to work in SKAGEN again. Having worked here a few months, what are your rst impressions? I was familiar with the system and knew a number of the people working here from before. What has impressed me are the pro- cesses and information flow/sharing in the portfolio department. The team is also very good at maintaining its focus. Coming home to roost Geir Tjetland is the newest member of the portfolio team that manages the equity fund SKAGEN Vekst. But he is by no means a newcomer either to the world of stocks, or to SKAGEN. Geir Tjetland is the newest member of the team managing SKAGEN Vekst. Trygve Meyer tm skagenfondene.no 17 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 SKAGEN TV: ASK THE PORTFOLIO MANAGERS W hat were the highlights and lowlights of the previous quarter? Which companies contributed the most and which detracted from the funds? How is the mood in the economy affecting the performance of the funds? The portfolio managers of SKAGEN Global and SKAGEN Kon-Tiki are available to answer these questions and any others you may have in live broadcasts at the end of each quarter. The next quarterly update with the portfolio managers will take place on Friday 4 May. You may send in questions to the portfolio either before or during the broadcast. Date: Friday 4 May Time: 10:30 for SKAGEN Global 13:00 for SKAGEN Kon-Tiki Place: www.skagenfunds.com Our objective is to provide our unit holders with world class communication. But in a world where information flows increasingly quickly and the endless stream of more or less qualified commentary can seem over- whelming, it is even more important to set out information in an accessible and easily understandable way. In the new News & Analysis section you can find an overview of all the news articles, opinion pieces and publications we create. The aim is to allow unit holders and others to quickly find the information of interest to them. Keep up to date We have recently created a new area on our web pages to provide a better overview of the array of news, reports, video clips and publications produced by SKAGEN. Perspectives Portfolio managers and others in SKAGEN write blog-type entries about the topics that they are passionate about everything from companies in the portfolios to the state of the world economy. Readers may comment on the entries. SKAGEN TV This is where you can find all the video interviews made with portfolio managers, including quarterly updates on the funds given by various members of the equity team (see below). News This section provides you with news about SKAGEN. Common topics include new additions to the portfolio management team, instances where SKAGEN has been involved in corporate governance and awards won by the company or the funds. Reports This is where you can find all the market and annual reports ever published by SKAGEN. You can also download monthly status reports on our funds here. SKAGEN in the media This section includes links to external media where SKAGEN, our funds or portfolio managers are referred to. SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 18 NEWS The objective of the new information docu- ments is to provide standardised information about all funds and fund types, irrespective of management company. This makes it easier for investors to make direct comparisons between funds from different management companies. The KIID is a two-page document which replaces the simplified prospectus and sets out the essential characteristics of a fund including objectives and investment philo- sophy, synthetic risk and reward profile, past performance, fees, etc. The KIID is a UCITS standardised docu- ment. For the EEA and EU countries which do not make the deadline there is a transition period until 30 June 2012 during which time these countries will be able to make use of the existing Simplified Prospectus. Since the KIID is a standardised document in all Euro- pean countries, it provides investors with the opportunity to compare key information for one fund with that of a competing fund across country borders in Europe. New risk scale for the funds The KIID provides a different risk scale to one that was used in the simplified prospectus. SKAGEN rates risk in the KIID in accor- dance with UCITS IV and the guidelines set out by CESR (Committee of European Securi- ties Regulators). The new KIID risk scale dif- fers from the risk scale previously used on our web pages and in the simplified prospectus. The KIID risk scale gives clients a European standardised snapshot of the risk level in a fund based on historic volatility. This makes it easier to compare funds across borders. The risk scale ranges from 1 to 7 based on rolling weekly data over the past five years, or by linking the reference index or a model portfolio to the funds history if this is shorter than 5 years. Funds may therefore move up or down the scale over time. You can find the KIIDs for all our funds on our website: www.skagenfunds.com/kiid New information document for investors As of 29 February SKAGEN phased out the Simplified Prospectus for all our funds. This has been replaced by the Key Investor Information Document (KIID). Since the Key Investor Information Docu- ment (KIID) which replaced the Simplified Prospectus in February is predominantly a legal document, and does not contain the same marketing content as could be found in the Simplified Prospectus, we saw a need to provide clients with additio- nal information about our funds. The fact sheets were developed with this in mind. The fact sheets provide information on: Fund cb|ectlve and strategy The pcrtfcllc team Fund facts katlngs and awards Perfcrmance Annual return fcr the past ten years and to date Ccuntry and sectcr allccatlcn Fcw tc buy Pcrtfcllc statlstlcs Tcp ten ccmpanles The fact sheets may be found on each fund page, in the Facts about the Fund box (see illustration). Fact sheets for SKAGENs equity funds were published for the first time on 13 March. Fact sheets for the fixed income funds are in the final production stages and we hope to have them ready shortly. New fact sheets for our funds SKAGEN has developed a new two-page fund fact sheet to provide clients with in-depth information about our funds. The cb|ectlve cf the Kllu ls tc prcvlde clear, slmple lnvestment lnfcrmatlcn tc lnvestcrs. The two-page document sets out the essential characteristics of a fund enabling investors to understand the nature and risks of the fund and to make informed investment decisions. The Kllu wlll prcvlde the lnvestcr wlth preclse lnfcrmatlcn abcut the fund's cb|ectlves and investment philosophy, synthetic risk and reward profile, past performance, charges and practical information. The Kllu wlll be updated cn a yearly basls, cr when there ls a materlal change ln the fund. KIID IN A NUTSHELL FACTS ABOUT THE FUND *Updated at the turn of the month. Key Investor Document (pdf) Fact Sheet (pdf) Key Investor Document (UK) (pdf) Prospectus (pdf) General Commercial Terms (pdf) Standard & Poors Rating (pdf) Morningstar qualitative rating (pdf) 19 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 PORTFOLI O MANAGERS REPORT ` The global stock markets increased more than ten percent in the first quarter this year measured in USD. This has occurred only six times since 1970. In the past, the market has generally continued to climb the rest of the year, and the average annual return has been 25 percent. 2012 may well be a good year for stocks. ` In 2011, a bad year for equities, companies managed to grow revenue and operating earnings by around 7 percent. They are expected to continue to grow at the same rate in 2012, and this provides solid support for stock markets going forward. ` Central banks in the US and Europe understand that a continued supply of liquidity is necessary to bolster distressed public finances and reduce debt without halting economic growth. ` Bonds no longer offer risk-free yields as an alternative to returns. The long yields in leading companies are so low that bonds now offer return-free risk. Corrections are to be expected. ` The low yields in the bond and money markets are forcing investors to turn their attention to stock markets. ` When things seem at their bleakest, consumers and businesses often find a way out of an economic crisis. We have not given up on Southern Europe. Good rst quarter = Good 2012? P h o t o :
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B l o o m b e r g Bull market in the rst quarter: The worlds stock markets increased by more than ten percent in the rst quarter. This has only occurred six times since 1970. Winning stocks in SKAGEN equity portfolios include US banks Citigroup and Goldman Sachs, both of which are headquartered on Wall Street in New York. Continued central bank support: Like the other major central banks, the European Central Bank (ECB) in Frankfurt has con- tinued to supply the banking system with liquidity. Corporate bond yields in many western countries are now so low that you can talk about return-free risk instead of risk-free returns which could have capital returning to the stock markets. Europe may recover: Many businesses are doing well. Norwegian airline company, Norwegian, which is a holding in two of the equity funds is in good shape and was one of the share price winners in the rst quarter. We believe that Europe, even distressed Southern Europe, could start growing again if structural reforms are implemented. 20 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 PORTFOLI O MANAGERS REPORT The first quarter of this year was one of the best first quarters for global equity markets in the past forty years. What were the drivers behind the 10.9% increase and what does it tell us for the remainder of 2012? A very strong first quarter with double digit returns is a rare event in the equity markets. Only six times since 1970 have the global stock markets achieved double digit returns in the first quarter measured in US dollars the other years were 1975, 1986, 1987, 1988 and 1998. On all previous occasions, bar- ring the dismal 1987, the market continued to climb for the rest of the year and the average annual return was 25%. Although the year has started well, inves- tors are still mindful of the 8% decline for the MSCI All Country index in 2011, also mea- sured in US dollars. The drop last year was fuelled by worries about the European debt crisis, fiscal troubles in the US and Japan, inflation fears at the start of the year and slo- wing growth in some of the worlds important economies like China and Brazil. In developed markets, we are now into the sixth consecutive year with cautious con- sumers and businesses holding back their investments. Both economic growth and general sentiment have been subdued. Could 2012 be a great year for equities? So will 2012 be a great year for stocks? To ana- lyse this, one should look at the concept of animal spirits, which is a term coined by the economist and investor John Maynard Keynes in his 1936 classic The General Theory of Employment, Interest and Money, and later revived by George Akerlof and Robert J. Shil- ler in their book Animal Spirits from 2009. Animal spirits describes the emotions that influence all kinds of important human eco- nomic behaviour. It has a very broad mea- ning but can to some extent be measured in terms of confidence. At present it is decidedly difficult to judge if global animal spirits are improving. Yet a regional breakdown provides more information and clarifies the picture somewhat. The first quarter has shown improving growth in the US, fuelled by the hard-pressed US consumer. As the average employed Ame- rican already spends all his earned income, the big drivers behind improved consumer spending are the 800,000 jobs created since sentiment lows in September 2011 and impro- ved sentiment among the top 20% of earners, who account for half of all US consumption; getting the rich to spend is the key to impro- ving US economic growth. The average consumer in Asia and Latin America becomes more affluent by the day and their global economic impact is simi- larly improving. This also holds true for other important regions such as Eastern Europe, the Middle East and parts of Africa. German statistics also show a similarly positive pattern; consumers are getting more confident and the ZEW Indicator of Econo- mic Sentiment has increased at a rate pre- viously only seen in 1993 and 2003 - both were years when the stock market bottomed out. Even the rest of Europe seemed to get its act together in the first quarter. Animal spirits and labour market reforms Still, the consumer in Southern Europe is very far from feeling confident about the future. Unemployment is running high and the risk of creating a generation of disillusio- ned youths is very real and must be avoided. Europe has seen similar situations before such as in the late 1970s and early 1980s. The despair was everywhere and though the lyrics from the punk rock group The Sex Pistols were probably extreme, they nevertheless gave a good sense of the atmosphere preva- lent at the time. What resolved the problems thirty years ago was the same cure needed to sort out the problems now: reform. Reforming the labour market and other parts of the eco- nomy could motivate employers to increase hiring and generate confidence in the future. Animal spirits, and confidence, have an inexplicable tendency to improve when things look to be at their darkest. For this very reason we are not writing off Southern Europe, even though some rounds of heavy belt tighte- ning and prudent government policies are still needed to balance government income and spending. What are the risks? In the first quarter stock markets were, to some extent, fuelled by better liquidity and a perception of lower risk after the Long Term Refinancing Operation (LTRO) by the Euro- pean Central Bank. Some negative pundits have been quick to point out that liquidity-dri- ven markets will sooner or later run aground and the liquidity will vanish. Hence, these pundits prefer to advise investors to get out before it is too late. We are not blind to the fact that risks exist. Governments net debt levels and spending commitments for an ageing population are still there. There are good arguments for beli- eving that the large government debt and spending levels will create an economic drag on growth rates. On the other hand, we can also envisage a situation where consumers will unleash their shopping beast after years of restraint. As mentioned before, the top earners in the US and other developed markets have been cautious and saving cash for a rainy day since 2007-08. Bank accounts and coffers are full and providing little or no returns. Keep in mind that money markets are yielding relati- vely low returns too. Europe has experienced desperate periods previously, such as at the end of the 1970s and beginning of the 1980s. The lyrics of the punk group The Sex Pistols were extreme examples of the mood of the day. What was needed then as now were reforms. P h o t o :
B l o o m b e r g 21 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 PORTFOLI O MANAGERS REPORT Putting cash to work Corporations have horded cash and it is now estimated that the stockpiles in European and US companies amount to about USD 4,000 billion. To put some of this cash to work, the UK for example is changing its tax regime to motivate more investment. When observing discretionary consump- tion patterns it is interesting to note that cash gets put to work very quickly when there are good offers on discretionary consumer goods like cruise vacations, clothing or cosmetic sur- gery. Private consumption therefore could be ripe for a surge based solely on a change in confidence among the top earners. More con- sumption would then fuel economic activity, which in turn would offset modest govern- ment spending. If governments hold back and continue to reform the labour markets and pensions systems at the same time as individuals and corporations expand, then we can easily be confident about the future. But let us look at some of the risks in this scenario. Could Southern Europe take work from China? Mediterranean unemployment is frighteningly high, especially among young people. The region has millions of inhabitants without steady income at a time when governme- nts are unable to provide proper support. However, things are changing all over the world and in some regions of China labour costs are now getting close to making Europe competitive again. Remember, it was only 20 years ago when shoes, shirts and other daily items came from Portugal, Spain and Italy. The manufacturing facilities and skills are probably still there to a large extent. With labour reforms and competitive labour market conditions, the flow could start to reverse and hence provide better activity in that region. Ination to be an issue? As mentioned earlier, corporate cash piles are huge and this, to some extent, reflects the fact that many corporations have been holding back on new investments in capacity. Obviously there have been investments in growth regions and maintenance investments in developed markets with low growth, but technology and production efficiency change over time and 5-6 years is a long time for many production facilities. While corporate cash piles are high, inven- tory levels are low, which could inadvertently produce inflation merely from a pick-up in demand. There are no signs of this yet, but we monitor developments closely because any change could impact inflation expecta- tions and equity returns some companies could face windfall profits today, that are not recognized in current share prices. Implication of higher oil prices In the first quarter, crude oil prices rose to record levels, measured in euro. Oil also rose to near record levels in US dollars as Brent hit USD 125 per barrel. The global demand and supply balance is stable, but jitters about potential hostility and embargoes on Iran -10% -5% 0% 5% 10% 15% 20% 2009 1999 1989 1979 1969 1959 1949 1939 1929 1919 1909 10-YEAR AVERAGE ROLLING RETURNS Drought in the stock market: Even if you disregard short term cyclical movements and measure the ten-year average re- turns in the US, there are large discrepancies in returns. The most recent ten-year returns measured are weighed down by nancial crises. Periods of loss are, however, few and slight. Source: Bloomberg. -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Whole year 1st quarter 2009 2005 2001 1997 1993 1989 1985 1981 1977 1973 WORLD INDEX SINCE 1970 Good start: Only six times since 1970 has the rst quarter yielded returns of more than 10%. A good start to the year has often meant a good year for stocks. Will 2012 repeat the pattern? Source: Bloomberg P h o t o :
B l o o m b e r g Animal spirits: Professor Robert J. Shiller, speaker at SKAGENs New Years Conference, has together with George Akerlof develo- ped on John M. Keynes classics from the 1936 which explore the idea of animal spirits inuencing human economic behaviour. P h o t o :
B l o o m b e r g 22 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 PORTFOLI O MANAGERS REPORT did create fear of oil shortages in the shor- ter-term. It is hard to judge what will happen with Iran in the longer-term, but it is not in anyones interest to have a military conflict with the associated pains, political upheaval, and regional turbulence and oil/gas supply disturbances. The world has plenty of energy sources, ranging from natural gas and solar to hydro and oil. Still, it is not easy to switch between these various sources. Longer-term resource planning points us towards a future with a broader mix of energy supplies from various regions and differing types of energy. The dependence on a single country is likely to decline. However, for the next couple of years the political balances in the Middle East will continue to dominate our animal spirits and confidence in the oil industry will indirectly impact consumers watching the meter when filling up their cars. Long-term interest rates increased in 1Q 2012 When 10-year bond yields in US and Germany fell below 2% in 2011 it was a sign of money flowing into so-called safe haven assets. Using common sense and a bit of knowledge of history, anyone could have foreseen that this situation would not be sustainable for a very long time. Warren Buffett to great effect recently quoted another famous investor: Bonds promoted as offering risk-free returns are now priced to deliver return-free risk. Inflation expectations are currently modest. Coupled with long-term average real interest rates, a 10-year bond yield higher and closer to 3% seems more realistic. The long-term bond yield is used for equity valuations, but having said that, the link bet- ween the long-term bond yield and earnings yield of equities has been disconnected for a few years. By the end of 1Q 2012 the earnings yield for the MSCI World index was 8.7%. It is still pretty attractive compared with the 2.2% yield on German or US 10-year government bonds. In both absolute and relative terms, equities can rise significantly in 2012 without going beyond past a sensible valuation. If 2012 is a year of 25% returns, or more, then earnings yields will go below 8%, equi- valent to P/E ratios at 12.5x or more; a level that still makes stocks attractive. However, corporates will have to grow their earnings to support valuations with reasonable growth expectations. The speed of the earnings growth depends on many things, but as the animal spirit of consumers improves in most regions, it can be seen as a good basis for further advances. A final perspective in 2011 (the bad year for equities) revenues and operating earnings grew 7% measured by MSCI World numbers. For 2012 the current estimates are another 7-8% more revenues and earnings, and this provides solid support for rising equity markets going forward. By Ole Seberg -2 -1 0 1 2 3 4 5 6 7 2 0 1 2 2 0 1 0 2 0 0 8 2 0 0 6 2 0 0 4 2 0 0 2 2 0 0 0 1 9 9 8 1 9 9 6 1 9 9 4 1 9 9 2 1 9 9 0 1 9 8 8 1 9 8 6 1 9 8 4 1 9 8 2 1 9 8 0 1 9 7 8 1 9 7 6 1 9 7 4 1 9 7 2 1 9 7 0 Global growth in real GDP Morgan Stanley forecast DM Conribution EM Conribution EM EXPECTED TO CREATE 80% OF GLOBAL GROWTH IN 2011 AND 2012 Source: IMF, Haver, Morgan Stanley. Periods shaded blue are recessions. 1,5 % 1,3 % 1,7 % -0,9 % 4,7 % 4,3 % 5,8 % 7,0 % 9,2 % -0,4 % 1,2 % 2,2 % 1,7 % 2,8 % 3,6 % 5,0 % 6,5 % 8,4 % -3 % -1 % 1 % 3 % 5 % 7 % 9 % 11 % Eurozone Developed economies USA Japan Europe ex. EU Latin America Emerging Markets Asia ex. Japan China Regional GDP growth 2012e 2011 RISING COMMODITY PRICES IN 2012 Source: JPMorgan Markets, 30 March 2012 1,5 % 1,3 % 1,7 % -0,9 % 4,7 % 4,3 % 5,8 % 7,0 % 9,2 % -0,4 % 1,2 % 2,2 % 1,7 % 2,8 % 3,6 % 5,0 % 6,5 % 8,4 % -3 % -1 % 1 % 3 % 5 % 7 % 9 % 11 % Eurozone Developed economies USA Japan Europe ex. EU Latin America Emerging Markets Asia ex. Japan China Regional GDP growth 2012e 2011 STABLE GROWTH EXPECTATIONS WITH EM LEADING THE WAY Source: Bache Commodity Index, rolling contracts, as of 30 March 2012 23 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 PORTFOLI O MANAGERS REPORT Energy-fuelled recovery Several of last years losers have turned out to be winning investments so far this year. The first quarter reversed some of what we experienced last year. Risk appetites have increased from a low level, at the same time as prospects have brightened. Combined with low valuation, this was the catalyst needed for recovery. The first quarter was a good one for SKA- GEN Vekst in both absolute and relative terms. The fund gained 12.4 percent, while the benchmark index was up 11.0 percent measured in euro. A strong oil price gave the energy-heavy Oslo Stock Exchange a lift of 13.0 percent. In the same period the world index gained 8.9 percent. The earnings season has so far not given rise to any big surprises or upwards adjust- ments. The mood has improved but compa- nies have been muted in their statements about prospects for 2012. The valuation of shares has risen since the new year, but is still at a moderate level relative to historic pricing. We are excited to see whether the earnings season we are now entering will confirm the dawning optimism that the stock market now appears to have priced in. Lift for supply shipping The energy sector, which is the funds lar- gest with around 25 percent of the invested assets, represented over 40 percent of the value creation in the quarter. A notable con- tribution came from our investments in supply shipping companies, which account for six percent of the fund in total. The winning sha- res in the sector were DOF and Solstad Off- shore. This was a reversal on last year when the former was the funds largest negative contributor. Seasonally, spring is a good time to own supply shares, when contracts for the busiest summer months are typically being entered into. The season got off to a good start this year and the rates have on the whole been at a higher level than previously. We expect the investment climate for supply sha- res to remain good and still see high activity within the rig and subsea market. There will be moderate delivery of new builds over the next few years, particularly within the disci- plines of Anchor Handling Tug Supply (AHTS) vessels and Construction Subsea Vessels (CSVs); disciplines in which both DOF and Solstad Offshore are well positioned. Despite a share price increase of between 22 and 70 percent for the funds supply investments year to date, the shares are still trading at a considerable discount to underlying values. We believe that this is a good starting point for further repricing. Our rig investments have also contributed positively in the period. Both Sevan Drilling and Transocean have gained 50 and 42 per- cent respectively in the first quarter. At the other end of the spectrum is our investment in Marine Accurate Well, a pro- ject company which is currently developing a semi-submersible rig. The rig is 95 percent complete and is expected to be delivered from the shipyard this summer. The company is working with several tenders at present and in todays tight rig market, should be able to sign a contract in the not too distant future. The company is not listed and is rarely sold in the unlisted market. In March, some shares were sold at a low price, and we therefore adjusted the value of our investment to reflect this price level. At the end of the month, the investment accounted for 0.3 percent of the funds assets. Within the energy sector, during the quar- ter we added to our position in EMGS, a glo- bal leader in electromagnetic seismology with patented technology. We anticipate an increase in orders and contracts and multi- client sales now that there is greater accep- tance of the technology from renowned major clients. In addition the ownership structure is open, meaning that the company is a clear takeover candidate. To set off this investment, we have trim- med our positions in our two other seismo- logy companies, TGS Nopec and Spectrum. SKAGEN Vekst PERFORMANCE (EUR) JANUARY-MARCH 2012* 2011 SKAGEN Vekst 12.4 % -19.3 % MSCI/OSEBX Index 11.0 % -8.2 % *As of 31 March 2012 SKAGEN Vekst team Portfolio managers Beate Bredesen, Ole Seberg and Geir Tjetland CONTRIBUTORS FIRST QUARTER LARGEST PURCHASES/SALES JANUARY-MARCH SKAGEN VEKST KEY FIGURES FOR THE LARGEST HOLDINGS SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 24 PORTFOLI O MANAGERS REPORT We added to our positions in Subsea 7 and Russian Gazprom in the quarter. At the tail end of the quarter we invested in the unpo- pular Baker Hughes, an investment that can also be found in SKAGEN Kon-Tiki and SKA- GEN Global. Cruise with long-term potential Another sector that contributed positively to the funds return in the quarter was consumer discretionary. Our cruise investments, in par- ticular Royal Caribbean Cruises, got off to a good start this year. Nonetheless, the Costa Concordia accident in mid-January created uncertainty around earnings developments again, not just for Carnival, but for the sec- tor as a whole. We believe the uncertainty to be transient. Although the price outlook for cruise tickets in the near future is weak, ticket prices slightly ahead in time show signs of improvement. We have therefore chosen to maintain our investments in the sector as the valuation and prospects are currently extremely low. The principle owner of the Norwegian pas- senger and freight line, Hurtigruten, increased his position to almost 33 percent ownership. Combined with finance-improving measures on the companys side, this provided fertile conditions for a price upturn. We took advan- tage of a higher share price to sell off some of our holding in order to free up assets from the less liquid part of the portfolio. Quarter winner: Norwegian oil services company, DOF, performed the best of all the companies in SKAGEN Veksts portfolio. P h o t o :
D O F Cruise ship operators on choppy waters: Following the tragic accident with Costa Concordia, which is owned by our portfo- lio company Carnival, the unrest spread to the entire cruise industry. We believe the sector will recover, however, and have maintained our investments. P h o t o :
B l o o m b e r g SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 25 PORTFOLI O MANAGERS REPORT Dixons Retail almost doubled A nice contributor in the sector, which has almost doubled so far this year, is consumer electronics retailer, Dixons Retail. The com- pany is market leader in the UK, Ireland and Scandinavia. We believe that the companys Nordic elements alone justify the valuation of the entire company. Earnings prospects have continued to improve along with the less depressed mood among consumers in the UK and parts of Europe. Optimism linked to the sale of new models of tablets as well as OLED TV sales associated with the upcoming Olympics in London are priced into the share price only to a moderate degree we believe. We are also satisfied with the contribution from the technology sector in the quarter, particularly Samsung Electronics (see the comments under the SKAGEN Global and SKAGEN Kon-Tiki sections). In this sector we exited Japanese Kyocera in the quarter, which constituted a minor position in the fund. There were both positive and negative con- tributions to the funds overall return from the industrials sector. Kongsberg Gruppen, the funds second largest investment, made a new announcement about the outlook for its Protech Systems division. Previously there were expectations that developments would be flat compared to last year. Now the com- pany believes that the uncertainty is grea- ter and activity in the division may be lower this year than it was last. Although analysts already had negative growth prospects for the division, the companys comment was not particularly well received in the stock market. The share price was down almost eight per- cent in the quarter. Nevertheless analysts expectations of earnings in this division are now back to the same level as at the end of last year, when the share price was higher. As expectations are extremely low, we believe the likelihood of positive earnings surprises from the division is greater. Lifted by larger aircraft eet Norwegian Air Shuttle almost doubled in value in the first quarter. The company announced one of the biggest orders of new aircraft in recent times. Via its new build pro- gram, Norwegian will expand its fleet from 62 aircraft today to 222 in 2025. In the same period, the global aircraft fleet is expected to double. We believe that the low cost company will grow at the expense of the less profitable part of the airline industry over the next few years. Throughout the quarter, we have recei- ved confirmation that ticket prices are on their way up and think that Norwegian is well posi- tioned in an attractive Nordic airline market. Norwegians aircraft fleet uses 25-40 percent less fuel than its Scandinavian competitors. The company continues to cut its unit costs and in combination with increased capacity utilization (load factor), this is a good starting point for improved earnings. The biggest change in this sector in the quarter was that we sold the final part of our position in Kverneland to the Japanese bid- der Kuboto. The funds worst investment in the quarter, and the only investment within the utilities sector, was Brazilian energy company, Eletro- bras. Delays in the licence awarding round and reporting, as well as renewed uncertainty about the use of the companys capital, did nothing to increase investors confidence in the company. The valuation is extremely low, however, relative to the assets owned by the company. Concentrated portfolio We continued to reduce the number of invest- ments in the quarter in order to concentrate the portfolio around fewer and hopefully better investments, thereby improving the quality of the portfolio. Twelve positions in total were disposed of, of which the above- mentioned Kverneland and US supermarket chain Winn-Dixie are the largest. Our top 12 positions are now valued at 8.9 times expected earnings this year, a discount of over 20 percent relative to the comparative ratio in the funds benchmark index. Similarly the price/book value of the top 12 positions is almost 30 percent. The fund is therefore well positioned for a further repricing of its shares in future. Read more about the fund on page 34 SKAGENFUNDS.COM/SKAGEN-VEKST Cheap electronics: The UK home electronics chain Dixons Retail was a good contributor to returns in SKAGEN Vekst after the share price almost doubled as a result of the lift in mood among Northern European consumers. P h o t o :
B l o o m b e r g 26 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 A normalisation It was a good start to the year for SKAGEN Global, both in absolute terms and relative to the world index (MSCI AC). The trend of rising risk premiums that we saw last year has reversed. A number of last years losers have therefore turned out to be winners so far this year, and vice versa. The US dollar, government bonds and other safe havens have performed weakly. In addition to shares, emerging market cur- rencies and corporate bonds have provided investors with good returns. We have, in other words, seen a normali- sation of capital markets after extreme risk aversion last autumn. The developments are in many ways reminiscent of what we saw in 2009. Samsung Electronics in new clothing As has been the case for the general stock market, the winners in SKAGEN Global in the first quarter were on the whole the losers last year, with a couple of major exceptions; our two largest investments, Samsung Electro- nics and Tyco International, performed well last year and the upturn has continued going into 2012. The share prices of the companies are up around 20 percent after the first three months of the year. Viewed through (other) investors eyes, Samsung Electronics has gone through a major transformation. From being seen as a supplier of components with cyclical ear- nings, the company is now perceived as one of the worlds most respected brands within the global electronics industry. Now it is Apple that investors compare the company to, rather than companies like Hynix, Micron and Intel. Fuelled by the impressive growth in the sales of tablets and smart phones, Samsung Electronics net result this year is expected to increase by more than 50 percent. Tyco up on split The US industrial conglomerate Tyco Inter- national (Tyco) is currently in the process of being split into three separate units, all of which will be listed. Despite a very good share price development recently, we expect that the combined price of the three new companies will be higher than Tycos current price on the stock exchange. Tyco recently announced that its Flow Con- trol division, which produces valves amongst other things, will merge with US company Pentair. The operations of the two companies complement each other well. As a sharehol- der in Tyco we will get direct ownership of the merged company. This transaction is the latest in a long line of shareholder-friendly decisions made by Tycos management. US banks hit back The biggest negative contributor last year, Citigroup, is up 40 percent this year, making it the funds second best contributor. The share price of another of last years losers, Goldman Sachs, has also experienced a similar lift. Several of our emerging market companies which were affected by investors flight to safety last year have also performed well in the period. Disappointing Tesco We lost the most on our stake in British gro- cery retailer, Tesco, in the first quarter. The shares fell heavily on the companys announ- cement early in the year of poor Christmas sales and reduced earnings expectations for this year. Price cuts and higher store opera- ting costs are not a recipe for success. In the aftermath of this disappointing announcement we spent a lot of time looking into precisely how serious the situation is. As we are not convinced that Tesco has good enough control over margin developments, we have reduced our position by 40 percent for the time being. Even with growth expectations adjusted downwards, Tesco is valued at less than ten times expected earnings for the year. But given developments in other large grocery companies that have lost control of margins, PORTFOLI O MANAGERS REPORT SKAGEN Global Portfolio managers Kristian Falnes, Torkell Eide, Sren Milo Christensen and Chris-Tommy Simonsen. PERFORMANCE (EUR) JANUARY-MARCH 2012* 2011 SKAGEN Global 10.6 % -6.0 % MSCI AC 8.9 % -4.3 % *As of 31 March 2012 SKAGEN Global team SKAGEN GLOBAL KEY FIGURES FOR THE LARGEST HOLDINGS CONTRIBUTORS FIRST QUARTER LARGEST PURCHASES/SALES JANUARY-MARCH SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 27 PORTFOLI O MANAGERS REPORT we are exercising caution. The operational risk has undoubtedly increased so we can no longer justify Tescos position among the funds top ten investments. Doubled after prot warning The US oil services company Baker Hughes recently announced that the companys expectations must be adjusted downwards. Higher costs, low gas prices in the US and weaker profit margins within Pressure Pum- ping are the main reasons for the profit war- ning. Baker Hughes share price has been weak, and the company was one of the funds biggest negative contributors. As is the case with Tesco, a new CEO has recently been appointed at Baker Hughes. He will no doubt want to carry out a clean-up operation to lay a better foundation for future earnings developments. The ratio between the share price and sales for Baker Hughes is now the same as at its lowest point during the financial crisis when the oil price was below USD 40 a barrel. You can buy the years expected earnings for a P/E of ten times. With a strong likelihood of continued growth internationally, as well as the hope of better margins over the next few years, the valuation of Baker Hughes is particularly attractive. We used the opportunity to dou- ble our holding in the company. We bought the lions share of the stake at a low price following the profit warning. Some of the purchase amount was financed by the sale of our remaining shares in Transocean. Up in German property Following the purchase of shares in GSW Immobilien, a newcomer to the portfolio, as well as our participation in a capital increase in TAG Immobilien, German property now accounts for 0.8 percent of SKAGEN Global. While German property prices have gene- rally been at a standstill since the mid-1990s, we are now seeing clear signs that the market is picking up. This is particularly true in cities with net population growth, such as Berlin. The upturn is also coming from low levels; the average square metre price of apartments owned by GSW Immobilien in Berlin is around EUR 800. Both GSW Immobilien and TAG Immobi- lien are trading at a significant discount to the assumed market value of the underlying properties. When investment fund Warburg Pincus sold all of its shares in EMGS early this year, we decided to buy into the Norwegian oil ser- vices company. EMGS is a world leader in the use of electromagnetic surveying in oil exploration. The technology is being adopted Valued split: The US industrial conglomerate Tyco International is in a process whereby one listed company may turn into three. The stock market appreciates this and has rewarded the company with a strong upturn in the rst quarter of 2012. P h o t o :
B l o o m b e r g Bank delivers: The US bank, Citigroup, one of the worlds most international banks, has put the nancial crisis behind it and is healthier than it has been in a long time. The banks exposure to emerging markets is also appreciated by the stock market. P h o t o :
B l o o m b e r g SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 by a growing number of major oil companies. EMGS, and the companys technology, is still in an early growth phase. Given its signifi- cant potential, the price tag of 14 times this years expected earnings must be viewed as moderate. EMGS is also one of the most obvious takeover candidates on the Oslo Stock Exchange. Russian discount We increased our holdings in Gazprom, Vimpelcom and Oracle in the quarter. The two former are still priced low relative to the underlying values, primarily as a result of poor corporate governance. In Vimpelcom the situation regarding the ownership of the Algerian mobile phone ope- rator, Djezzy, has still not been clarified. The parties will hopefully come to an agreement during the spring. The most likely outcome is that the Algerian state takes over the majority of the shares which will reduce Vimpelcoms slightly too high debt ratio. We decided to increase our holding in US software company, Oracle, when it reported disappointing figures for the fourth quarter last year. Oracle recently released figures for the first quarter this year (as of February, divergent financial year) which surprised the stock market. It was particularly gratifying to see the seven percent growth in new licences. Although Oracles share price is up 15 per- cent this year, we still believe the company to be undervalued. A price tag of 12 times this years earnings is cheap for a company with a solid balance sheet (net cash constitutes around ten percent of the market value), good cash flow and good potential for future ear- nings growth. Continued reductions in Pzer and Unilever We have continued to reduce our positions in Pfizer and Unilever. After good share price performance last year, most of our catalysts for revaluation have now taken place. In other words, the distance to our fundamental valua- tion of the companies has now been substan- tially reduced. Pfizers share price is now in excess of our target price of USD 22, which admittedly does not take into account values in the companys new drug research portfolio. Pfizer has pro- ven that it is in a position to develop ground- breaking drugs, but we find it difficult to make a qualified guess as to how much this portfo- lio is worth. We therefore maintain our con- servative valuation of the company. As the difference between the mar- ket price and the tender amount from the Tokyo Stock Exchange for Osaka Securities Exchange has gradually lessened, we have reduced our position in the latter. Mixed earnings season The earnings season in the fourth quarter last year was mixed for our companies, and clearly worse than the previous quarter. In addition to the above-mentioned Baker Hughes and Tesco, our other holdings Citigroup, Siemens, TE Connectivity, Kyocera, Akzo Nobel, Indo- sat, Unilever and Petrobras also reported figures below our expectations. On the other hand, Tyco International, Microsoft, Goldman Sachs, SCA, Time Warner Cable, Comcast, Pfizer, Oracle, Ensco and Cheung Kong sur- prised positively. At the end of the quarter the funds cash position was 2.0 percent, down from 2.3 per- cent at the turn of the year. The ten largest investments constituted 36 percent of the portfolio, the same as at the start of 2012. Shift in mood In our annual report for 2011 we pointed out that a shift in mood from fear to greater opti- mism and faith in the future could result in a substantial price increase in the stock mar- kets. The credit for the positive share price development in the first quarter mainly goes to this shift in mood, which took place gra- dually at the end of last year. We think it is likely that the upwards valua- tion of stocks in general, and our portfolio companies in particular, will continue albeit with natural corrections along the way. The prices of companies in the portfolio are still very low relative to the value crea- tion. The ten largest holdings are priced at an average of 8.3 times expected earnings this year and 1.0 times book equity. Even if one has extremely conservative growth expectations, these are not ratios to cause alarm to existing or potential unit holders. 28 PORTFOLI O MANAGERS REPORT Read more about the fund on page 36 SKAGENFUNDS.COM/SKAGEN-GLOBAL Grocery giant idles: The British grocery retailer, Tesco, had a tough quarter. Weak Christmas sales and higher costs in stores were punished by the market, and the share price fell substantially. P h o t o :
B l o o m b e r g 29 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 PORTFOLI O MANAGERS REPORT SKAGEN Kon-Tiki Cash ow back to emerging markets The positive developments in the worlds emerging markets continued from the end of last year into the first quarter this year. Risk aversion among investors is on the wane and record cash flow is returning to emerging markets out of the safe havens in the parts of the world experiencing low growth. SKAGEN Kon-Tiki performed somewhat more weakly than the emerging markets index. This can partly be explained by the fact that our investments outside the emer- ging markets did not do as well. Over the past five years we have main- tained a relatively low risk profile which has provided good results in both absolute and relative terms in a tough climate for equities; SKAGEN Kon-Tiki has provided unit holders with an average annual return of 8.8 percent, versus a return of 4.7 percent for the emerging markets index, measured in euro. Company choices pay off We were early movers when it came to weighing up in consumer companies within emerging markets. There are four billion people in the area whose purchasing power is gradually increasing, regardless of the debt crisis in the US and Europe. Korean car manufacturer Hyundai Motor is a good example of this. We started buying shares in the midst of the win- ter depression of 2009, and the share price has multiplied since. In the period we have maintained a rela- tively low profile within cyclical commodity companies, which has also paid off. We did not, however, benefit from the generally low valuation of companies in the portfolio at the start of the year in the first quarter. On the other hand, our geographi- cal weighting, which is a result of company choices, has yielded results. China, in which we are significantly underweight, was the weakest of the larger emerging markets. Sec- tor-wise, we profited most from technology, in particular from our long participation in Samsung Electronics. Local concerns Although global investors once again dared to take greater risk which in this case mani- fested itself in them taking the opportunity to buy cheap shares the effects were not equally positive in all local stock markets. In some markets, China in particular, develop- ments were marred slightly by concerns of a national nature. There was a general expectation that aut- horities in China would speed up the economy using stronger stimuli. We saw little of this. Nor did the stock market in the oil and gas nation of Russia get the lift that was antici- pated and that has previously been the case in times of record high oil prices. Indian sha- res continued to be stigmatized by a lack of political drive and accusations of corruption. The increased willingness to purchase shares in emerging markets can mainly be attributed to global investors greater risk tolerance. When the mood among domestic investors lightens, the market may experience a renewed lift. Weaker earnings On the whole the results from companies in global emerging markets have been somewhat weaker than expected. Sales are increasing but cost pressures have eaten into margins. Lower inflation and somewhat better growth indicators from more develo- ped countries could quickly turn this picture around. We are already seeing a trend of rising earnings expectations for several compa- nies, including our electronics giants Hon PERFORMANCE (EUR) JANUARY-MARCH 2012* 2011 SKAGEN Kon-Tiki 9.8% -13.3% MSCI Emerging Markets Index 11.1% -15.7% *As of 31 March 2012 SKAGEN Kon-Tiki team Portfolio managers Kristoffer Stensrud, Knut Harald Nilsson, Cathrine Gether and Ross Porter CONTRIBUTORS FIRST QUARTER LARGEST PURCHASES/SALES JANUARY-MARCH SKAGEN KON-TIKI KEY FIGURES FOR THE LARGEST HOLDINGS SK AGEN F uNdS MArKE t rEport Number 1 apri l 2012 30 portfoli o managers report Hai Precision Industry (Hon Hai) and Sams- ung Electronics. As margins are returning to a more normal level, this trend will most likely continue throughout 2012. The combination of low earnings expec- tations among investors and historically low valuations is a good starting point for plea- sant times ahead for equity markets. High oil price did not pay off A high and rising oil price was not favourable for the funds energy companies. Our largest energy holding, oil services company Baker Hughes, was the biggest loser in the quarter. Low gas prices led to a substantial drop in gas drilling activity, to the benefit of oil. Having reduced our position in Baker Hughes at the end of last year, we increased our stake at the end of the quarter following a profit warning from the company. Baker Hughes is now trading at the lowest levels we have seen in a decade, relative to both sales and book equity. The opening of several new oil provinces over the past year means that activities within oil services are set to take off shortly. We substantially added to our position in Russian Gazprom. The companys results for 2011 were considerably better than expected. It seems as though the company is also pro- posing a more shareholder-friendly dividend policy. After a fantastic journey we reduced our holding in Seadrill somewhat and used the capital to buy shares in Pacific Drilling and DryShips. We also bought into South African coal and oil company, Sasol, whose unique technology for transforming gas and coal into oil may trigger a revaluation of the company. Cheap Kazakh mining company In spite of generally rising commodity prices, it was a relatively weak quarter for our com- modity companies. The fear of lower growth in China combined with upward pressure on costs did nothing to lift investors spirits. We took advantage of the sombre mood to buy into a new company, Eurasian Natu- ral Resources Corporation, a Kazakh mining company listed in London. The company which produces ferrochrome, iron ore and aluminium has previously struggled with poor corporate governance. This is in the process of being improved and current activities generate a good cash flow and dividend. The stock market does not appear to appreciate the giant Congolese copper project Kolwezi, which the company took over from our pre- vious holding, First Quantum. Another new investment is Ipeke Dogal, the main owner of Turkish gold producer Koza Altin. Ipeke Dogal will use the considerable value from gold production to look for oil and other minerals. We get dual exposure at half the price with this investment. We exited Indah Kiat Pulp & Paper, a mar- ginal holding in the portfolio, at a slight loss. Despite high pulp prices the company did not manage to increase earnings in 2011. There have been no signs of improvement in corporate governance either. The best sector contributor in the quarter was newcomer, Exxaro. Comeback for our mexican companies The industrials sector provided a good con- tribution, primarily thanks to the excellent performance of Mexican construction com- pany, Empresas ICA. After a dismal 2011, the company was revalued in the quarter. In the same sector we sold out of Barloworld and Nordic American Tankers. The most important driver behind the share price development of our new invest- ment, DryShips, had previously been its majo- rity holding in Ocean Rig. The upside for the DryShips stake in todays hot rig market lies primarily in the companys not insubstantial fleet of drybulk carriers and tankers. Times are very hard for ships like these and this is reflected in the companys share price. We believe that the valuable Ocean Rig hol- ding will provide DryShips with the strength needed to implement an aggressive new- build program at the bottom of the market. Egyptian Orascom Construction Indu- stries, which is a leading construction com- pany in the Middle East and a significant fertilizer manufacturer, is a newcomer in the portfolio. A generally good economy in the region and reconstruction requirements as a result of the Arab revolution should contribute to the order book in future. The company can also boast a good track record the pyramids sub-supplier strikes back: Taiwanese electronics com- pany Hon Hai Precision Industry, which is a major Apple supplier, has increased its proft forecast. The share price shot up after performing poorly last year. p h o t o :
B l o o m b e r g Cheaper oil services: The US oil services company Baker Hughes was badly affected by falling gas prices, which caused a slowdown in gas drilling activity and a drop in share price. We added to our holding in the company since we believe future prospects to be good. p h o t o :
B l o o m b e r g SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 are still standing. During the course of the year the company will be split into two, with one construction and one fertilizer unit. We expect to see a repricing of the company as a result. Tentative step into solar energy With our purchase of a small holding in inte- grated Chinese solar energy producer, Yingli Green Energy, we took our first cautious step into alternative energy. The company is one of the leading suppliers of solar energy solutions in China. An 80 percent fall in prices means that solar energy solutions are now profita- ble, even without subsidies. The focus for participants in the solar industry will be new markets, rather than the previously subsidy- driven industrialized markets. Yingli Green Energy has a new, modern and competitive capacity of 2.5 TW finan- ced by cheap Chinese government loans. In a sector that has been exposed to disasters over the past few years, Yingli Green Energy appears to be a survivor in a market which may be set to explode. In consumer goods, Chinese Great Wall Motors and Brazilian Cosan continued their positive developments. We bought into Chi- nese electronics chain, Gome, which is in the process of being revalued after a poor year last year. The world leader in tea, Indian Tata Global Beverages, was also to our liking and fell within our purchase price range. We are excited by the companys expansion into the embryonic coffee market in India. After a period of good price development, we halved our holding in Shangri-La Hotels. At the same time we doubled our position in Heineken. Good Hungarian medicine The health sector made a good contribution to the funds return, led by Hungarian Gedeon Richter, which was given approval for its most interesting Central Nervous System (CNS) project. The worst contributor in the sector was Hanmi Pharma. Financials was also a positive sector, with Turkish Sabanci and Russian VTB-Bank con- tributing the most; after a dismal 2011 the upturn was welcome for both. The liquidity packages from the European Central Bank (ECB) to banks did a lot to improve the mood among investors after a depressing second half in 2011. We are still cautious in this sec- tor, and look for secular growth situations. We sold our stake in Asya Katilim Bankasi and reduced our position in Standard Char- tered, while substantially increasing that in Turkish Yapi Kredi Bank. Mobile data is the way forward Technology provided a particularly satisfy- ing contribution. Primarily as a result of the above-mentioned revaluation of Samsung Electronics, but also thanks to the turnaround operation in Hon Hai, which has paid off. Inde- pendent analysts have assessed labour con- ditions at Hon Hai and we believe that the results of this will strengthen the companys competitiveness. The cooperation with Apple and the paradigm shift towards mobile data processing mean that our position in Hon Hai should yield good results in future. Telecommunications provided a marginal contribution, as was also the case for the emerging markets index. Investors are con- cerned that the increase in data traffic will result in new investments at the same time as the earnings model is in many cases dubious. In global emerging markets mobile data is the only realistic way to proceed, which is why we are also selectively increasing our analytical focus within this sector. Brazilian energy company Eletrobras is still our only investment within the regulated utilities sector. As the authorities have again postponed dealing with existing power con- cessions, the Eletrobras share price suffered yet again. The extreme divergence between the price of the companys assets and the market price is still unparalleled. Time to be more aggressive? Over the past five years we have, as we have said, followed a conservative invest- ment strategy. 2012 may be the year when a more aggressive strategy could give good future results. We have therefore increased our efforts in more cyclical sectors. As a result of European angst and Chinese doubt, the pricing of cyclical sectors does not currently reflect the re-purchase value of the resources. At the same time many consumer companies in emerging markets have been given a high price tag. 31 PORTFOLI O MANAGERS REPORT Read more about the fund on page 38 SKAGENFUNDS.COM/SKAGEN-KON-TIKI P h o t o :
B l o o m b e r g New alternative in China: With a small investment in Yingli Green Energy, a Chinese solar energy producer, we took our rst tentative step into the alternative energy sector. The company is a leading supplier of solar energy solutions in China. 32 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 The balance sheets of most major central banks have increased significantly since 2008. While some claim that central bank lending and asset purchases stimulate the economy, the effect of balance sheet policies depends crucially on how central banks inter- vene. The effect of quantitative easing (QE) is most likely negligible. Credit easing (CE), on the other hand, can alleviate stress in credit markets and help the economy. But neither QE nor CE is monetary policy. Monetary policy is interest rate policy. Quantitative teasing The origins of quantitative easing can be tra- ced back to the Bank of Japan a decade ago. The central bank bought government bonds on the assumption that more central bank money would incite private spending. That did not happen. Recently the Federal Reserve (Fed) and the Bank of England have purcha- sed Treasuries and issued more central bank deposits. The idea is to push investors into risky assets and stimulate private spending on capital goods. I believe the effect is slight. Although the US recovery seems to have become more robust of late, this probably has little to do with the Feds balance sheet. QE basically consists of swapping one form of public debt, central bank depo- sits (reserves), for another, government bonds. Since central banks are owned by their governments, QE has no effect on the amount of consolidated public debt. What QE does is to cut the duration of privately-held public debt. But this means that the public sector takes on more interest rate risk; the public sectors interest expenses will rise more rapidly if interest rates spike. The pri- vate sector, which finances the public sector, is likely to hedge the potential increase in future taxes by holding less long-term public debt and more short-term public debt. Hence QE leads to less private demand for Treasury debt and more private demand for central bank deposits. Thus there is no lasting effect on government bond prices, and QE does not fulfil its intended function of pushing private investors into more risky assets and stimula- ting private spending. Credit policies The Feds first round of balance sheet policies was different from its current QE measures. In the aftermath of the Lehman bankruptcy credit flows largely came to a standstill. The Fed acted as a lender of last resort, inter- mediating credit between markets that had become dysfunctional. The Fed took more risk on its balance sheet, but since credit markets were segmented, the private sector could not take compensatory action. Therefore, the first round of balance sheet policies, correctly named credit easing (CE) by the Fed, did have a positive effect on financial markets. Since the financial crisis erupted the European Central Bank (ECB) has been a very reluctant quantitative easer. The ECB has lent a great deal of money to European banks that have problems accessing funds in private markets, however. The ECBs policies were expanded by massive 3-year loans in December and March. Since this can be seen as CE rather than QE the ECB has named its operations enhanced credit support the ECBs balance sheet policies should have a positive effect on financial markets and the broader economy. Dont follow the money Some argue that swollen central bank balance sheets are potentially highly inflationary; I believe that to be a misunderstanding. First, since QE probably has a negligible effect on the economy, it could be reversed swiftly without any significant detrimental effects. Second, whether the central banks balance sheets have grown because of QE or CE, it is unnecessary to shrink them in order to tighten monetary policy. Monetary policy is not about steering the amount of central bank money but about interest rate control. Hence, regardless of the size of their balance sheets, central banks can hike short-term interest rates by raising the interest rate they pay on central bank deposits. In fact, central banks can tighten monetary policy and simultaneously intervene aggres- sively in credit markets. Higher inflation, or increased inflation expectations, can force central banks to raise their policy rates. At the same time lingering dysfunctionality in credit markets could prompt some of them, most probably the ECB, to expand their balance sheets further. The point is that credit policy is different from monetary policy; investors should not assume that a massive amount of central bank money precludes monetary tightening. I expect policy rates to approach normaliza- tion before the balance sheets have shrunk back to pre-2008 levels. PORTFOLI O MANAGERS REPORT Balancing act FIXED INCOME Torgeir Hien Portfolio manager SKAGEN Tellus th skagenfunds.com Eurozone Japan US UK P e r c e n t P e r c e n t Source: Marcobond 2011 2010 2009 2008 2007 35 30 25 20 15 10 5 35 30 25 20 15 10 5 CENTRAL BANK BALANCE SHEETS AS A PERCENT OF GDP 33 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 PORTFOLI O MANAGERS REPORT Gaining traction SKAGEN Tellus, the global sovereign bond fund, gained a solid 2.6 percent as measured in EUR during the first quarter of 2012. The fund did much better than the benchmark index, which fell 2.9 percent last quarter. After a dire 2011, we hope that our unit holders welcome the outperformance. Since incep- tion in September 2006, SKAGEN Tellus has delivered an average annual return of 5.8 percent, slightly better than the index. To be ahead again of the index was one of our main objectives as 2011 expired. Relative to the index we have benefitted from having very short duration in safe haven bonds. We believed, and still believe, that long term nominal yields in these markets are extremely low, and that they are set to rise further as the recovery gathers momentum and markets alter their expectations regar- ding future policy rates. The fund also gained in relative terms by not being invested in yen- denominated papers. Japan is not Greece; the land of the rising sun has its own cur- rency. But financing around 50 percent of state expenditure with borrowing when the governmental debt is above 230 percent of GDP is a recipe for a fiscal sunset. The small depreciation we saw in the first quarter is nothing compared to what might be in store. In absolute terms SKAGEN Tellus gained by being invested in long-term emerging market bonds. These investments are unhedged, and with few exceptions we had positive contributions both from falling yields and stronger currencies versus the EUR. We also saw some currency gains on short-term non EUR denominated papers. So far our convic- tion that the USD will appreciate versus the EUR has not been validated, however. Accor- ding to our calculations the dollar is under- valued by about 20 percent relative to the euro. And with divergent growth rates, the Federal Reserve will probably tighten faster than the European Central Bank. This should be bullish for the dollar. SKAGEN Tellus SKAGEN Tellus 2.60% -0.67% Barclays Capital Index -2.93% 7.83% *As of 31 March 2012 SKAGEN Tellus Portfolio manager Torgeir Hien PERFORMANCE (EUR) JANUARY-MARCH* 2011 2007 1991 1993 1995 1997 1999 2001 2003 2005 2009 110 100 90 80 70 60 50 40 110 100 90 80 70 60 50 40 Source: Marcobond Public expenditures T r i l l i o n
J P Y T r i l l i o n
J P Y Public revenues JAPANESE PUBLIC FINANCES 34 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 HISTORICAL PRICE DEVELOPMENT SKAGEN VEKST (EUR) A minimum of 50 percent of the assets of the SKAGEN Vekst equity fund will at all times be invested in Norway. The rest will be invested in the global equity market. SKAGEN Vekst is suitable for investors who want an equity fund with a good balance between Norwegian and global companies. The fund has a broad mandate which gives it the freedom to invest in a number of companies, industries and regions. SECURI TI ES PORTFOLI O SKAGEN VEKST AS OF 31- 03-2012 Risk Security Number Acquistion value NOK * Market price Cur- rency Market- value NOK* Unrealised gain/loss * Share of fund Stock- exchange ENERGY DOF ASA 5 702 213 108 660 36,50 NOK 208 131 99 471 2,62 % Oslo Brs Solstad Offshore ASA 1 938 650 95 344 106,00 NOK 205 497 110 153 2,59 % Oslo Brs Petroleo Brasileiro Pref ADR 1 159 165 119 582 25,40 USD 168 036 48 454 2,12 % New York Bonheur ASA 1 192 594 88 117 129,50 NOK 154 441 66 324 1,95 % Oslo Brs Ganger Rolf ASA 1 273 817 130 405 120,50 NOK 153 495 23 090 1,93 % Oslo Brs TGS Nopec Geophysical Co ASA 975 867 73 516 156,10 NOK 152 333 78 817 1,92 % Oslo Brs Sevan Drilling ASA 17 599 671 140 651 7,59 NOK 133 582 -7 069 1,68 % Oslo Brs Gazprom Oao ADR 1 564 000 100 976 12,20 USD 108 898 7 922 1,37 % London Int. Transocean Ltd 313 900 138 551 54,40 USD 97 457 -41 094 1,23 % New York Siem Offshore Inc 8 036 317 68 365 10,95 NOK 87 998 19 633 1,11 % Oslo Brs Electromagnetic Geoservices AS 4 206 079 55 162 16,80 NOK 70 662 15 500 0,89 % Oslo Brs Eidesvik Offshore ASA 1 682 641 64 221 33,80 NOK 56 873 -7 347 0,72 % Oslo Brs Subsea 7 SA 324 800 37 875 150,80 NOK 48 980 11 105 0,62 % Oslo Brs BP Plc ADR 171 381 54 168 44,54 USD 43 565 -10 603 0,55 % New York Norwegian Energy Co ASA 5 127 513 78 354 7,81 NOK 40 046 -38 308 0,50 % Oslo Brs Northern Offshore Ltd 2 750 000 26 552 12,35 NOK 33 963 7 411 0,43 % Oslo Brs Marine Accurate Well ASA 67 652 076 51 259 0,35 NOK 23 678 -27 580 0,30 % Unotert Fred Olsen Production ASA 3 000 000 18 735 7,80 NOK 23 400 4 665 0,29 % Oslo Brs BP Plc 553 263 35 035 4,63 GBP 23 349 -11 686 0,29 % London Seabird Exploratio Plc 11/15 6,00% Call 5 172 592 30 716 69,00 USD 20 864 -9 852 0,26 % Unotert Baker Hughes Inc 85 300 19 949 41,15 USD 20 033 83 0,25 % New York Spectrum ASA 730 000 6 407 27,40 NOK 20 002 13 595 0,25 % Oslo Axess Minor items 108 799 77 716 -31 083 0,98 % Total Energy 1 651 395 1 972 998 321 603 24,87 % RAW MATERIALS Norsk Hydro ASA 5 969 510 152 178 31,01 NOK 185 115 32 936 2,33 % Oslo Brs Akzo Nobel NV 222 000 59 466 44,27 EUR 74 737 15 271 0,94 % Amsterdam Koza Altin Isletmeleri AS 643 750 46 209 33,80 TRY 69 607 23 398 0,88 % Istanbul Agrinos AS 897 378 25 330 40,50 NOK 36 344 11 014 0,46 % Unotert Norske Skogindustrier ASA 5 970 000 345 541 5,70 NOK 34 029 -311 512 0,43 % Oslo Brs Rottneros AB 12 204 585 60 163 2,71 SEK 28 477 -31 686 0,36 % Stockholm Hindalco Industries Ltd 1 950 673 46 052 129,40 INR 28 269 -17 783 0,36 % Nat. India Minor items 39 047 39 569 521 0,50 % Total Raw Materials 773 986 496 146 -277 840 6,25 % INDUSTRIALS Kongsberg Gruppen ASA 3 275 767 136 060 107,00 NOK 350 507 214 448 4,42 % Oslo Brs Wilh. Wilhelmsen Holding ASA 1 315 811 93 970 150,00 NOK 197 372 103 402 2,49 % Oslo Brs Norwegian Air Shuttle ASA 1 504 738 83 483 108,00 NOK 162 512 79 029 2,05 % Oslo Brs Dockwise Ltd 1 032 808 173 152 117,50 NOK 121 355 -51 797 1,53 % Oslo Brs Stolt-Nielsen Ltd 926 602 114 905 108,00 NOK 100 073 -14 832 1,26 % Oslo Brs LG Corp 233 756 48 434 65 000,00 KRW 76 554 28 120 0,96 % Seoul Aveng Ltd 2 575 700 75 193 39,09 ZAR 74 919 -274 0,94 % Johannesburg Odfjell SE-A 1 664 725 74 526 38,00 NOK 63 260 -11 267 0,80 % Oslo Brs Glamox ASA 5 944 034 5 852 10,00 NOK 59 440 53 588 0,75 % Unotert Golar LNG Ltd. 186 611 30 307 217,60 NOK 40 607 10 299 0,51 % Oslo Brs I.M. Skaugen SE 1 339 151 16 790 27,30 NOK 36 559 19 769 0,46 % Oslo Brs Fairstar Heavy Transport NV 4 414 585 46 670 7,99 NOK 35 273 -11 397 0,44 % Oslo Brs Goodtech ASA 21 168 416 48 135 1,57 NOK 33 234 -14 901 0,42 % Oslo Brs TTS Group ASA Konv. 8 % 01/16 19 000 000 18 620 148,00 NOK 28 424 9 804 0,36 % Oslo Brs LG Corp Pref 224 482 25 796 22 500,00 KRW 25 448 -348 0,32 % Seoul Minor items 286 449 121 965 -164 484 1,54 % Total Industrials 1 278 342 1 527 501 249 159 19,25 % CONSUMER DISCRETIONARY Royal Caribbean Cruises Ltd 902 048 124 547 29,18 USD 150 213 25 667 1,89 % New York Dixons Retail Plc 57 626 905 284 228 0,19 GBP 98 112 -186 116 1,24 % London Carnival Corp 485 865 120 531 32,09 USD 88 983 -31 548 1,12 % New York Hurtigruten ASA 22 671 503 81 526 3,86 NOK 87 512 5 986 1,10 % Oslo Brs LG Electronics Inc Pref 600 000 144 988 24 500,00 KRW 74 064 -70 923 0,93 % Seoul Continental AG 121 000 50 302 70,77 EUR 65 119 14 817 0,82 % Xetra Mahindra & Mahindra Ltd GDR 591 300 10 523 13,75 USD 46 402 35 879 0,58 % London Int. Fjord Line AS 2 850 000 28 500 15,00 NOK 42 750 14 250 0,54 % Unotert NHST Media Group ASA 60 000 31 447 600,00 NOK 36 000 4 553 0,45 % Unotert Renault SA 79 000 23 888 39,52 EUR 23 745 -143 0,30 % Paris Minor items 27 962 3 529 -24 433 0,04 % Total Consumer Discretionary 928 441 716 430 -212 011 9,03 % 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 20 40 80 160 320 480 10 11 12 N A V
S K A G E N
V e k s t SKAGEN Vekst Benchmark Index (EUR) 20 % annual return
4 2 1 3 5 6 7 35 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 IT 9,7% Energy 24,6% Industrials 19,3% Finance 11,5% Raw Materials 6,3% Health 5,6% Consumer Discretionary 9,0% Telecom 3,9% Cash 1,8% Consumer Staples 5,9% Utilities 2,7% SECTOR DISTRIBUTION GEOGRAPHICAL DISTRIBUTION 10 LARGEST HOLDINGS * Children and young women picking flowers in a field north of Skagen, 1887. Detail. By Michael Ancher, one of the Skagen painters. The picture is owned by the Skagens Museum. SECURI TI ES PORTFOLI O SKAGEN VEKST AS OF 31- 03-2012 South-America 5,2% Cash 1,8% Asia ex Japan 10,2% Japan 0,2% EMEA 5,7%
Eurozone 6,1% North America 6,3% Norway 59,0% Peripheral EU 5,3% Oceania 0,2% * Figures in 1000 NOK The market value as of 31.03.2012 is the last quoted price from the stock exchange. The average cost method is used for the calculation of sales gain. Security Number Acquistion value NOK * Market price Cur- rency Market- value NOK* Unrealised gain/loss * Share of fund Stock- exchange CONSUMER STAPLES Cermaq ASA 1 559 045 65 773 75,00 NOK 116 928 51 156 1,47 % Oslo Brs Morpol ASA 8 407 150 175 896 9,00 NOK 75 664 -100 231 0,95 % Oslo Brs Kesko Oyj B 374 811 97 876 24,33 EUR 69 347 -28 529 0,87 % Helsinki Chiquita Brands Intl 1 119 523 91 964 8,86 USD 56 610 -35 354 0,71 % New York Royal Unibrew A/S 135 865 38 746 388,00 DKK 53 881 15 134 0,68 % Kbenhavn Austevoll Seafood ASA 1 972 716 62 173 21,80 NOK 43 005 -19 168 0,54 % Oslo Brs Yazicilar Holding AS 750 000 25 622 12,40 TRY 29 751 4 129 0,37 % Istanbul Minor items 102 684 23 638 -79 045 0,30 % Total Consumer Staples 660 734 468 825 -191 909 5,91 % HEALTH CARE Teva Pharmaceutical-Sp ADR 719 787 217 973 44,79 USD 183 996 -33 977 2,32 % NASDAQ Clavis Pharma ASA 943 918 31 160 68,50 NOK 64 658 33 499 0,81 % Oslo Brs Photocure ASA 1 109 401 44 688 44,70 NOK 49 590 4 902 0,63 % Oslo Brs Algeta ASA 256 000 25 537 143,70 NOK 36 787 11 250 0,46 % Oslo Brs Medi-Stim ASA 1 611 000 20 130 20,20 NOK 32 542 12 413 0,41 % Oslo Brs Origio A/S 1 550 000 24 276 18,30 NOK 28 365 4 089 0,36 % Oslo Brs Karolinska Development AB 1 234 600 43 031 24,40 SEK 25 937 -17 095 0,33 % Stockholm Minor items 45 211 19 670 -25 540 0,25 % Total Health Care 452 006 441 546 -10 460 5,57 % FINANCIALS Olav Thon Eiendomsselskap ASA 180 025 33 834 888,00 NOK 159 862 126 028 2,01 % Oslo Brs Gjensidige Forsikring ASA 2 298 872 135 501 67,25 NOK 154 599 19 099 1,95 % Oslo Brs Hannover Rueckversicherung AG 367 500 74 061 44,54 EUR 124 475 50 414 1,57 % Frankfurt Danske Bank A/S 741 784 83 171 94,50 DKK 71 648 -11 523 0,90 % Kbenhavn Northern Logistic Property ASA 2 728 689 82 502 24,50 NOK 66 853 -15 649 0,84 % Oslo Brs Hitecvision AS 762 746 5 183 65,00 NOK 49 578 44 395 0,62 % Unotert Korean Reinsurance Co 716 135 8 469 13 650,00 KRW 49 252 40 783 0,62 % Seoul Sparebanken st 1 460 000 25 877 31,30 NOK 45 698 19 821 0,58 % Oslo Brs Norwegian Finans Holding ASA 12 712 000 24 925 3,50 NOK 44 492 19 567 0,56 % Unotert Haci Omer Sabanci Holding AS 1 501 444 23 339 7,66 TRY 36 792 13 453 0,46 % Istanbul Sparebanken Vest 995 506 45 056 33,20 NOK 33 051 -12 005 0,42 % Oslo Brs Irsa Sa ADR 397 502 31 351 10,18 USD 23 095 -8 257 0,29 % New York Minor items 55 990 49 033 -6 957 0,62 % Total Financials 629 260 908 428 279 168 11,45 % INFORMATION TECHNOLOGY Samsung Electronics Co Ltd Pref GDR 116 936 92 728 346,30 USD 231 113 138 385 2,91 % London Int. Samsung Electronics Co Ltd GDR 50 000 19 712 565,50 USD 161 371 141 659 2,03 % London Int. Q-Free ASA 3 182 604 44 688 23,20 NOK 73 836 29 149 0,93 % Oslo Brs Corning Inc 909 450 78 893 14,00 USD 72 692 -6 202 0,92 % New York Eltek ASA 17 038 235 91 536 4,14 NOK 70 538 -20 997 0,89 % Oslo Brs Proact IT Group AB 458 101 15 214 144,50 SEK 56 994 41 780 0,72 % Stockholm Samsung SDI Co Ltd 40 000 16 815 137 000,00 KRW 27 610 10 796 0,35 % Seoul EDB Ergogroup ASA 1 907 740 23 212 13,20 NOK 25 182 1 970 0,32 % Oslo Brs Minor items 89 226 47 479 -41 748 0,60 % Total Information Technology 472 024 766 816 294 792 9,67 % TELECOM France Telecom SA 1 111 904 142 131 11,10 EUR 93 899 -48 232 1,18 % Paris Mobile Telesystems ADR 645 000 41 051 18,28 USD 67 291 26 241 0,85 % New York Sistema Jsfc GDR 573 709 19 190 19,69 USD 64 470 45 281 0,81 % London Int. Telekomunikasi Indonesia Tbk ADR 265 000 14 762 30,61 USD 46 295 31 533 0,58 % New York Indosat Tbk PT ADR 193 488 32 182 28,00 USD 30 920 -1 262 0,39 % New York Minor items 7 842 1 550 -6 292 0,02 % Total Telecom 257 156 304 425 47 269 3,84 % UTILITIES Centrais Eletricas Brasileiras SA Pref 2 610 818 126 051 23,51 BRL 191 998 65 946 2,42 % Sao Paulo Minor items 29 055 19 014 -10 042 0,24 % Total Telecom 155 107 211 011 55 905 2,66 % Total equity portfolio* 7 258 450 7 814 125 555 675 98,49 % Disposable liquidity 119 810 1,51 % Total share capital 7 933 935 100,00 % Base price as of 31.03.2012 1 293,1778 36 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1999 10 20 40 80 160 240 SKAGEN Global World Index 20 % annual return N A V
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G l o b a l HISTORICAL PRICE DEVELOPMENT SKAGEN GLOBAL (EUR) The SKAGEN Global equity fund invests in stocks worldwide. The fund seeks to maintain a balanced industry exposure. SKAGEN Global is suitable for investors who want an equity fund which invests over the whole world and is therefore diversified both geographically and by industry. The fund is also suitable for those who already have exposure towards the Norwegian equity market, but who wish to strengthen their portfolio and reduce risk. SECURI TI ES PORTFOLI O SKAGEN GLOBAL AS OF 31- 03-2012 +++++ Security Number Acquistion value NOK * Market price Cur- rency Market- value NOK* Unrealised gain/loss * Share of fund Stock- exchange ENERGY Gazprom Oao ADR 13 151 412 966 520 12,20 USD 914 710 -51 811 2,67 % London Int. Baker Hughes Inc 2 133 086 560 665 41,44 USD 503 940 -56 725 1,47 % New York Petroleo Brasileiro Pref ADR 3 396 473 606 992 25,36 USD 491 053 -115 939 1,43 % New York Weatherford Intl Ltd 5 666 310 482 081 14,94 USD 482 616 535 1,41 % New York Kazmunaigas Exploration GDR 3 671 058 464 232 20,28 USD 424 434 -39 798 1,24 % London Int. OMV AG 2 064 000 445 062 26,46 EUR 415 029 -30 034 1,21 % Wien Ensco Plc - ADR 1 291 844 369 790 52,63 USD 387 610 17 820 1,13 % New York Nabors Industries Ltd 3 340 496 464 608 17,21 USD 327 845 -136 763 0,96 % New York BP Plc 4 612 282 234 832 4,62 GBP 194 190 -40 642 0,57 % London BP Plc ADR 617 696 188 955 44,43 USD 156 460 -32 495 0,46 % New York Petroleo Brasileiro SA 2 065 412 146 770 23,15 BRL 149 491 2 722 0,44 % Sao Paulo Electromagnetic Geoservices AS 6 981 000 107 661 16,90 NOK 117 979 10 317 0,34 % Oslo Brs Afren Plc 8 877 951 68 970 1,33 GBP 107 720 38 750 0,31 % London Noble Corp 504 593 111 915 37,20 USD 107 020 -4 895 0,31 % New York Total Energy 5 219 055 4 780 097 -438 958 13,93 % RAW MATERIALS Akzo Nobel NV 1 912 478 578 591 43,87 EUR 637 471 58 880 1,86 % Amsterdam Cliffs Natural Resources Inc 1 391 917 371 502 69,65 USD 552 695 181 193 1,61 % New York Heidelbergcement AG 1 170 781 367 883 45,20 EUR 402 078 34 195 1,17 % Xetra Ternium SA ADR 2 858 382 450 212 23,62 USD 384 903 -65 309 1,12 % New York Norsk Hydro ASA 9 761 378 288 436 30,90 NOK 301 627 13 190 0,88 % Oslo Brs Mayr-Melnhof Karton AG 450 627 203 444 75,40 EUR 258 158 54 714 0,75 % Wien UPM-Kymmene Oyj 1 467 477 97 177 10,15 EUR 113 171 15 994 0,33 % Helsinki Minor items 117 929 86 409 -31 520 0,25 % Total Raw Materials 2 475 174 2 736 511 261 336 7,97 % INDUSTRIALS Tyco International Ltd 6 332 310 1 308 796 55,85 USD 2 016 213 707 417 5,88 % New York Bunge Ltd 1 731 468 564 425 67,89 USD 670 149 105 723 1,95 % New York LG Corp 1 973 017 508 947 65 000,00 KRW 645 604 136 657 1,88 % Seoul Siemens AG 923 819 541 363 75,31 EUR 528 611 -12 752 1,54 % Frankfurt Randstad Holding NV 1 884 477 466 558 28,30 EUR 405 204 -61 354 1,18 % Amsterdam TE Connectivity Ltd 1 845 719 288 767 36,63 USD 385 437 96 670 1,12 % New York Stolt-Nielsen Ltd 1 893 500 336 914 107,50 NOK 203 551 -133 363 0,59 % Oslo Brs BayWa AG 744 577 222 363 28,56 EUR 161 571 -60 792 0,47 % Frankfurt Minor items 338 591 154 725 -183 867 0,45 % Total Industrials 4 576 725 5 171 065 594 340 15,07 % CONSUMER DISCRETIONARY Comcast Corp 4 236 789 416 985 29,39 USD 709 884 292 899 2,07 % NASDAQ Toyota Industries Corp 3 019 921 502 646 2 496,00 JPY 521 614 18 969 1,52 % Tokyo Renault SA 1 424 602 362 154 39,17 EUR 423 978 61 824 1,24 % Paris Hyundai Motor Pref (2pb) 562 937 157 824 70 100,00 KRW 198 655 40 831 0,58 % Seoul Time Warner Cable Inc 406 427 109 532 80,76 USD 187 124 77 592 0,55 % New York Television Broadcasts Ltd 4 565 862 110 528 52,35 HKD 175 514 64 987 0,51 % Hong Kong Yamaha Motor Co Ltd 1 953 411 159 122 1 109,00 JPY 149 911 -9 211 0,44 % Tokyo Dixons Retail Plc 78 684 888 109 156 0,19 GBP 134 822 25 666 0,39 % London LG Electronics Inc Pref 1 036 948 270 944 24 500,00 KRW 127 892 -143 052 0,37 % Seoul Minor items 44 138 74 516 30 378 0,22 % Total Consumer Discretionary 2 243 030 2 703 912 460 882 7,88 % Risk
4 2 1 3 5 6 7 37 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 IT 14,4% Energy 13,9%
Industrials 15,1% Finance 17,5% Raw Materials 8,0% Health 5,4% Consumer Discretionary 7,9% Telecom 6,2% Consumer Staples 6,1% Utilities 3,5% Cash 2,0% SECTOR DISTRIBUTION South America 8,3% Cash 2,0% Asia ex Japan 17,0% Japan 4,9% EMEA 7,1%
Eurozone 14,8% North America 32,9% Norway 3,5% Peripheral EU 8,8% North-Africa 0,9% GEOGRAPHICAL DISTRIBUTION 10 LARGEST HOLDINGS * From the moor north of Skagen, 1885. Detail. By P.S. Kryer, one of the Skagen painters. The picture is owned by the Skagens Museum. SECURI TI ES PORTFOLI O SKAGEN GLOBAL AS OF 31- 03-2012 * Figures in 1000 NOK The market value as of 31.03.2012 is the last quoted price from the stock exchange. The average cost method is used for the calculation of sales gain. Security Number Acquistion value NOK * Market price Cur- rency Market- value NOK* Unrealised gain/loss * Share of fund Stock- exchange CONSUMER STAPLES Svenska Cellulosa AB-B 7 497 731 593 474 114,80 SEK 739 880 146 406 2,16 % Stockholm Unilever NV-Cva 2 296 346 398 892 25,57 EUR 446 133 47 241 1,30 % Amsterdam Tesco Plc 12 597 340 456 323 3,30 GBP 378 222 -78 102 1,10 % London Yazicilar Holding AS 4 021 961 97 412 12,40 TRY 159 494 62 082 0,46 % Istanbul United Intl Enterprises 154 171 22 774 815,00 DKK 128 319 105 546 0,37 % Kbenhavn Royal Unibrew A/S 253 219 61 811 388,00 DKK 100 337 38 526 0,29 % Kbenhavn Minor items 186 065 148 093 -37 971 0,43 % Total Consumer Staples 1 816 751 2 100 478 283 728 6,12 % HEALTH CARE Pzer Inc 6 152 893 719 550 22,69 USD 795 803 76 253 2,32 % New York Roche Holding AG-Genusschein 461 983 402 234 157,00 CHF 457 814 55 580 1,33 % Zrich Teva Pharmaceutical-Sp ADR 1 801 502 383 411 44,25 USD 454 464 71 052 1,32 % NASDAQ Rhoen-Klinikum AG 1 257 091 138 342 15,09 EUR 144 129 5 788 0,42 % Xetra Minor items 29 944 1 824 -28 120 0,01 % Total Health Care 1 673 480 1 854 034 180 554 5,40 % FINANCIALS Citigroup Inc 6 679 820 1 577 639 36,42 USD 1 386 934 -190 705 4,04 % New York Goldman Sachs Group Inc 883 683 640 977 123,70 USD 623 185 -17 792 1,82 % New York Gjensidige Forsikring ASA 8 317 774 491 858 67,35 NOK 560 202 68 344 1,63 % Oslo Brs Hannover Rueckversicherung AG 1 563 931 330 375 44,25 EUR 525 808 195 433 1,53 % Frankfurt Banco Do Estado Rio Grande Do Sul Pref 7 842 527 155 483 20,16 BRL 494 316 338 834 1,44 % Sao Paulo Cheung Kong Holdings Ltd 3 780 674 283 780 100,30 HKD 278 448 -5 332 0,81 % Hong Kong Haci Omer Sabanci Holding AS 11 319 870 213 856 7,66 TRY 277 303 63 447 0,81 % Istanbul Kinnevik Investment AB-B 2 039 277 100 415 153,40 SEK 268 900 168 485 0,78 % Stockholm Aberdeen Asset Management Plc 10 859 589 96 133 2,57 GBP 254 032 157 899 0,74 % London Asya Katilim Bankasi AS 29 208 168 288 115 1,96 TRY 183 081 -105 034 0,53 % Istanbul TAG Immobilien AG 2 921 133 153 887 6,95 EUR 154 364 476 0,45 % Frankfurt Osaka Securities Exchange Co 4 723 93 588 459 500,00 JPY 150 180 56 593 0,44 % Tokyo EFG-Hermes Holding SAE 10 956 636 206 143 13,58 EGP 140 436 -65 707 0,41 % Cairo Industrial Bank of Korea 1 973 755 144 101 13 750,00 KRW 136 621 -7 480 0,40 % Seoul Japan Securities Finance Co 4 006 975 233 138 479,00 JPY 132 819 -100 319 0,39 % Tokyo Albaraka Turk Katilim Bankasi AS 19 059 400 213 096 2,03 TRY 123 734 -89 362 0,36 % Istanbul GSW Immobilien AG 599 179 102 445 25,92 EUR 118 024 15 579 0,34 % Xetra Irsa Sa ADR 1 815 671 151 638 10,20 USD 105 582 -46 057 0,31 % New York Minor items 79 162 99 871 20 709 0,29 % Total Financials 5 555 830 6 013 842 458 012 17,53 % INFORMATION TECHNOLOGY Samsung Electronics Co Ltd Pref 578 868 1 333 977 795 000,00 KRW 2 316 693 982 716 6,75 % Seoul Oracle Corp 6 252 604 1 007 985 29,19 USD 1 040 510 32 524 3,03 % NASDAQ Kyocera Corp 1 300 268 684 514 7 580,00 JPY 682 042 -2 472 1,99 % Tokyo Microsoft Corp 2 199 798 325 540 32,15 USD 403 257 77 717 1,18 % NASDAQ Samsung Electronics Co Ltd Pref GDR 140 891 142 339 346,30 USD 278 155 135 816 0,81 % London In- ternational Yahoo! Inc 2 109 702 179 617 15,24 USD 183 298 3 681 0,53 % NASDAQ Minor items 42 374 40 299 -2 075 0,12 % Total Information Technology 3 716 346 4 944 254 1 227 908 14,41 % TELECOM Vimpelcom Ltd-Spon ADR 11 907 183 935 874 11,12 USD 754 857 -181 017 2,20 % New York China Mobile Ltd 7 150 200 414 448 85,45 HKD 448 646 34 198 1,31 % Hong Kong China Mobile Ltd ADR 1 386 102 379 877 55,00 USD 434 619 54 743 1,27 % New York Indosat Tbk PT ADR 921 819 137 600 28,00 USD 147 148 9 548 0,43 % New York Vivendi SA 1 267 811 152 961 13,75 EUR 132 451 -20 511 0,39 % Paris Minor items 159 637 208 749 49 112 0,61 % Total Telecom 2 180 398 2 126 470 -53 928 6,20 % UTILITIES Centrais Eletricas Brasileiras SA Pref 11 295 481 698 456 23,50 BRL 829 910 131 454 2,42 % Sao Paulo Centrais Eletricas Brasileiras SA 7 122 805 594 014 16,99 BRL 378 358 -215 657 1,10 % Sao Paulo Total Utilities 1 292 471 1 208 268 -84 203 3,52 % Total equity portfolio* 30 749 259 33 638 929 2 889 671 98,03 % Disposable liquidity 675 046 1,97 % Total share capital 34 313 975 100,00 % Base price as of 31.03.2012 822,1424 38 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003 20 10 40 80 120 SKAGEN Kon-Tiki Emerging Markets Index 20 % annual return N A V
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K o n - T i k i HISTORICAL PRICE DEVELOPMENT SKAGEN KON-TIKI (EUR) The SKAGEN Kon-Tiki equity fund will invest at least 50 percent of its assets in emerging markets. These are markets that are not included in the MSCI World Index. Neverthe- less, following on from our require- ment to have a reasonable industry balance, 50 percent of the funds assets may be invested in markets that are included in the MSCI World Index. SKAGEN Kon-Tiki is suitable for an investor who wants to benefit from the value creation taking place in the worlds emerging markets. The fund offers the opportunity of extraordinary returns, but at a higher risk than with a global/ Norwegian equity fund. SECURI TI ES PORTFOLI O SKAGEN KON-TI KI AS OF 31- 03-2012 +++++ Security Number Acquistion value NOK * Market price Cur- rency Market- value NOK* Unrealised gain/loss * Share of fund Stock- exchange ENERGY Baker Hughes Inc 6 624 935 1 861 319 41,44 USD 1 565 137 -296 182 3,38 % New York Gazprom Oao ADR 22 085 821 1 524 370 12,20 USD 1 536 117 11 747 3,32 % London Int. Petroleo Brasileiro Pref ADR 5 943 178 1 026 138 25,36 USD 859 249 -166 889 1,86 % New York Seadrill Ltd 2 873 932 266 345 212,50 NOK 610 711 344 366 1,32 % Oslo Brs Tullow Oil Plc 3 554 688 299 448 15,26 GBP 494 124 194 677 1,07 % London Sasol Ltd 1 699 949 497 038 370,50 ZAR 467 713 -29 325 1,01 % Johannesburg Petroleo Brasileiro SA 3 200 000 245 877 23,15 BRL 231 611 -14 265 0,50 % Sao Paulo Pacic Drilling SA 3 741 922 230 070 10,19 USD 217 487 -12 583 0,47 % New York Archer Ltd 13 276 071 320 208 14,15 NOK 187 856 -132 351 0,41 % Oslo Brs Deep Sea Supply Plc 12 229 431 125 766 12,80 NOK 156 537 30 771 0,34 % Oslo Brs Siem Offshore Inc 10 977 629 94 336 10,90 NOK 119 656 25 320 0,26 % Oslo Brs Minor items 96 272 48 259 -48 013 0,10 % Total Energy 6 587 185 6 494 458 -92 727 14,03 % RAW MATERIALS Vale Sa Spons ADR 8 522 364 900 179 22,53 USD 1 094 885 194 707 2,37 % New York Exxaro Resources Ltd 4 683 604 591 283 198,13 ZAR 689 105 97 822 1,49 % Johannesburg Eurasian Natural Resources 7 267 473 433 990 5,92 GBP 392 240 -41 750 0,85 % London Vale SA-Pref A 1 231 900 210 807 41,16 BRL 158 529 -52 278 0,34 % Sao Paulo Drdgold Ltd ADR 3 724 701 206 450 7,29 USD 154 800 -51 650 0,33 % NASDAQ Asia Cement China Holdings 50 706 000 186 391 3,90 HKD 145 210 -41 181 0,31 % Hong Kong Minor items 59 153 70 782 11 629 0,15 % Total Raw Materials 2 588 252 2 705 552 117 299 5,85 % INDUSTRIALS ABB Ltd 8 957 636 964 815 135,30 SEK 1 041 792 76 976 2,25 % Stockholm Aveng Ltd 21 017 094 617 358 39,09 ZAR 610 089 -7 269 1,32 % Johannesburg Empresas ICA S.A.B 42 542 700 621 197 24,25 MXN 459 502 -161 695 0,99 % Mexico Harbin Electric Company Ltd 68 000 000 614 366 8,14 HKD 406 450 -207 917 0,88 % Hong Kong Bidvest Group Ltd 2 878 881 335 297 179,75 ZAR 384 280 48 983 0,83 % Johannesburg AirAsia Bhd 47 375 200 110 718 3,45 MYR 304 146 193 427 0,66 % Kuala Lumpur A P Moller - Maersk B 6 500 247 249 43 080,00 DKK 285 970 38 722 0,62 % Kbenhavn Golar LNG Ltd. 1 274 141 230 093 216,80 NOK 276 234 46 140 0,60 % OsloBrs Norwegian Air Shuttle ASA 1 628 768 119 886 107,50 NOK 175 093 55 206 0,38 % Oslo Brs Tekfen Holding AS 8 158 907 123 013 6,18 TRY 161 252 38 239 0,35 % Istanbul Enka Insaat Ve Sanayi AS 8 416 664 105 720 5,68 TRY 152 888 47 167 0,33 % Istanbul Frontline 2012 Ltd 4 912 000 83 435 24,00 NOK 117 888 34 453 0,25 % Unotert Minor items 510 630 493 246 -17 384 1,07 % Total Industrials 4 683 780 4 868 828 185 048 10,52 % CONSUMER DISCRETIONARY Hyundai Motor Pref (2pb) 3 574 100 570 644 70 100,00 KRW 1 261 266 690 621 2,73 % Seoul Great Wall Motor Co Ltd 105 000 000 190 465 15,10 HKD 1 164 233 973 768 2,52 % Hong Kong Hyundai Motor Pref (1p) 3 259 810 521 108 67 800,00 KRW 1 112 612 591 504 2,40 % Seoul Mahindra & Mahindra Ltd GDR 7 628 837 140 559 13,75 USD 598 015 457 456 1,29 % London Int. LG Electronics Inc Pref 3 150 000 850 969 24 500,00 KRW 388 507 -462 463 0,84 % Seoul DRB-Hicom Bhd 54 368 600 205 041 2,52 MYR 254 953 49 912 0,55 % Kuala Lumpur Gome Electrical Appliances Holding Ltd 160 266 000 237 151 1,61 HKD 189 470 -47 681 0,41 % Hong Kong Hengdeli Holdings Ltd 64 928 000 122 661 3,28 HKD 156 379 33 718 0,34 % Hong Kong LG Electronics Inc 297 269 79 295 82 800,00 KRW 123 909 44 613 0,27 % Seoul Mahindra & Mahindra Ltd 1 482 013 115 856 700,20 INR 116 008 152 0,25 % Nat. India Minor items 29 196 000 326 925 223 742 -103 183 0,48 % Total Consumer Discretionary 3 360 676 5 589 093 2 228 416 12,08 % Risk
4 2 1 3 5 6 7 39 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 IT 11,6% Energy 14,0% Industrials 10,5%
Finance 17,0% Raw Materials 5,8% Health 4,7% Consumer Discretionary 12,1% Telecom 9,2% Consumer Staples 7,5% Utilities 4,7% Cash 3,0% SECTOR DISTRIBUTION Cash 3,0% Asia ex Japan 38,8% East Africa 0,2% EMEA 23,7% Japan 0,7% South America 14,9% Eurozone 1,9% North America 4,0% Norway 4,4% Peripheral EU 6,0% North Africa 0,7% West Africa 1,8% GEOGRAPHICAL DISTRIBUTION 10 LARGEST HOLDINGS * Skagen reefs lightship, 1892. Detail. By Carl Locher, one of the Skagen painters. The picture is owned by the Skagens Museum. SECURI TI ES PORTFOLI O SKAGEN KON-TI KI AS OF 31- 03-2012 * Figures in 1000 NOK The market value as of 31.03.2012 is the last quoted price from the stock exchange. The average cost method is used for the calculation of sales gain. Security Number Acquistion value NOK * Market price Cur- rency Market- value NOK* Unrealised gain/loss * Share of fund Stock- exchange CONSUMER STAPLES Cosan Ltd 8 525 000 433 663 14,65 USD 712 005 278 342 1,54 % New York Shoprite Holdings Ltd 6 722 590 320 674 137,30 ZAR 685 428 364 755 1,48 % Johannesburg Kulim Malaysia BHD 67 500 400 213 083 4,18 MYR 525 042 311 959 1,13 % Kuala Lumpur Yazicilar Holding AS 9 654 470 239 354 12,40 TRY 382 855 143 501 0,83 % Istanbul Heineken NV 918 707 268 693 41,65 EUR 290 729 22 036 0,63 % Amsterdam PZ Cussons Plc 7 800 000 130 854 3,00 GBP 213 155 82 301 0,46 % London Royal Unibrew A/S 489 758 82 208 388,00 DKK 194 064 111 856 0,42 % Kbenhavn Tata Global Beverages Ltd 13 626 721 182 536 112,35 INR 171 150 -11 386 0,37 % Nat. India Minor items 317 890 278 245 -39 645 0,60 % Total Consumer Staples 2 188 954 3 452 673 1 263 719 7,46 % HEALTH CARE Richter Gedeon Nyrt 968 258 1 070 376 37 600,00 HUF 937 285 -133 091 2,03 % Budapest Stada Arznemittel AG 2 597 658 383 691 24,66 EUR 486 711 103 020 1,05 % Frankfurt Hanmi Pharm Co Ltd 760 725 315 456 60 300,00 KRW 230 923 -84 533 0,50 % Seoul China Shineway Pharmaceutical 22 497 000 162 815 11,76 HKD 194 270 31 455 0,42 % Hong Kong Eis Eczacibasi Ilac Ve Sanayi 21 418 365 146 800 2,09 TRY 143 158 -3 641 0,31 % Istanbul Minor items 298 187 200 668 -97 519 0,43 % Total Health Care 2 377 325 2 193 016 -184 309 4,74 % FINANCIALS Banco Do Estado Rio Grande Do Sul Pref 19 274 229 434 278 20,16 BRL 1 214 859 780 582 2,63 % Sao Paulo Haci Omer Sabanci Holding AS 49 058 140 964 828 7,66 TRY 1 201 777 236 949 2,60 % Istanbul VTB Bank Ojsc GDR 34 393 253 1 127 989 4,51 USD 884 302 -243 687 1,91 % London Int. State Bank of India 2 305 149 662 042 2 096,35 INR 540 226 -121 816 1,17 % Nat. India Standard Chartered Plc 3 658 731 426 729 15,56 GBP 518 752 92 024 1,12 % London Aberdeen Asset Management Plc 21 603 336 340 012 2,57 GBP 505 354 165 343 1,09 % London JSE Ltd 6 464 519 249 899 79,40 ZAR 381 164 131 264 0,82 % Johannesburg Kiwoom Securities Co Ltd 1 065 984 194 810 71 000,00 KRW 381 005 186 195 0,82 % Seoul Korean Reinsurance Co 4 765 066 181 791 13 650,00 KRW 327 434 145 643 0,71 % Seoul Bangkok Bank Public Co-Nvdr 9 410 500 240 648 185,00 THB 321 813 81 165 0,70 % Bangkok Yapi Ve Kredi Bankasi AS 25 265 176 292 767 3,60 TRY 290 877 -1 890 0,63 % Istanbul Gjensidige Forsikring ASA 3 867 692 228 194 67,35 NOK 260 489 32 295 0,56 % Oslo Brs EFG-Hermes Holding SAE 14 949 381 353 507 13,37 EGP 188 650 -164 856 0,41 % Cairo Nordnet AB 7 007 907 97 310 23,30 SEK 140 357 43 047 0,30 % Stockholm Kiatnakin Bank Pcl-Nvdr 19 238 700 142 186 37,00 THB 131 582 -10 604 0,28 % Bangkok Minor items 632 213 566 181 -66 032 1,22 % Total Financials 6 569 201 7 854 822 1 285 621 16,97 % INFORMATION TECHNOLOGY Samsung Electronics Co Ltd Pref 550 547 1 360 170 795 000,00 KRW 2 203 349 843 180 4,76 % Seoul Hon Hai Precision Industry 65 100 000 1 405 300 114,50 TWD 1 439 358 34 058 3,11 % Taipei Samsung Electronics Co Ltd Pref GDR 505 370 496 402 346,30 USD 997 730 501 328 2,16 % London Int. Softbank Corp 2 000 000 443 593 2 447,00 JPY 338 667 -104 925 0,73 % Tokyo Naspers Ltd 988 091 236 708 431,00 ZAR 316 249 79 541 0,68 % Johannesburg Minor items 224 066 65 746 -158 319 0,14 % Total Information Technology 4 166 237 5 361 100 1 194 862 11,59 % TELECOM China Mobile Ltd ADR 5 096 446 1 513 808 55,00 USD 1 598 016 84 208 3,45 % New York Sistema Jsfc GDR 11 303 681 901 767 19,69 USD 1 268 869 367 101 2,74 % London Int. Bharti Airtel Ltd 19 324 305 885 064 337,90 INR 729 969 -155 095 1,58 % Nat. India Indosat Tbk PT 105 000 000 326 495 5 050,00 IDR 329 816 3 320 0,71 % Indonesia Indosat Tbk PT ADR 2 054 595 350 229 28,00 USD 327 971 -22 259 0,71 % New York Total Telecom 3 977 364 4 254 640 277 277 9,19 % UTILITIES Centrais Eletricas Brasileiras SA Pref 27 410 963 2 036 002 23,50 BRL 2 013 959 -22 044 4,35 % Sao Paulo Centrais Eletricas Brasileiras SA 2 452 151 187 633 16,99 BRL 130 256 -57 377 0,28 % Sao Paulo Minor items 58 627 40 870 -17 756 0,09 % Total Utilities 2 282 262 2 185 086 -97 176 4,72 % Total equity portfolio* 38 781 237 44959266 6 178 029 97,15 % Disposable liquidity 1 316 653 2,85 % Total share capital 46275919 100,00 % Base price as of 31.03.2012 529,7418 40 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 SECURI TI ES PORTFOLI O SKAGEN TELLUS AS OF 31- 03-2012 SKAGEN Tellus is an actively managed global bond fund investing in bonds issued by governments, regional autho- rities and financial institutions all over the world. SKAGEN Tellus is a good option for investors who wish to invest in global bonds and who have an investment horizon of at least 12 months. Investors must be tolerant of exchange rate fluctuations. * Interior. Brndums annex, ca. 1920. Detail. By Anna Ancher, one of the Skagen painters. The picture is owned by the Skagens Museum. ++++ Security M a t u r i t y C o u p o n F a c e
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f u n d GOVERNMENT BONDS Australian Government 15.04.2012 5,75 4 000 23 388 590,13 619 23 605 24 224 218 5,25 % Brazilian Government 10.01.2028 10,25 6 000 21 788 372,64 425 22 358 22 784 570 4,93 % Canadian Government 01.08.2013 2,00 5 000 28 695 577,22 91 28 861 28 952 167 6,27 % Chilean Government 05.08.2020 5,50 800 000 10 006 1,22 78 9 750 9 828 -256 2,13 % European Bank Recon & Dev 17.06.2015 0,50 20 000 18 273 87,59 71 17 518 17 589 -755 3,81 % Colombian Government 14.04.2021 7,75 5 000 000 17 419 0,38 1 181 19 003 20 185 1 584 4,37 % Czech Republic 16.09.2013 2,80 40 000 12 240 31,17 184 12 469 12 653 229 2,74 % Irish Government 18.10.2020 5,00 2 000 13 419 674,58 340 13 492 13 832 72 3,00 % European Bank Recon & Dev 06.06.2014 5,25 130 000 14 998 10,99 620 14 289 14 909 -709 3,23 % Mexican Government 20.11.2036 10,00 40 000 21 226 56,69 489 22 674 23 163 1 448 5,02 % New Zealand Government 15.04.2015 6,00 2 000 10 596 507,01 256 10 140 10 396 -456 2,25 % Polish Government 25.10.2021 5,46 15 000 26 434 185,65 641 27 848 28 489 1 414 6,17 % Russian Government 10.03.2018 7,85 50 000 9 956 20,19 42 10 097 10 139 141 2,20 % US Government 31.08.2013 0,12 7 000 40 672 567,96 4 39 757 39 761 -915 8,61 % South African Government 31.03.2036 6,25 50 000 29 714 55,19 1 154 27 594 28 749 -2 120 6,23 % UK Government 14.05.2012 0,00 3 000 26 971 910,21 0 27 306 27 306 335 5,91 % Norwegian Government 20.06.2012 0,00 25 000 24 910 99,68 0 24 920 24 920 10 5,40 % US Government 31.05.2012 0,75 7 000 39 294 569,76 99 39 883 39 982 589 8,66 % Total Bond Portfolio 390 000 6 296 391 566 397 862 1 566 86,15 % Disposable liquidity 63 876 0 63 954 63 954 78 13,85 % TOTAL 453 876 6 296 455 520 461 816 1 644 100,00 % Portfolio Key Figures Effective underlying return 3,17 % Effective yield to clients* 2,37 % Duration** 3,16 * Effective underlying return adjusted for managment fee. ** Duration is a simplied expression of how much the price of the security will change if the interest rate changes by one percentage point. *** Figures in 1000 NOK Effective interest is the average annual return of an interest bearing security until maturity. Securities are valued at market price as of 31.03.2012. Bonds and notes for which there are no market maker prices are at all times valued against the applicable yield curve. Unit price as of 31.03.2012 105,1926 Risk
4 2 1 3 5 6 7 41 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 FI NANCI AL STATEMENT Financial statement AS OF 31.03.2012 Income Statement (all gures in NOK 1000) SKAGEN Vekst 01.01.2012 - 31.03.2012 SKAGEN Global 01.01.2012 - 31.03.2012 SKAGEN Kon-Tiki 01.01.2012 - 31.03.2012 SKAGEN Avkastning 01.01.2012 - 31.03.2012 SKAGEN Hyrente 01.01.2012 - 31.03.2012 SKAGEN Hyrente Institusjon 01.01.2012 - 31.03.2012 SKAGEN Tellus 01.01.2012 - 31.03.2012 SKAGEN Krona** 01.01.2012 - 31.03.2012 PORTFOLIO REVENUE AND COSTS Interest income and costs -2 292 -1 655 2 215 10 286 37 326 13 773 4 258 3 884 Dividends 13 755 126 300 84 565 - - - - - Realised capital gain/loss 40 378 -9 541 98 741 28 516 -1 064 3 573 - Change unrealised gain/loss 808 752 2 729 414 3 110 807 9 509 8 587 2 791 -5 116 458 Broker's fee -628 -2 585 -10 006 -3 -34 -16 -7 -25 Currency gain/loss -20 410 -47 816 -11 935 2 347 - - -1 144 - Portfolio result 839 556 2 794 117 3 274 387 22 167 46 395 15 484 1 564 4 317 MANAGEMENT REVENUE AND COSTS Management fee - xed -19 845 -83 590 -225 808 -1 289 -2 572 -587 -1 027 -196 Management fee - variable* -70 411 -57 139 55 520 - - - - - Asset management result -90 256 -140 728 -170 287 -1 289 -2 572 -587 -1 027 -196 Result before tax 749 300 2 653 388 3 104 100 20 878 43 823 14 896 537 4 121 Tax cost -517 -10 686 -5 576 - - - - - NET INCOME FOR THE PERIOD 748 783 2 642 702 3 098 523 20 878 43 823 14 896 537 4 121 Balance Sheet SKAGEN Vekst 31.03. 2012 SKAGEN Global 31.03. 2012 SKAGEN KonTiki 31.03. 2012 SKAGEN Avkastning 31.03. 2012 SKAGEN Hyrente 31.03. 2012 SKAGEN Hyrente Institusjon 31.03. 2012 SKAGEN Tellus 31.03. 2012 SKAGEN Krona 31.03. 2012 ASSETS Norwegian securities at cost price 4 045 665 931 460 1 560 763 699 118 3 139 740 1 011 730 24 910 - Foreign securities at cost price 3 212 785 29 797 459 37 220 474 103 433 - - 365 090 414 371 Unrealised capital gains 555 675 2 910 011 6 178 029 1 426 3 466 1 759 1 566 283 Accrued interest securities - - - 3 955 16 264 8 276 5 204 2 462 Total securities portfolio 7 814 125 33 638 929 44 959 266 807 932 3 159 470 1 021 765 396 770 417 117 Dividend receivable 20 433 163 168 178 134 - - - - - Accrued interest bank - - - - - - - - Total accrued income 20 433 163 168 178 134 - - - - - Accounts receivable - brokers 48 995 34 699 26 242 - 15 256 - - - Accounts receivable - management company 1 2 3 - - - 1 - Tax receivable on dividends 3 100 25 070 2 519 - - - 883 - Other receivables - - - - - - - - Total other receivables 52 096 59 771 28 764 - 15 256 - 884 - Bank deposits 161 063 817 934 1 471 642 103 313 739 617 432 669 65 528 36 011 TOTAL ASSETS 8 047 717 34 679 803 46 637 806 911 245 3 914 344 1 454 434 463 183 453 128 EQUITY CAPITAL Unit capital at par value 613 646 4 182 501 8 739 935 675 615 3 788 414 1 433 756 438 984 424 798 Premium -971 896 17 750 554 23 078 590 236 991 32 932 -3 945 46 333 2 551 Total paid-in equity capital -358 249 21 933 055 31 818 524 912 606 3 821 346 1 429 811 485 317 427 348 Retained earnings 8 293 597 12 452 307 14 477 167 -2 865 38 862 13 963 -23 447 5 155 TOTAL EQUITY CAPITAL 7 935 348 34 385 362 46 295 691 909 741 3 860 208 1 443 774 461 871 432 504 DEBT Accounts payable - brokers 20 036 126 282 136 542 - 32 273 10 072 - 19 809 Accounts payable - management company 90 256 140 728 170 287 1 289 2 572 587 1 027 196 Other debt 2 076 27 430 35 285 215 19 291 - 285 619 Total other debt 112 368 294 441 342 114 1 504 54 136 10 660 1 312 20 624 TOTAL DEBT AND EQUITY CAPITAL 8 047 717 34 679 803 46 637 806 911 245 3 914 344 1 454 434 463 183 453 128 Number of units issued 6 136 463,58 41 825 008,42 87 399 345,55 6 756 149,86 37 884 144,48 14 337 561,21 4 389 840,45 4 247 976,32 Base price per unit 1293,1778 822,1424 529,7418 134,6540 101,8939 100,6893 105,1926 101,8137 Note: Divergence in price relative to the portfolios is due to accruals divergence as of 31.03.2012. * Calculated variable management fee as of 31.03.12: pursuant to the regulations, the denitive statement shall take place as of 31.12.2012 based on value developments during the rest of the year. ** Figures in SEK 1000 SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 42 Return and risk measurements NOTICE Returns in euro* as of 31-03-2012 Year to date 1 year 2 year 3 year 5 year 10 year Since start SKAGEN Vekst 12,4 % -9,3 % 0,2 % 23,2 % -0,5 % 11,3 % 15,6 % Oslo Brs Benchmark Index (OSEBX) linked OSEBX/MSCI AC Total Return Index 11,0 % 2,2 % 8,1 % 30,6 % -0,2 % 9,3 % 9,6 % SKAGEN Global 10,6 % 2,1 % 8,5 % 25,7 % 3,0 % 10,7 % 16,0 % MSCI World Linked Index (DM trough AC Total Return) 8,9 % 5,3 % 7,1 % 19,7 % -0,9 % 0,3 % 1,8 % SKAGEN Kon-Tiki 9,8 % -4,5 % 5,4 % 30,1 % 8,8 % 18,2 % 18,2 % MSCI Emerging Markets Index (Daily Traded Net Total Return) 11,1 % -2,9 % 4,6 % 24,9 % 4,7 % 9,4 % 9,4 % SKAGEN Tellus (Euro) 2,60 % 6,58 % 5,27 % 10,37 % 5,55 % 5,8 % Barclays Capital Global Treasury Index 3 - 5 years (Euro) -2,93 % 9,80 % 6,10 % 5,86 % 6,70 % 5,7 % RIGHT OF CANCELLATION When you buy fund units, according to the Right of Cancellation Act (Act no. 105 of 2001-12-12, ref. 22b, litra a), clients have no right of cancellation. However, when subscriptions are sent to us by mail/fax or are carried out via the Investor client at VPS (My Account), you are entitled to information about the fund and the management company immediately after the purchase. The information is avail- able in the funds product sheet (simplied prospectus) and the general commercial terms. Statutory information is sent to unit holders in the welcome letter immediately after the rst subscription. Subsequently, unit holders can nd all information on our website www. skagenfunds.com as well as in the annual report. as of 31-03-2012 SKAGEN Vekst SKAGEN Global SKAGEN Kon-Tiki SKAGEN Tellus MEAN VARIANCE ANALYSIS LAST 5 YEARS Standard deviation, fund 25,8 % 20,2 % 25,3 % 7,63 % Standard deviation, benchmark index 31,5 % 16,1 % 24,0 % 9,00 % Sharpe-ratio, fund -0,11 0,03 0,25 0,41 Sharpe-ratio, benchmark index -0,08 -0,20 0,10 0,47 Relative volatility/tracking error 10,6 % 8,0 % 5,7 % 10,40 % Information ratio -0,03 0,48 0,69 -0,10 Correlation 0,95 0,93 0,97 0,23 Alpha -0,4 % 4,0 % 3,8 % Beta 0,78 1,17 1,03 R2 90 % 86 % 95 % GAIN LOSS ANALYSIS LAST 5 YEARS Relative gain 86 % 126 % 108 % 87 % Relative loss 87 % 107 % 96 % 90 % Relative gain/loss ratio 0,98 1,17 1,12 0,96 Positive index divergence 12,83 12,09 9,92 11,86 Negative index divergence 13,20 8,08 6,01 12,71 Index divergence ratio 0,97 1,50 1,65 0,93 Percentage positive index divergence 49 % 60 % 62 % 48 % Percentage positive index divergence when market is up 25 % 72 % 62 % 15 % Percentage positive index divergence when market is down 78 % 47 % 62 % 84 % Percentage of number of positive index divergence 40 % 58 % 57 % 57 % Percentage of number of positive index divergence when market is up 29 % 69 % 56 % 35 % Percentage of number of positive index divergence when market is down 54 % 46 % 58 % 79 % VALUE AT RISK LAST 5 YEARS; 2.5 % CONFIDENCE Value at risk: observed, NAV -20,4 % -15,0 % -19,0 % -5,0 % Value at risk: observed, Benchmark -26,9 % -10,0 % -16,8 % -3,7 % Relative Value at Risk, observed -5,5 % -6,4 % -4,2 % -9,5 % GAIN/LOSS ANALYSIS SINCE INCEPTION Relative gain 96 % 159 % 122 % 89 % Relative loss 78 % 103 % 99 % 85 % Relative gain/loss ratio 1,24 1,55 1,23 1,05 Positive index divergence 15,17 20,95 13,41 11,79 Negative index divergence 9,90 8,34 5,77 11,74 Index divergence ratio 1,53 2,51 2,32 1,00 Risk and performance measurements Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund managers skill, the funds risk profile and subscription and management fees. The return may become negative as a result of negative price develop- ments. Investments in foreign currencies are normally not hedged. SKAGEN Vekst has a fixed management fee of 1% pro anno. Returns exceeding 6 % p.a. are shared 90/10 between the unitholders and the management company. SKAGEN Global has a fixed management fee of 1% pro anno. Better value development measured in percent in the funds net asset value compared with the MSCI AC World Index (in NOK) is shared 90/10 between the unitholders and the management com- pany. SKAGEN Kon-Tiki has a fixed management fee of 2% pro anno. Better value develop- ment measured in percent in the funds net asset value compared with the MSCI Emer- ging Markets Index (in NOK) is shared 90/10 between the unit holders and the manage- ment company. However, the total annual management fee charged may not exceed 4 % of the funds average annual asset value. If the funds net asset value shows a poorer development measured in percent than the MSCI Emerging Markets Index, 10 % of the poorer value development is deducted from the fixed management fee. However, the total annual management fee charged may not be lower than 1 % of the funds average annual asset value. SKAGEN Global and SKAGEN Kon-Tiki may be charged a variable management fee even if the funds return has been negative, as long as the fund has outperformed the benchmark. Conversely, the fund may have a positive return without being charged a variable management fee, as long as there is no outperformance of the benchmark. The fixed management fees are calculated daily and charged quarterly. The variable management fees are calculated daily and charged annually. The annual management fee is 0.8% for SKAGEN Tellus. The management fee is cal- culated daily and charged quarterly. Please refer to the product sheets and pro- spectuses for a detailed description of the cost, etc. They are available upon request from SKAGEN Funds or at www.skagenfunds.com * All return figures beyond 12 months are annualised. RETURN AND RI SK ME ASUREMENTS SK AGEN F UNDS MARKE T REPORT 4 NUMBER 1 4 APRI L 2012 43 I NVESTMENT PHI LOSOPHY Portfolio management is a team sport in SKAGEN. All portfolio managers share a strong belief in SKAGENs applied value orientation, a contrarian and common sense based investment style that requires patience, dedication and thorough analysis. Our experienced portfolio managers are generalists, good analysts and strong decision makers. The teams operate on a flat structure and everyone is required to contribute their own investment ideas. Each team does, however, have one lead portfolio manager with ultimate responsibility for the fund and thereby the right to veto any potential investments which are not supportive of our investment philosophy, or which breach our ethical or corporate gover- nance guidelines.
Shared ideas, individual decisions Interaction within the portfolio team is mostly informal. The teams are all located around one desk in Stavanger and share ideas and com- municate in a continuous and ad-hoc manner across the table. Although there is a common research plat- form, individual managers are responsible for taking independent decisions for their fund. Portfolio managers are rewarded not only based on the excess returns and performance of the funds but also according to other criteria, such as commitment to the firm and their ability to share investment ideas. Many portfolio mana- gers invest a considerable share of their perso- nal wealth in their funds, thereby aligning their interests closely with those of the clients. Our portfolio managers share a strong belief in SKAGENs contrarian investment style a long term approach that requires patience, dedication and thorough research. SKAGENS Portfolio Team Sren Milo Christensen Chris-Tommy Simonsen Torkell Eide Kristian Falnes SKAGEN Global Ole Seberg Geir Tjetland (New in 2012) Beate Bredesen SKAGEN Vekst Ross Porter Cathrine Gether (On leave) Knut Harald Nilsson Kristoffer Stensrud SKAGEN Kon-Tiki Tomas N. Middelthon (New in 2012) Elisabeth A. Gausel (On leave) Ola Sjstrand SKAGEN Hyrente & SKAGEN Hyrente Institusjon Jane Sirevg Tvedt SKAGEN Avkastning Torgeir Hien SKAGEN Tellus Harald Espedal Investment director PHONE: +47 51 21 38 58 * EMAI L: CONTACT@SKAGENF UNDS. COM Countries highlighted in dark blue are a home market. Countries highlighted in light blue are those in which SKAGEN has an ofce. Countries highlighted in green are those in which SKAGEN has marketing permission.
SKAGENs International department has over the past few years grown to meet increasing interest and demand from outside the home market in the Nordic region.
The department now handles inquiries and clients from countries as diverse as the Netherlands, Luxembourg, Finland, Iceland, the UK and Switzerland. SKAGENs international department has grown alongside the international expansion and is based between Stavanger, Norway, London, UK and Amsterdam, the Netherlands. SKAGEN continues to expand in Europe Ofces: Head office SKAGEN Funds Postbox 160 4001 Stavanger, Norway or Skagen 3, Torgterrassen Stavanger, Norway Tel.: +47 51 21 38 58 Fax: +47 51 86 37 00 Email: contact@skagenfunds.com www.skagenfunds.com London Albemarle House 1 Albemarle Street London W1S 4HA UK Amsterdam Museumplein 5 D 1071 DJ Amsterdam The Netherlands Contact Customer Services Customer Services is open from Monday to Friday from 9 a.m. to 5 p.m. (CET) Either visit us at our office, send an email or call us and we will do our utmost to assist you. Graphical production: Printting Produksjon as