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We end the first full month for Carnegie High Yield Select at the same time as we round off 2017. We are very pleased with the performance during this relatively short period that the fund has been running, and we have progressed further than planned in achieving a “normalised” portfolio in terms of the number of holdings and individual weightings. Carnegie High Yield Select rose 0.53 percent this month, which means it has yielded 0.92 percent since it opened on November 2, 2017. In summary, so far so good.

We would like to reiterate our message that, in this market climate, we aim to achieve interest payments, known as coupons, rather than hope for returns from the rising bond prices and the high risk appetite that characterised debt markets in 2017. We are also striving to limit the downside through shorter credit and interest terms, which clearly also limit the potential returns. But with underlying coupons of around 6 percent in the current portfolio, we believe this remains the right choice.

Credit markets were surprisingly active in December, until the Christmas holidays brought a much-needed calm. The effects of being late in an active primary cycle became even clearer in December, meaning improved margins and bond terms. The secondary market remained selective, with margins for housing developers and other real estate companies generally rising against a backdrop of falling property prices and some imbalances in supply and demand. As the primary market switched to holiday tempo, however, risk appetite in the secondary market generally improved and the last days of the year were relatively strong.

We have added a number of names at attractive levels throughout the month, both in the primary and secondary markets, and we are approaching our target of a “normalised” portfolio. The investments and the inflows are not entirely linear, which means that the portfolio will be gradually built up. For example, there was a large deposit on December 29, which meant that we had 18 percent in cash over the new year, which affects the key figures. For this reason, we report our key figures from three different perspectives: 1) what the portfolio looks like right now; 2) how the portfolio would have looked if we adjust for what we assess is a normalised level of cash (about 5 percent of capital); and 3) the target we see ahead of us for how the portfolio will look in 1-2 months.

 

Portfolio data Current Norm. cash Target
Effective interest (currency adjusted %) 5.3 6.2 ~5.5%
Credit duration (years) 2.4 2.8 ~3
Interest duration (years) 1.0 1.1 <1.5

 

We believe that strong economic signals will continue to contribute to relatively improved credit quality overall in 2018. Historically high risk appetite, geopolitical risks and less expansionary monetary policy mean we intend to maintain a balanced portfolio. The fund invests in a limited number of companies that provide a high underlying return, so the performance of these companies is the most critical factor for returns in the longer term, although the fund is not immune in the short term to changes in market sentiment.