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Absolute Returns in Impact-Screened High-Yield Market

Stockholm (HedgeNordic) – While many high-yield bond investors prioritize avoiding defaults, there is one team in the Nordics that does not shy away from investing in distressed investments. Managed by Tom Hestnes and co-portfolio manager Ole Einar Stokstad, Norselab Meaningful Impact High Yield aims to generate absolute returns by investing in performing Nordic high-yield bonds, maintaining the flexibility to spice up returns with distressed investments. As an Article 9 fund, all its investments must fall within a pre-vetted universe of high-yield issues approved by Norselab’s four-member impact team.

Tom Hestnes, who has been involved in over 50 restructurings in the Nordics since 2015, joined Norselab in 2022 to launch a series of alternative investment funds that partially invest in special distressed opportunities. Joined by Ole Einar Stokstad, formerly Head of Credit Research at DNB Markets, the duo has been managing Norselab Meaningful Impact High Yield since December 2022. A year later, amid promising opportunities in the Nordic real estate market, Norselab launched a second high-yield fund structured as an alternative investment fund to invest in Nordic real estate.

AIF Advantages

With both Hestnes and Stokstad joining Norselab in mid-2022, the team opted for the alternative investment fund structure to overcome structural limitations in the Nordic high-yield market, such as limited liquidity. “Managing less liquid investments in a liquid structure like UCITS has proven quite a challenge sometimes,” explains Hestnes. “The AIF structure allows for better fund management by offering investors monthly liquidity instead of daily.”

Additionally, the AIF structure permits the use of leverage, with Meaningful Impact High Yield benefiting from a 15 percent credit facility that serves as a liquidity buffer. This structure also facilitates currency risk hedging in the portfolio, particularly important for a pan-Nordic portfolio. “We use that credit facility for margin calls, so external factors like currency fluctuations do not affect the portfolio.”

“The AIF structure permits more concentration, allowing us to maintain a fundamental approach to investments.”

Equally important, the AIF structure allows the two-person team to maintain more concentration and focus on a smaller number of issues in the portfolio. “Asset growth becomes your enemy at a certain stage in the Nordic high-yield market,” notes Hestnes. Under UCITS regulations, the maximum investment in a single issuer can reach ten percent of the portfolio. “Once you reach four to five billion Norwegian kroner, you are forced to invest in more companies,” he elaborates. For a two-person team, size becomes an issue at that point. “The AIF structure permits more concentration, allowing us to maintain a fundamental approach to investments.”

100% Alpha Focused

Norselab Meaningful Impact High Yield adopts a benchmark-agnostic strategy, targeting the highest risk-reward opportunities in the credit segment around B and BB+. “We are 100 percent alpha-focused,” says Hestnes. “We do not benchmark against anyone or anything, and try to deliver the best absolute return in the high-yield space.” However, Hestnes and Stokstad, do not solely seek the best risk-reward opportunities in the market. “With almost all our investments, we like to have expectations of positive triggers or catalysts,” emphasizes Hestnes. “In a flat market with a portfolio yielding 12.5 percent, we seek an outcome closer to 15 percent” due to catalysts driving additional returns.

“We are 100 percent alpha-focused. We do not benchmark against anyone or anything, and try to deliver the best absolute return in the high-yield space.”

While the Nordic high-yield market returned 10.5 percent in 2023, Norselab Meaningful Impact High Yield returned 15.7 percent, reflecting the active selection of credits with positive catalysts. “We spice up the returns with distressed and catalyst-driven investments,” explains Hestnes. Active investing in the Nordic high-yield market serves as a tool for generating above-market returns. “We refrain from using the term ‘trading’ because we don’t trade. However, we aim to be active and benefit from large relative value spreads within sectors and risk categories,” he adds. “The beauty of illiquid markets lies not only in their challenges but also the opportunities they present, which we try to exploit by turning the portfolio.”

“We spice up the returns with distressed and catalyst-driven investments.”

The team decided to overweight the “investment companies” sector in 2023, as it was heavily impacted in late 2022 due to the rise in interest rates. “This sector rebounded very strongly in 2023,” notes Hestnes. Underweighting or nearly avoiding investments in real estate in the first half of 2023 also proved to be beneficial for Meaningful Impact High Yield. However, the team started overweighting the sector in August, and September. Amid promising opportunities in the Nordic real estate market, Norselab soon launched a second high-yield fund to invest in Nordic real estate.

Article 9

Meaningful Impact High Yield is classified as Article 9, designated as “dark green” under the SFDR. While Tom Hestnes and Ole Einar Stokstad form the portfolio management team responsible for selecting investments for Meaningful Impact High Yield, there is a separate team of four impact professionals at Norselab assisting the fund’s journey to Article 9 status.

Meaningful Impact High Yield seeks to invest in issuers that generate a net positive contribution, through their core products and services, to the UN Sustainable Development Goals. “Our internal impact analyst team, currently consisting of four people, have been through the entire universe and identified those companies that contribute to one or more SDGs,” explains Hestnes. “All issuers have passed through the team’s thorough impact assessment process.”

While the team of four continually monitors and updates their recommendations, Hestnes and Stokstad are responsible for picking investments from the pre-vetted universe of issuers. “Our job as portfolio managers is to make the best absolute returns within that part of the universe,” concludes Hestnes.

This article is part of HedgeNordic’s Nordic Hedge Fund Industry Report.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

In-Depth: High Yield

This In-Depth series explores the universe of high-yield bonds, drawing on insights from both allocators and fund managers investing in this segment. This series explores both the benefits and challenges of investing in high-yield markets, with a particular focus on the Nordic market. Above all, this series showcases different approaches to capitalizing on opportunities in this space.

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