Stockholm (HedgeNordic) – Exactly five years ago, Norwegian fund boutique Borea Asset Management launched a specialized fund focused on investing in additional tier-1 (AT1) securities of Nordic, predominantly Norwegian, banks. Over this period, Borea Obligasjon has generated an annualized return of 7.3 percent for investors, enjoyed positive returns every single year despite numerous unforeseen turbulences.

“We are very pleased with the performance and strengthened in our hypothesis that this market provides very good returns compared to the risk we expose ourselves to,” says portfolio manager Magnus Vie Sundal. “Having gone through both a worldwide pandemic and subsequent turmoil in US regional banking, as well as the downfall of Credit Suisse, the AT1 market has proved to be resilient, and we have seen zero credit losses in our fund,” he emphasizes. “We are very happy with this performance.”

“We are very pleased with the performance and strengthened in our hypothesis that this market [AT1 securities] provides very good returns compared to the risk we expose ourselves to.”

Magnus Vie Sundal, Portfolio Manager at Borea Asset Management.

AT1 securities, born out of the financial crisis of 2008, help banks meet regulatory capital requirements and act as a loss absorption mechanism by converting into equity or being written down to absorb losses if a bank’s capital falls below a certain threshold. Borea Obligasjon focuses solely on Nordic banks, with about three-quarters of its exposure in Norwegian banks. “This is based on our view of these banks operating in a superior environment with a strong economy providing the basis for a strong social welfare state,” explains Vie Sundal.

The team running Borea Obligasjon previously told HedgeNordic that the “Norwegian welfare state represents the ultimate backstop for Norwegian consumers,” ensuring debt serviceability in the retail market, which is the primary focus of most savings banks. “Thus, credit losses have been small, combined with high capital requirements on the banks,” says Vie Sundal. “In sum, this gives us comfort on the credit quality, while the securities still pay a good premium over the risk-free rate.” Borea Obligasjon has delivered an annualized return of 7.25 percent since its inception five years ago, compared to an average three-month NIBOR money market rate of 2.17 percent during the same period.

“Prices have come up and credit spreads have tightened on AT1 securities, but we have recently seen a stabilisation.”

Magnus Vie Sundal, Portfolio Manager at Borea Asset Management.

Despite sluggish economic growth, Nordic bank earnings are strong, and banks are well capitalized, according to Vie Sundal. “Recent stress tests have strengthened our comfort in the resilience of the banking system,” he elaborates. “Prices have come up and credit spreads have tightened on AT1 securities, but we have recently seen a stabilisation. In the current market environment, pricing is fair, but I would be a bit more wary should prices increase substantially from here.”

Vie Sundal emphasizes that turmoil in global markets over the five years highlight the strength of Borea Asset Management’s operational framework. “We may not invest in the most exotic assets, but we focus on always maintaining flexibility, and having the ability to buy when others are forced sellers,” he says. “It is in rough seas that we can do the really good deals, and monthly liquidity and flexibility through a credit facility is a big advantage in this market.”

“We do believe a higher-for-longer interest rate environment could put some pressure on broad equity market valuations and hence regard the returns offered in AT1 securities as good, both on an absolute and relative level.”

Magnus Vie Sundal, Portfolio Manager at Borea Asset Management.

Looking ahead, Vie Sundal anticipates more of the same for Borea Obligasjon. “We believe we are positioned to gain from volatile periods,” says the portfolio manager. “Meanwhile, we are perfectly happy sitting still and receiving coupons,” mentions Vie Sundal. “We do believe a higher-for-longer interest rate environment could put some pressure on broad equity market valuations and hence regard the returns offered in AT1 securities as good, both on an absolute and relative level.”