Finnish asset manager Evli has long been recognized as a specialist in fixed income, managing €7 billion across the asset class. While the firm has extensive experience in investing Nordic high yield bonds through its European high-yield bond fund and Nordic corporate bond funds, it wasn’t until early this year that Evli launched a dedicated high-yield bond fund focused exclusively on the Nordic market.
“Evli offers a wide range of credit funds, but this is the first time we’re launching a pure Nordic high-yield bond fund,” says Jani Kurppa, who has spent over a decade managing investments in all the different segments of the Nordic corporate bond markets at Evli. The decision to introduce a dedicated fund was driven by the strong growth of the Nordic high-yield market – not only in terms of the number of issuers, but also its increasing industry diversification and improved liquidity. “It has also proven to be a compelling asset class over time, consistently outperforming other credit and fixed-income segments,” Kurppa adds.
Features of the Nordic High Yield Market
Einari Jalonen, who co-manages the Evli Nordic High Yield Fund alongside Kurppa, has spent 11 years investing in European high-yield bonds at Evli – a mandate that has included exposure to the Nordic market. The Nordic high-yield universe stands out for several reasons, most notably its higher credit spreads. “Nordic issuers typically offer spreads that are 100 to 200 basis points wider than comparable European high-yield bonds,” explains Jalonen. “Those higher spreads translate into higher expected returns, which is one of the main reasons we’re drawn to the Nordic market. You’re getting additional yield pickup for the same level of credit risk as in the Euro or U.S. high-yield markets.”
“Those higher spreads translate into higher expected returns, which is one of the main reasons we’re drawn to the Nordic market. You’re getting additional yield pickup for the same level of credit risk as in the Euro or U.S. high-yield markets.”
Nordic issuers have default rates comparable to those in other high yield markets, but tend to exhibit higher recovery rates in the event of default. Another distinguishing feature of the Nordic high-yield market is its dominance of floating-rate notes, which typically results in interest rate durations that are two to three years shorter than in other markets, according to the fund’s managers. This combination allows the Nordic high-yield segment to offer better yields for similar levels of credit risk, while also contributing to lower return volatility for investors.
“The Nordic high-yield market has evolved a lot since the financial crisis. We’re able to build a robust portfolio of Nordic high-yield bonds that’s diversified across both countries and sectors.”
The growing maturity and sector diversification of the Nordic high-yield bond market is another key reason behind Evli’s decision to launch a dedicated Nordic-focused fund. The market used to be heavily concentrated in oil and offshore issuers from Norway and real estate companies from Sweden. In recent years, however, the landscape has broadened significantly. “The Nordic high-yield market has evolved a lot since the financial crisis,” says Kurppa. “Today, we can construct a well-diversified portfolio even while excluding all oil and gas exposure – which we do – and limiting our allocation to Swedish real estate,” he adds. “We’re able to build a robust portfolio of Nordic high-yield bonds that’s diversified across both countries and sectors.”
A Pan-Nordic Approach Relying Bottom-Up Selection
High-yield bond managers often display a degree of home bias, with Swedish managers typically overweighting Swedish issuers and Norwegian managers leaning more heavily toward Norwegian exposure. Operating out of Helsinki, Finland – whose high-yield bond market is considerably smaller than those of Norway and Sweden – gives Evli a more neutral starting point and enables the team to construct a truly pan-Nordic portfolio. “Finland’s high-yield market is relatively small, so it’s not possible for us to have a strong home bias,” says Kurppa. “That naturally positions us as pan-Nordic selectors. We strive for balanced diversification across all the Nordic countries, rather than focusing heavily on one home market or the two largest markets, Sweden and Norway.”
“Finland’s high-yield market is relatively small, so it’s not possible for us to have a strong home bias. That naturally positions us as pan-Nordic selectors.”
With both Kurppa and Jalonen bringing over a decade of experience in bond investing beyond the Nordic high-yield space, the duo applies a time-tested, bottom-up approach to portfolio construction. “We focus on bottom-up analysis,” says Jalonen, “looking for issuers that can service their debt through different market cycles.” More specifically, they target companies that consistently generate positive free cash flow over the cycle, show improving leverage and debt coverage metrics, and issue bonds that offer an attractive spread relative to the underlying risk.
“We focus on bottom-up analysis, looking for issuers that can service their debt through different market cycles.”
This focus naturally leads to significant exposure to bonds issued by private equity-backed companies. “We’re looking for businesses that generate stable cash flows across cycles – and coincidentally, that’s exactly what private equity managers seek as well,” explains Jalonen. According to Kurppa, the team favors issuers with a stable cash flow profile and at least a few years of operating history. “We’re not in the business of project financing. We believe companies should be able to generate sufficient operational cash flow to cover their coupon payments from day one.”
This investment approach results in lower exposure to highly cyclical sectors and a greater allocation to industrial companies. The team’s decision to exclude oil and gas from the portfolio is driven by two key considerations: ESG alignment and an aversion to commodity-related risk. “We’ve excluded oil and drilling from the fund, not only as part of our ESG framework, but also because it introduces too much commodity risk,” says Kurppa. “We don’t believe in trying to time cyclical sectors, and commodity exposure simply isn’t the kind of risk we want in the portfolio.”
Portfolio Construction: Diversification, Duration, and Liquidity
Structured as a daily UCITS fund, the Evli Nordic High Yield strategy employs bottom-up selection to build a well-diversified portfolio of up to 100 holdings. “We currently have 80 names in the portfolio, which we consider the optimal number,” says Kurppa, with the fund managing an asset base of €100 million. “We aim for a portfolio of between 60 and 100 holdings,” he adds. The portfolio is designed to avoid significant concentration, with individual holdings typically weighing between 0.5 percent and a maximum of 3 percent.
Evli’s Nordic high-yield fund targets an outperformance of approximately 200 basis points relative to the broader high-yield bond market. “While we don’t have specific return targets, our goal is to outperform the general Nordic high-yield bond market,” says Kurppa. A key driver of this outperformance is the team’s preference for unrated debt. “We tend to favor unrated bonds because they offer a higher yield pickup,” Kurppa notes. With around three-quarters of the market being unrated, the team finds an ample opportunity set.
“While we don’t have specific return targets, our goal is to outperform the general Nordic high-yield bond market. We tend to favor unrated bonds because they offer a higher yield pickup.”
The current portfolio has a duration of 0.7 years, largely due to the predominance of floating-rate bonds in the Nordic high-yield market. “About 80 percent of the Nordic high-yield market is issued in floating-rate format,” says Jalonen. “As a result, when you go through the bottom-up selection process, most of the bonds end up being floating-rate.” That said, the team avoids making duration or interest rate bets, with the portfolio’s duration simply reflecting the outcome of their bottom-up selection approach.
As a daily-traded UCITS fund, the portfolio management team closely monitors market liquidity. In addition to maintaining a highly diversified portfolio and holding a portion in cash, “the key to managing liquidity risks is ensuring good credit quality,” says Kurppa. “Most liquidity problems during downturns stem from issuers that are underperforming, whether due to business or balance sheet issues.” The solution to mitigating both defaults and liquidity challenges, he adds, is to “develop and execute a selection process that ensures a high-quality portfolio.”
