When allocators and investors hear about annual returns of 20 or 30 percent, their first thought is typically of strong equity market performance. Few, if any, would associate such returns with the fixed-income market. Yet, Øivind Thorstensen and Simen André Aarsland Øgreid of Kraft Fondene achieved a 32.3 percent gain with Kraft Nordic Bonds and a 23.3 percent return with the Norwegian-tilted Kraft Høyrente by investing in Nordic high-yield bonds. While maintaining a sector-agnostic approach, the duo achieved these strong returns by adopting an opportunistic approach and capitalizing on opportunities in the Swedish real estate market.
Kraft Fondene manages two high-yield-focused funds alongside an investment-grade fund launched in early 2024. While Kraft Nordic Bonds primarily targets the Nordic high-yield bond market as a whole, Kraft Høyrente maintains a stronger focus on Norway. However, both funds’ prospectuses allow for flexibility to seize opportunities across a broader Pan-European universe when advantageous. “While Kraft Nordic Bonds should have a connection to the region, and in theory, the fund should be equally weighted across Nordic countries, we are not constrained by geography and take an opportunistic approach to where we see the best opportunities,” explains Thorstensen. “There is also room to allocate to Pan-European opportunities, and this flexibility applies equally to Kraft Høyrente.”
“We’re definitely not sector specialists, nor do we claim to be. We are agnostic, and what ultimately drives our activity is the opportunity itself, how we assess capital protection relative to bond pricing and risk pricing.”
This flexibility extends beyond country exposure to sector allocation as well, allowing Thorstensen and Øgreid to take concentrated positions in sectors offering compelling risk-reward dynamics. “We’re definitely not sector specialists, nor do we claim to be,” says Thorstensen. “We are agnostic, and what ultimately drives our activity is the opportunity itself, how we assess capital protection relative to bond pricing and risk pricing,” he elaborates. Liquidity is another key consideration, particularly in the Nordic high-yield market, which is often characterized by lower liquidity. “Our approach is built on three pillars: capital protection, relative pricing and liquidity.”
Capitalizing on the Swedish Real Estate Opportunity Set
Kraft Nordic Bonds gained 32.3 percent in 2024, driven by the team’s ability to identify and capitalize on opportunities, most notably in the Swedish real estate market. “As opportunities emerge, we can quickly navigate and rotate into specific sectors,” says Thorstensen. While many viewed the Swedish real estate market as distressed, Thorstensen clarifies that it was the capital markets for real estate companies – not the companies themselves – that were under pressure. “It’s a misconception that real estate was distressed. The capital markets were dislocated, but the companies’ balance sheets were not. The businesses were well-functioning and adapting to the higher interest rates,” he explains.
“It’s a misconception that real estate was distressed. The capital markets were dislocated, but the companies’ balance sheets were not. The businesses were well-functioning and adapting to the higher interest rates.”
To deconstruct and explain the opportunity set in the real estate market, Thorstensen looks back to 2020 and 2021, when many real estate companies issued substantial amounts of debt amid near-zero or even negative base rates. However, when inflation surged and was met with aggressive rate hikes to contain it, “the bonds started to trade off quite significantly,” he recalls. “In parallel, a broader fear took hold in the sector, investors began questioning whether these companies would ever be able to access bond financing again. As a result, the capital markets for real estate became completely dislocated for a period,” Thorstensen explains.
While Thorstensen acknowledges that some companies were indeed likely to struggle with refinancing, he emphasizes that there were opportunities to selectively invest in the strongest real estate firms. “If you cherry-picked the best companies, you could reasonably expect them to maintain access to equity and funding in some form,” he explains. Thorstensen and his co-portfolio manager focused on issuers with the ability to take proactive measures, such as selling assets, accumulating liquidity, raising equity, adjusting rents for inflation, cutting costs, and streamlining operations. “Our view was that if you’re going to invest in the sector, you need to pick the best companies.”
“If you cherry-picked the best companies, you could reasonably expect them to maintain access to equity and funding in some form. Our view was that if you’re going to invest in the sector, you need to pick the best companies.”
For high-yield bond managers, the primary objective is simple: avoid defaults. In assessing the real estate sector, Thorstensen and his team saw an opportunity where “principal was very well protected, and the asymmetry was so compelling that it was hard not to consider real estate.” Thorstensen illustrates this by comparing a traditional high-yield issuer to some of the real estate issuers they invested in. “A typical high-yield issuer might have a loan-to-value (LTV) ratio of around 75 percent, sometimes higher, sometimes lower. This type of issuer, often rated CCC or single B, might see its bonds priced in the 8–12 percent yield range,” he explains.
In contrast, many real estate issuers originally held investment-grade ratings and had strong balance sheets but came under pressure due to rising interest rates. “These companies weren’t fundamentally weak, their challenge was the sharp repricing of debt, not underlying financial distress,” he adds. Thorstensen notes that their exposure had an average book value LTV of 45–50 percent, with yields ranging from 10–20 percent. However, the market was highly fragmented, with little consistency in spreads. “One investment-grade bond could yield 10 percent, while another offered 15 percent. By purchasing bonds at a 50 percent discount to nominal value, our market-adjusted book value LTV was just 25–30 percent, meaning we could withstand a 70 percent decline in property values before we would start losing money on the investment.”
“We recognized that the real estate sector offered significant risk-return opportunities…That meant we could take on the level of risk we wanted, whenever we wanted, without constraints, and that was key to our success.”
Reflecting on 2024, Thorstensen describes it as a standout year. “We recognized that the real estate sector offered significant risk-return opportunities across both investment-grade and high-yield bonds. That meant we could take on the level of risk we wanted, whenever we wanted, without constraints, and that was key to our success.”
Focus on Liquidity and Portfolio Concentration
As daily-traded UCITS vehicles, both high-yield bond funds managed by Kraft Fondene place a strong emphasis on liquidity. “Unlike many others, both of our funds maintain a high degree of official ratings. Around 70 to 80 percent of our exposure is rated by a third-party agency, with ratings ranging from triple C to triple B to single A,” Thorstensen explains. Bonds from rated issuers tend to have higher liquidity than those from non-rated issuers. “The rating creates liquidity by enabling us to access a wider range of mandates, not just locally but internationally. It’s like night and day in terms of liquidity,” he explains.
“The rating creates liquidity by enabling us to access a wider range of mandates, not just locally but internationally. It’s like night and day in terms of liquidity.”
Thorstensen also opts for a high degree of exposure to blue-chip companies, publicly listed entities, and large corporations that fund themselves internationally. “The issuance volume also supports liquidity, as does the issuer itself. Larger companies tend to have more transparent balance sheets, stronger reporting requirements, and greater visibility, all of which contribute to better liquidity,” he elaborates. “Once you have the rating, size, and issuance, these three elements work together to enhance liquidity.”
“We typically hold between 45 and 50 positions in our portfolio…we prefer this approach, as it gives us a clearer overview of our holdings.”
Thorstensen and his team’s focus on liquidity and investing in more liquid bonds allows them to maintain a more concentrated portfolio compared to many of their peers. “We typically hold between 45 and 50 positions in our portfolio, whereas our peers might have 100, 150, or even 200,” he explains. “But we prefer this approach, as it gives us a clearer overview of our holdings. We like to have conviction-based positions within the UCITS rules.” However, this concentration is guided by the three pillars of their strategy: principal protection, relative pricing and liquidity. “If these factors align, then we’re comfortable with a more concentrated portfolio.”
