Delivering strong returns during a market rebound is one thing. Preserving performance momentum once spreads tighten and dispersion fades is another. That was the test facing Øivind Thorstensen and Simen André Aarsland Øgreid after a standout 2024 in the Nordic high-yield market. Following a 32.7 percent return in 2024, the team at Kraft Fondene entered 2025 with a market characterized by lower dispersion, tighter spreads, and fewer obvious dislocations. Even so, both the Nordic-focused Kraft High Yield and the more European-oriented Kraft Corporate Bonds delivered double-digit returns.

“We went from a recovery phase with high dispersion between rating categories to a lower-dispersion, late-cycle environment where it became much harder to find attractive risk-reward,” reflects Thorstensen. In his view, delivering around 12 percent in 2025 was in many ways more challenging than generating 33 percent in 2024. “In 2024, we bought into dislocated sectors and benefited from massive spread compression. In 2025, opportunities were far more selective.”

“We went from a recovery phase with high dispersion between rating categories to a lower-dispersion, late-cycle environment where it became much harder to find attractive risk-reward.”

Rotating the Book After a Banner Year

Coming into 2025, the team recognized the shift in market dynamics. After what Thorstensen describes as the “tailwind and euphoria” of 2024, the team entered the new year with an already solid investment portfolio. “We had already built a strong book of investments, good material for us to chew on for several years,” says Thorstensen. That foundation, he argues, allowed the team to be selective in a market that had become tighter and less forgiving. “It put us in a very strong position to be careful and disciplined in our approach.”

“We had already built a strong book of investments, good material for us to chew on for several years. It put us in a very strong position to be careful and disciplined in our approach.”

That discipline has defined the strategy since the launch of Kraft Høyrente in 2019, rebranded as Kraft High Yield earlier this year to reflect its more Nordic-oriented mandate. “Our approach is all about risk-reward, relative pricing, and protecting your downside or your capital,” Thorstensen explains. In a lower-dispersion, late-cycle environment such as 2025, he believes that discipline became even more important.

Kraft High Yield gained 11 percent in 2025, bringing its annualized return since its 2019 launch to 10.4 percent. The younger and more geographically flexible Kraft Corporate Bonds returned 12.3 percent in 2025, taking its annualized return since inception in 2021 to 16.3 percent. Following the exceptionally strong performance in 2024, Thorstensen and Øgreid used the transition into 2025 to actively rotate the portfolio.

“We saw relationships becoming asymmetrical in the wrong direction, more downside than upside.”

“We took profits where yields had compressed significantly from our entry levels,” Thorstensen notes. One example was Heimstaden Bostad, exited at a yield just above 5 percent, after having purchased at yields between 20 and 50 percent in 2023 and 2024. The team also reduced exposure to banking and financials, particularly subordinated paper, where spread compression had been substantial. “We saw relationships becoming asymmetrical in the wrong direction, more downside than upside,” Thorstensen says.

Avoiding the Echo Chamber

In some years, Kraft Fondene’s positioning resembles peers; in others, such as 2024 and 2025, it diverges meaningfully. That divergence is deliberate. “We try to avoid existing in an echo chamber,” says Thorstensen. “We stay true to our principles rather than following the consensus.”

“We try to avoid existing in an echo chamber. We stay true to our principles rather than following the consensus.”

Kraft’s high-yield strategy rests on three core pillars: protection of principal, portfolio liquidity, and relative pricing of risk. Thorstensen argues that its consistent application is what drives results across cycles. “It may sound almost simplistic to talk about three pillars, but that’s really what it comes down to: risk-reward, relative pricing, and protecting your downside or your capital,” he reiterates. “That discipline became even more important in 2025 and 2026.”

Idiosyncratic Alpha in a Low-Dispersion Market

The return-versus-risk equation becomes especially important when credit spreads are historically tight and broad market beta offers limited compensation. “We still see a meaningful pipeline of situations where the balance-sheet risk is lower than what pricing implies,” observes Thorstensen. With dispersion across sectors compressed, excess returns increasingly stem from idiosyncratic mispricings. “Opportunities will come from company-specific events: news flow, temporary sell-offs, or company-specific situations,” Thorstensen adds. In such an environment, alpha is less about riding spread compression and more about reacting selectively to mispriced credits.

“We still see a meaningful pipeline of situations where the balance-sheet risk is lower than what pricing implies.”

Thorstensen continues to see lingering distortions in pricing. “We still see remnants of the Covid turmoil in companies that had high operational leverage on their balance sheets,” he says. In some cases, certain issuers have emerged from the inflation and rate shock with stronger liquidity profiles and more resilient capital structures, yet still trade at levels implying distress. “There can be a clear dislocation between perceived risk and actual balance-sheet risk,” he explains. “That’s where we find value.”

The team is also closely monitoring sectors facing structural disruption. Software-as-a-service (SaaS) companies, for example, have recently come under pressure amid concerns about artificial intelligence reshaping competitive dynamics. “We’ve seen bonds in that space sell off,” Thorstensen observes. “If we’re comfortable with the balance sheet, we can consider stepping in when pricing becomes attractive.”

With a solid portfolio foundation already in place, the Kraft team can afford to be patient, observing pockets of stress or opportunities and stepping in only when risk-reward becomes compelling. “There are pockets of value emerging,” says Thorstensen. “We are sitting very comfortably, which allows us to assess sectors carefully and decide at what point we should enter.”

Importantly, this opportunism operates strictly within the framework of the fund’s core pillars. Thorstensen reiterates that the search for opportunities must always be anchored in downside protection. “We will stick to our discipline of making sure our downside is protected,” he says, adding that much of the strategy’s effectiveness stems from maintaining liquidity at the portfolio level.

“If our bonds are liquid, our book is liquid. That allows us to rotate across sectors or switch from one company to another on our own terms, not when the market dictates.”

“If our bonds are liquid, our book is liquid. That allows us to rotate across sectors or switch from one company to another on our own terms, not when the market dictates,” Thorstensen emphasizes. That structural flexibility, he argues, is a decisive advantage. “It’s a massive enabler for us to execute the strategy properly and to capture alpha through better risk-reward decisions.”

Strong Start to 2026 Amid Search for Yield

Despite entering 2026 with tight spreads, both Kraft funds have started the year strongly, up more than 3 percent early on. Thorstensen attributes part of the performance to strong risk appetite and a renewed search for yield as rates have declined from their peaks in late 2024 and early 2025. “The lower-rate environment has created a tailwind.” As yields in safer assets have declined, capital has increasingly moved into higher-yielding segments of the credit market. However, Thorstensen remains cautious about extrapolating current conditions too far forward. “The question is how long that tailwind will stay with us.”

“In the event of a sell-off, returns could come under pressure, but equally, there is upside if markets remain constructive. A range of 8 to 12 percent is realistic.”

Thorstensen points to the portfolio’s carry as a key underpinning for returns. “We have roughly 7 percent in carry from interest income. If you conservatively annualize that over the remainder of the year, you are already moving into double-digit territory,” he explains. While acknowledging that market volatility could alter the trajectory, Thorstensen considers a double-digit return a reasonable base case under current conditions, while allowing for variability on both sides. “In the event of a sell-off, returns could come under pressure, but equally, there is upside if markets remain constructive. A range of 8 to 12 percent is realistic.”

Flexibility Beyond the Nordics

Although one fund maintains a purely Nordic focus, the other has broadened its mandate to a pan-European universe while retaining a Nordic perspective, thereby preserving the flexibility to allocate capital where relative value opportunities are most compelling. In Thorstensen’s view, mandate flexibility is critical in a late-cycle environment. “If you are trapped in a narrow niche mandate, you risk suffering when opportunities dry up,” he says.

“If you are trapped in a narrow niche mandate, you risk suffering when opportunities dry up.”

Regional focus can provide informational advantages, but strategy and process ultimately drive alpha generation. “Our edge comes from our disciplined approach and our ability to apply it consistently across cycles,” Thorstensen concludes. “That’s what enables us to deliver alpha.”