Half Year Report

HALF YEAR REPORT

THE ART OF COMMON SENSE

NEW OPPORTUNITIES ON THE HORIZON

JULY 2015 | www.skagenfunds.com LEADER

Patience and NEW EQUITY lessons learned FUND

In an increasingly globalised world, there is more is true, however, and this can give rise to a period I would like to highlight the pressure than ever on fund managers to react to of reflection and soul searching, also in SKAGEN. successful launch of our new events and quickly turn around their investment Our recently appointed Investment Director, global equity fund in the portfolios. Ole Søeberg, has spent some time this spring quarter. SKAGEN Focus is a The alternatives seem to be either to chase looking at the investment process and has made high concentration fund with the current events or simply to give up and buy a few refinements that will strengthen the internal around 35 core holdings. The an index fund. In our view, however, chasing the processes. In the long run, however, it is still the portfolio managers apply the best markets, such as China, or giving up will operations in a company and how much one pays same investment policy as not allow you create the best returns over time. for these that create the value and cause the our other funds, investing in The well-known value investor, Warren Buf- share price of the company to increase. That is undervalued, under-resear- fett, once observed that: “The stock market is a an important point to remember now as we enter ched and unpopular compa- device for transferring wealth from the impatient the second half of 2015. nies. They have a bottom-up to the patient”. His words seem to hold true more The rest of the year may well be an exciting perspective and concentrate than ever now that the markets have entered a period with a potential interest rate hike in the on specific companies and period in which value and company focus is in US and new economic developments in many their intrinsic value. Being such short supply. emerging markets and Europe, amongst other benchmark-agnostic, their In a recent report on active and passive inves- things. In the short term, the return of all our investment decisions will be ting, the fund research company Morningstar equity funds may be influenced more by fluctu- made independently of the concluded that value management has a greater ations than what the companies actually deliver. benchmark index, with the aim chance of long-term success than other types The valuation of many emerging market com- of generating superior returns of active management. We are in no doubt that panies is now attractive compared with those in over time. common sense; coupled with an applied value developed markets and an improvement in global The portfolio may have a focus and stock picking form the best premise economic growth should improve earnings pro- relative bias towards mid-sized for creating excess returns over time, as it has spects for companies in many of these countries. companies, given the portfo- in the past. We wish you a pleasant summer. lio managers´ experience of At times, it may seem as though the opposite finding attractive investment opportunities among such companies. You can find out more at www.skagenfunds. com/focus and read the portfolio managers´ first report on the fund on page 27 of this report.

– Leif Ola Rød CEO

2 SKAGEN FUNDS HALF YEAR REPORT | 2015 CONTENT

Portfolio managers Filip Weintraub and Jonas Edholm of the newly launched SKAGEN Focus that makes its debut in the Market Report Bloomberg

10 34 Photos: Photos: Corporate bond fund SKAGEN Credit has bought bonds in INEOS, one of the world’s largest petrochemical companies. Bonheur/Ganger Rolf must now be seen more as a company Pictured here are granules manufactured at their facility in Cologne. within renewable energy that also has an option on a future improvement in the rig market.

LEADER EQUITY FUNDS FINANCIAL Patience and lessons learned > 2 SKAGEN Vekst > 10 STATEMENT Leif Ola Rød Slight improvement Half year accounts > 36 SKAGEN Global > 14 PORTFOLIO Uphill struggle Return and risk measurements > 39 MANAGERS´ REPORT SKAGEN Kon-Tiki > 18 Staying the course

SKAGEN m² > 23 INTRODUCTION SKAGEN seeks to the best of its ability to ensure Rainy quarter thatall information given in this report is correct, How to spend it? > 5 however, makes reservations regarding possible Corporate cash piles have SKAGEN Focus > 27 errorsand omissions. Statements in the report re- increased significantly in the Hunting for exceptional investments flect theportfolio managers’ viewpoint at a given past five years, but what should time, andthis viewpoint may be changed without notice. management do with the money? The report should not be perceived as an offer FIXED INCOME orrecommendation to buy or sell financial instruments. SKAGEN does not assume respon- FUNDS sibility for direct or indirect loss or expenses incurredthrough use or understanding of the re- Fixed income comment > 31 port. SKAGEN recommends that anyone wishing Long-term interest rates: to invest in our funds contacts a qualified custo- up, sideways or down? mer adviser by telephone on +47 51 80 37 09 or by email at [email protected]. SKAGEN Tellus > 32 Headwinds

SKAGEN Credit > 34 Unrest creates opportunities

SKAGEN FUNDS HALF YEAR REPORT | 2015 3 SKAGEN FUNDS

SKAGEN FOCUS Returns Lead manager: Filip Weintraub Start: 26 May 2015 Return since start* 10 The following tables show the returns for SKAGEN’s 5 funds versus their respective benchmarks in euro. The figures are updated as of 30.06.2015 0

Unless otherwise stated, all performance data in this report is in euro, relates -5 to class A units and is net of fees. -4.7% -7.6% -10

Equity Fund Fixed Income Fund SKAGEN Focus MSCI All Country World Index

* Since inception on 26 May 2015 SKAGEN GLOBAL SKAGEN VEKST

Lead manager: Knut Gezelius Start: 7 August 1997 Lead managers: Ole Søeberg and Geir Tjetland Start: 1 December 1993

Return past 12 months Average annual return since start Return past 12 months Average annual return since start 20 18.8% 20 25 24.0% 20 14.4% 15.2% 15 15 20 15 10.3% 15 10 10 10 10.2% 10 5 4.4% 5 5 4.3%

0 0 0 0 SKAGEN VekstMSCI Nordic/MSCI AC ex Nordic -5 -5 * The benchmarkSKAGEN Global index prior MSCIto 1/1/2010 All Country was Wo therld IndeMSCIx (DailyWorld Tr Indexaded Net Total Return)* * Effective 1/1/2014, the fund’s investment mandate changed. Read more on page 13. The benchmark index prior to 1/1/2010 was the Oslo Stock Exchange Benchmark Index (OSEBX).

SKAGEN KON-TIKI SKAGEN m²

Lead managers: Kristoffer Stensrud and Knut Harald Nilsson Start: 5 April 2002 Lead managers: Michael Gobitscheck and Harald Haukås Start: 31 October

Return past 12 months Average annual return since start Return past 12 months Average annual return since start

25 24.7% 20 20 20 16.5% 20 15 15 15 14.8% 16.2% 13.7% 15 10 10 10 8.6% 7.6% 10

5 5 5 5 2.0% 0 0 0 0

-5 -5 -5 -5 SKAGEN m² MSCI All Country World Index Real Estate IMI SKAGEN Kon-Tiki MSCI Emerging Markets Index SKAGEN CREDIT EUR SKAGEN TELLUS

Lead manager: Ola Sjöstrand Start: 30 May 2014 Lead manager: Torgeir Høien Start: 29 September 2006

Return past 12 months Average annual return since start Return20 past 12 months Average20 annual return since start

15 15 15 15 13.4%

10 10 10 10 7.0% 5.9% 5.0% 5 5 5 5

0.1% 0.1% -0.1% 0 0 0 0 -0.2% -5 -5 -5 -5

SKAGEN Credit EUR3 Month EURIBOR SKAGEN TellusJ.P.Morgan Broad Index Unhedged (EUR)*

* The benchmark index prior to 1/1/2013 was Barclay’s Capital Global Treasury Index 3-5 years.

4 SKAGEN FUNDS HALF YEAR REPORT | 2015 Portfolio managers´ report Introduction

> SKAGEN equity funds returned 3-10% in the first of half 2015, measured in euro. Our bond funds delivered 1.5-2.5%.

> 10-year government bond yields spiked upwards in 2Q 2015 from abnormally low levels.

> M&A activity has been heady in 2015 and could beat the previous annual record set in 2007.

> Global equities are up 3% year to date in USD. The Chinese stock market rose sharply

Photo: Bloomberg Photo: hitting a total market cap of over USD 10 trillion (10,000bn), despite lower economic growth, before falling back again. The US market is USD 25 trillion and the total global Photo: Bloomberg Photo: USA. After 9 consecutive positive quarters, the S&P index market is USD 73 trillion. fell by 0.2% in the quarter. SKAGEN Global continues to be strongly underweight US equities which currently constitutes 36% of the fund. Photo: Bloomberg Photo:

Volatility. Chinese local shares stood out as a positive in the second quarter, with a 28% increase. The frothy valuations reversed somewhat at the end of the quarter. Pictured: a display showing the Hang Seng Index figure in Hong Kong. On 8 July 2015, the benchmark plunged the most since the global financial crisis

Photo: Bloomberg Photo: rippled across Asia. Greek tragedy. Greece has failed to adapt to the new reality of prudent financial management needed in the post financial crisis era. Pictured: queues outside Bank of Greece, Athens.

SKAGEN FUNDS HALF YEAR REPORT | 2015 5 PORTFOLIO MANAGERS´ REPORT

How to spend it?

Corporate cash piles have increased significantly in the past five years, but what should management do with the money?

– Ole Søeberg Chief Investment Officer

Seven years ago, the financial crisis chang- ving competitiveness and market share. using the 2014 figure for US companies ed market behaviour overnight. The hou- Taking a global view and using the (USD 550bn) among which buybacks are sing bubble burst, M&A activity dried up MSCI AC World Index as a proxy, the 2,500 most common. and financial assets plummeted in value. most widely followed global companies Once the shares have been bought, Companies were suddenly compelled to are on track to generate USD 32 trillion of we would prefer that they were cancel- rethink their liquidity and balance sheet revenues in FY 2015, equivalent to app- led to avoid diluting long-term share- strategy amid a squeeze on lending. Banks roximately 40% of global GDP, and USD 3 holders. Unfortunately some companies too had to rebuild capital and their own trillion of net income. keep them to sell later on or give them balance sheets. Fortunately, lower global to employees who then sell them back interest rates made it possible for many into the market. companies to re-finance their debt on better terms, often stabilising and even MSCI WORLD AC INDEX Mergers and acquisitions (M&A) improving cash flows. Company cash can also be spent on 2009, trl $ 2015, trl $ Since then, the global economy has Revenues 27 32 growing a business, typically by investing chugged along at a decent, if not impres- Net Income 1.4 2.9 in new plants, upgrading facilities or deve- sive, pace and companies have changed Dividend 0.8 1.2 loping a new product or service. However, Market Cap 32 47 the way they use their cash. Some firms it takes time for the benefits of this invest- and regions, such as Greece, have failed ment to materialise. So it can be quicker to to adapt to the new reality, but broadly buy another company that seems to offer speaking prudent financial management the sort of transformation that is required. has been the order of the day. Dividends and share buybacks However, any type of M&A and investment Since 2012, we have seen cash flows The proportion of this net income distri- should only be undertaken if it adds value, that were previously used to reduce net buted to shareholders via dividends takes i.e. generates a higher return than the cost debt or held in reserve being redirected USD 1.2 trillion out of the total cash pile, of the capital invested plus the “risk-free” towards three main areas (or a mix of the- excluding the impact of cross holdings. rate (often the rate of interest from govern- se): dividends and stock buybacks; acqui- Company share buybacks account for a ment bonds). sitions (M&A) and investments into impro- further USD 700bn, based on estimates Since 2012, cash has increasingly been

6 SKAGEN FUNDS HALF YEAR REPORT | 2015 used to finance M&A. The previous high private equity players. The graph below competition for assets and pushes prices was 2007 when total deal value reached shows global M&A activity since 2003. It up. In the past 10 years, IPO and secondary USD 4.2 trillion (see Bloomberg data is interesting to note that the more bullish deal activity has been running at between below). In the first half of 2015, the total periods in the stock market coincide with USD 0.6 and 0.9 trillion a year. Here too it value was USD 2.5 trillion, meaning this periods of high M&A activity. appears that 2015 is on track for a record year is likely to reach or exceed the previous It is also worth noting that as private breaking year. record – good news for investment bankers equity firms exit from companies via stock and lawyers. market listings (known as initial public offe- Investing in the business In addition to corporate bidders, we have rings or IPOs) they tend to recycle it back Share prices have increased a lot in recent also seen activity from a large pool of into other M&A. This in turn creates more years, so it is harder to buy a company that can add value. Hence, you might expect GLOBAL M&A ACTIVITY SINCE 2003 investment in business and research and

Trillion $ Thousands development (R&D) would be the prefer- 6 30 red option for enhancing a company’s value. This has been a lower priority for 5 25 many companies since the financial cri-

4 20 sis, however, initially due to a need to strengthen their finances and later to an 3 15 increasingly short-term attitude by the

2 10 market towards results. In our view, a good management team making the right invest- 1 5 ment in organic growth typically creates

0 0 the most long-term value. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Given the recent increases in IPOs Volume Deal count *Year to date Source: Bloomberg Finance L.P. and M&A, we sense a lowering of the caveat emptor principle (i.e. taking proper account of the risks involved) and the

SKAGEN FUNDS HALF YEAR REPORT | 2015 7 use of more aggressive tactics – factors Animal spirits so the returns available from deposits and that have historically led to an increase in So-called ‘animal spirits’ may be one rea- government bonds compared to equities overall risk. A McKinsey survey showed son. Human behaviour is driven by recent would continue to favour equities. That is that corporate M&A is most successful experience. After five or six years of a bull unchanged over the last five years, but the when executed during tough economic market, many investors feel they are finan- equity advantage has reduced as stock pri- conditions, which often coincide with cial geniuses, as do listed companies that ces have increased. bear markets and inexpensive asset pri- have seen their stock multiply. Nonetheless, we continue to find pock- ces, as you might expect. Why then do In this sort of environment, we prefer ets of value among businesses that have those engaged in corporate activity not to stand back from the noise and take a been overlooked. These sorts of companies learn from past experience and tread with long-term view. The pace of global economic tend to stick to their knitting and let others caution in years such as 2007 and 2015? growth and inflation levels suggest that do M&A at frothy valuations. They also tend interest rates will remain relatively modest, to apply common sense when considering how best to invest their cash. Given the cost INVESTMENT HARDER-HIT BY THE CRISIS THAN GDP IN OECD of financing is likely to remain lower for longer, we could start to see more spending on % % 110 110 R&D and infrastructure. This in turn would broaden economic expansion and increase 105 105 global growth, rather than simply adding 100 100 to share valuations, and create favourable

95 95 conditions for many of our holdings.

90 90

85 85

80 80 2000 2002 2004 2006 2008 2010 2012 2014

Total real investment Real GDP Source: OECD Economic Outlook 97 database

8 SKAGEN FUNDS HALF YEAR REPORT | 2015 SKAGEN portfolio managers always strive to achieve the best possible absolute and risk-adjusted returns. However, since summer 2014, when the US dollar started to strengthen and a few weeks later the oil price began to fall, our equity funds have lagged their benchmark indices. This has been mostly due to their lower exposure to US dollar assets and higher exposure to emerging markets that tend to be more driven by commodity prices. Although we are disappointed by this relative underper- formance, as long term investors, we feel it is crucial not to fall into the trap of chasing shorter term macro movements in financial markets.

Instead, we prefer to adhere to our proven investment philosophy and common sense approach, which has generated substantial returns over time, while also taking steps to review everything we do and making sure we improve where we can. The result of this review has been a honing of our investment process in order to optimise each step. We believe this greater focus on methodology and the lessons learned from past investment decisions (positive and negative) will lead to superior performance in future.

second quarter pit stop – more or less as planned

Global equities were flat in the period in USD and the year-to-date performance is 3%. We Long term bond yields have incre- began 2015 with an 8%-10% expectation for annual equity returns, so things are going ased by 40 to 70 basis points, but more or less as planned. nevertheless remain at levels that should continue to support econo- Germany has stood out as a negative with a 9% decline in euro terms as a stronger cur- mic activity rency has led to a decrease in competitiveness and a market correction, following a 20% rally in the first quarter. Energy prices have rebounded by Chinese local shares have stood out as a positive, with a 14% increase in the second 15%-20%, but other commodities quarter. The valuations of many Chinese companies now appear frothy and we have have fallen slightly already seen some reversal. In the West, stock valuations continue to offer 6.0% earnings yield, but we note that Global economic growth is on 10-year bond rates have moved upwards. In order for bonds to compete with equities in track to reach 3.5% and the direc- yield terms we need to see 10-year bond rates move closer to 3.0%. The current level is tion of travel is similar to that in 0.9% in Germany, 2.3% in US and 0.4% in Japan. first quarter: America and Asia Emerging markets are valued 2 percentage points higher with an earnings yield of have been slightly weaker and 8.2% and therefore offer a fairly rich risk premium to developed markets. Europe slightly stronger

SKAGEN FUNDS HALF YEAR REPORT | 2015 9 SKAGEN Vekst Exploring the narrow path to prosperity > Better developments in the US and Japan than Europe > Continuing to concentrate the portfolio Photo: Bloomberg Photo: > Several investments Bonheur/Ganger Rolf must now be seen more as a company within renewable energy that also has an option on a future improvement in the rig market. reached price target and were sold Slight improvement 1 2 3 4 RISK 6 7 Fund start date 1 December 1993 SKAGEN Vekst beat its benchmark index in the second quarter. Return since start 1 713,51%

AUM EUR 938 million SKAGEN Vekst lost 2.4% while the benchmark index fell 3.8%, measured in euro. Year Number of unitholders 72 165 to date SKAGEN Vekst has gained 6.6% versus the index which is up 13.2%. In general the European markets performed fairly poorly in the quarter while Japan, Hong Kong and the US performed somewhat better. In Scandinavia, Sweden and Finland were PERFORMANCE IN EUR 2Q 15* 12 M* weak while Denmark and Norway were more or less flat. During the quarter the fund exited Nokian Tyres, Toto, Novo Nordisk, Stolt Nielsen SKAGEN Vekst -2,4 % 4,4% and Sparebanken Øst. We reached our price target in all of these companies and see MSCI Nordic/MSCI AC -3,8 % 18,8% better return potential in other companies going forward. We also exited Toshiba after ex. Nordic the Japanese company announced accounting irregularities (see separate section * As of 30 June 2015 below). The remainder of Bank Norwegian was also sold out of the portfolio in the second quarter. In total we earned 7.5 times our initial investment bought just before the global financial crisis. In hindsight, we started to reduce the position slightly pre- maturely, but are satisfied with the final result. We sold a large part of our position in Royal Unibrew as we prefer the pricing of our other Danish brewer, Carlsberg. There are several newcomers in the portfolio, the largest being Credit Suisse (see details below). We also bought smaller positions in Danish companies Solar and H Lundbeck AS as well as Swedish Elekta. The bulk shipping company, Golden Ocean Group, is also new following a spin-off from Frontline 2012. In general we have continued to concentrate the portfolio and the proceeds from this have largely gone into increasing the size of the fund’s largest holdings. The 10 and 35 largest holdings now account for 52% and 91% of the portfolio, respectively. At the end of the first half year, the 35 largest positions in the SKAGEN Vekst portfolio are priced at 11 times this year’s underlying earnings versus 15 times for the benchmark. Measured in book value, the portfolio also trades at a substantial discount PORTFOLIO MANAGERS to the benchmark index. We should therefore be well positioned for the rest of 2015 Geir Tjetland, Ole Søeberg, Erik Bergöö and despite the potential disruption to markets from macroeconomic factors. Alexander Stensrud* * Junior manager

Beach cyclists. 1894. Detail. By Einar Hein, one of the Skagen painters. This image belongs to the Skagens Museum (cropped).

10 SKAGEN FUNDS HALF YEAR REPORT | 2015 Increased profitability Credit Suisse is a newcomer in the portfolio. The bank, which is the second largest in Switzerland, has long struggled with poor profitability and is among the worst in Europe measured by cost/income ratio. The bank has hired a new CEO, Tidjane Thi- am, who started in June. We believe that Thiam will launch a cost cutting initiative that will substantially improve the bank’s ON THE ONE HAND ... profitability. A reduction in the cost/income ratio from the current 85% to a more Best despite strike moderate 65% should be attainable and in Norwegian was by far the best contributor to the fund in Q2. At the start of the quarter turn increase the return on net capital from there was a great deal of commotion due to the strike in late winter. The company pro- 7-8% to 15-20%. When this happens – ved yet again that they are capable of dealing with any fallout and passengers quickly some time over the coming years – the returned after the turbulence. Our earlier doubts about Norwegian’s long-haul initiatives bank should be priced at 1.5-2 times book are being laid to rest. It now appears as though the long-haul part of the company will value which would double the current sha- account for much of the future growth. Norwegian has its operations in order, but some re price to CHF 45-50. political obstacles continue to impede developments. The company recently announced that it is starting up routes from three US cities to the Caribbean. This will bring the number of Norwegian’s direct routes from the US up to 31 (of which seven depart from New York), making it the largest foreign airline company operating out of New York measured by the number of destinations. We like the company’s operational ambitions and await the value creation that will arise from the leasing company’s activities.

HISTORICAL PRICE DEVELOPMENT SKAGEN VEKST

2 40 2 40 Continued upside 1 60 1 60 SKAGEN Vekst Lundin Petroleum has so far been an 80 80 extremely good investment for the fund, particularly given the fall in oil price that 40 40 has taken place while we have held the 20 20 position. The company recently announced MSCI Nordic/MSCI AC ex. Nordic* that their long-standing CEO, Ashley Hep- 10 10 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 penstall, will step down but will continue to sit on the company’s board. The new man at the helm, Alex Schneiter, has been SKAGEN VEKST 2Q 2015 (MILL NOK) in the Lundin system since 1993. Schneiter 5 largest contributors 5 largest purchases was the favourite to take the reins from Norwegian Air Shuttle ASA 133 Credit Suisse Group AG 134 Heppenstall and we do not anticipate any Lundin Petroleum AB 44 Kinnevik Investment AB-B 66 Danske Bank A/S 30 Carlsberg AS-B 50 change in direction for the company. We Carlsberg AS-B 22 Kia Motors Corporation 45 are primarily invested in Lundin Petroleum Golar LNG Ltd 20 Elekta AB - B shs 43 due to its 22% stake in the Johan Sverdrup 5 largest detractors 5 largest sales field. We calculate a price per Sverdrup Norsk Hydro ASA -118 Toshiba Corp -159 Samsung Electronics Co Ltd Pref -86 Nokian Renkaat OYJ -80 barrel of USD 9 and therefore see signifi- Toshiba Corp -62 Toto Ltd -72 cant upside for the share. AirAsia Bhd -52 Novo Nordisk A/S-B -65 Casino Guichard Perrachon SA -30 Norwegian Finans Holding ASA -46

SKAGEN FUNDS HALF YEAR REPORT | 2015 11 SKAGEN VEKST

ON THE OTHER HAND ...

New assessment Our investments in Bonheur/Ganger Rolf have disappointed in the last couple of years. We underestimated the collapse in the rig market, which had a significant impact on Fred Olsen Energy, which used to be the companies’ main asset. The discount to NAV in this holding company has been huge though, and is the main Bloomberg Photo: Toshiba’s CEO Hisao Tanaka at a press conference where he announced that the company has set up a committee to investi- reason why we kept it in the portfolio. An gate allegations of improper accounting. announcement made in late June, however, is a game changer when it comes to the Irregularities found valuation of the companies: TRIG (The At the start of April, Toshiba announced that they had discovered improper accounting Renewables Infrastructure Group Limited) on infrastructure projects from 2013. In May the company announced that, as a result acquired 49% of Fred Olsen Wind Limi- of this, they would withdraw the financial statement for the previous year and not ted (50/50 owned by BON/GRO). TRIG is pay a year-end dividend. A committee was assigned to further investigate the case. It buying into a company with 433 MW of appears as though these accounting irregularities may also apply to divisions other installed windmill capacity. In this trans- than infrastructure and operations accounting for more than 10% of Toshiba’s turnover action FOWL is priced at NOK 9.3bn, and are impacted. We chose to exit the position on these announcements and realised a Bonheur alone will receive NOK 2.2bn in total negative return of NOK 16 million. The outcome remains to be seen, but our fear cash, corresponding to NOK 50 per share is that the problem is more widespread than it first appears. versus today’s share price of approximate- ly NOK 60. In addition, they get substantial SKAGEN VEKST KEY NUMBERS FOR THE LARGEST HOLDINGS (AS OF 30-06-2015) value in the form of renewable energy, offshore, cruise and property, amongst Company Holding size Price P/E 2015E P/E 2016E P/BV last Price target Samsung Electronics 7,0% 993 000 5,8 5,9 0,9 1 500 000 other things. This is perhaps proof that the Norwegian Air Shuttle 6,2% 325 10,5 8,6 5,4 340 stock market is not efficient, since all the Continental AG 6,1% 213 13,7 11,9 4,0 275 focus has been on a lamentable rig market Norsk Hydro 5,8% 33,1 9,4 8,3 0,9 57,5 while all the other values in the company Citigroup 5,2% 55 9,2 8,0 0,8 75 Teliasonera AB 5,0% 49 12,4 12,2 1,9 70 have been overlooked. Bonheur/Ganger Danske Bank A/S 4,8% 197 11,7 11,5 1,3 205 Rolf must now be seen more as a company Carlsberg 4,5% 608 16,0 13,5 1,8 750 within renewable energy which also has an ABB 4,2% 174 14,4 12,4 3,1 250 option on the future improvement in the rig Kia Motors 3,6% 45300 6,3 6,1 0,8 75000 Weighted top 10 52 % 9,7 8,9 1,4 37 % market. It may also be time for the stock Weighted top 35 91 % 10,8 9,3 1,3 47 % market to revise its view that the Olsen Benchmark index 15,2 13,8 2,3 family does not create long-term value. P/E may deviate from other sources when based on SKAGEN estimates.

Accounting woes each associate, both of which are planned Air Asia´s share price was sent into a to be listed in 2017. tailspin after an extremely negative ana- We do not see any difference between lyst report from GMT Research. The report the current situation and a similar situation accuses Air Asia of milking transactions when they established Air Asia Thailand a with its money-losing associates in the few years ago. At that time net gearing was Philippines and Indonesia, such as plane more than 4 versus the current 2.5. Air Asia leasing and maintenance deals, to boost the is confident it can bring net gearing down parent company’s operating cash flow. As to 2 by year end. the associates are currently unable to pay If it turns out that the above-mentioned their bills to the parent company, Air Asia associates are not in a position to pay their is extending significant capital to them – bills, however, and Air Asia has to do a full essentially gearing up – and funding its impairment of total receivables, the company own profit and operating cash flow, the will still have value in the form of 128 owned report said. planes which will exceed the net debt by a Air Asia states that both associates will considerable margin. We choose to maintain be able to pay their bills during the course our position in the company and see a consi- of the year. The company is also working derable upside when the associates in Indo- to raise new capital of USD 100 million for nesia and the Philippines turn profitable.

12 SKAGEN FUNDS HALF YEAR REPORT | 2015 See the portolio in its entirety at SECURITIES PORTFOLIO SKAGEN VEKST AS OF 30 JUNE 2015 www.skagenfunds.com/vekst-portfolio

SECTOR DISTRIBUTION Acquistion Market- Unrealised Share of Stock Security Number value NOK * value NOK* gain/loss * fund exchange Health 3,9% Telecom 7,3% Lundin Petroleum AB 1 800 000 177 336 243 572 66 236 2,96% Stockholm Cash 1,1% Ganger Rolf ASA 1 213 817 124 262 78 898 -45 364 0,96% Oslo Børs Industrials Raw materials Bonheur ASA 1 192 594 88 117 76 326 -11 791 0,93% Oslo Børs 21,4% 7,3% Solstad Offshore ASA 2 052 746 102 753 71 230 -31 523 0,87% Oslo Børs Energy 8,0% GCL-Poly Energy Holdings Ltd 30 000 000 59 320 54 307 -5 013 0,66% Hong Kong Rec Silicon ASA 32 000 000 47 398 53 888 6 490 0,65% Oslo Børs Finance Consumer 16,9% DOF ASA 5 762 213 110 022 34 573 -75 448 0,42% Oslo Børs staples Minor items 256 220 41 807 -214 413 0,51% 9,8% Total Energy 965 429 654 602 -310 827 7,96% Consumer discretionary Norsk Hydro ASA 14 542 679 373 563 480 636 107 072 5,84% Oslo Børs 13,4% Kemira OYJ 850 000 81 883 76 473 -5 411 0,93% Helsinki IT 11,0% OCI Co Ltd 39 000 33 003 24 618 -8 384 0,30% Seoul Minor items 20 776 18 601 -2 175 0,23% GEOGRAPHICAL DISTRIBUTION Total Raw materials 509 225 600 327 91 102 7,30% EMEA 1,3% Japan 2,0% Norwegian Air Shuttle ASA 1 561 410 124 109 507 302 383 193 6,17% Oslo Børs ABB Ltd 2 070 000 289 197 343 206 54 010 4,17% Stockholm Cash 1,1% Peripeheral EU 3,9% Koninklijke Philips NV 1 379 643 279 529 277 282 -2 248 3,37% Amsterdam North America 6,8% Wilh. Wilhelmsen Holding ASA 874 858 62 479 149 163 86 685 1,81% Oslo Børs Nordic 55,4% FLSmidth & Co A/S 311 000 104 468 117 743 13 275 1,43% Copenhagen Asia ex Japan AirAsia Bhd 27 960 000 142 496 89 467 -53 030 1,09% Kuala Lumpur 13,3% Golar LNG Ltd 190 000 58 722 70 327 11 605 0,85% NASDAQ Solar AS - B Shs 104 000 40 099 44 557 4 458 0,54% Copenhagen Frontline 2012 Ltd 1 000 000 41 502 41 000 -502 0,50% Unlisted Eurozone Danieli & Officine Meccaniche SpA 312 962 41 406 37 515 -3 891 0,46% Italy 16,3% YIT Oyj 550 125 32 137 31 114 -1 023 0,38% Helsinki Goodtech ASA 2 055 949 46 750 25 288 -21 462 0,31% Oslo Børs Minor items 61 826 28 590 -33 237 0,35% Total Industrials 1 324 721 1 762 554 437 833 21,42% Effective 1/1/2014, the fund’s investment manda- Continental AG 269 250 149 278 502 657 353 379 6,11% Frankfurt te changed from investing a minimum of 50% of its Kia Motors Corporation 932 000 285 845 296 120 10 275 3,60% Seoul assets in Norway to investing a minimum of 50% of Volvo AB 2 590 000 219 106 253 325 34 219 3,08% Stockholm its assets in the Nordic countries. This means that Nippon Seiki Co Ltd 273 000 28 148 42 617 14 470 0,52% Tokyo returns prior to the change were achieved under dif- ferent circumstances than they are today. The fund’s Minor items 33 138 9 057 -24 080 0,11% benchmark index prior to 1/1/2014 was an evenly Total Consumer discretionary 715 513 1 103 776 388 263 13,42% composed benchmark index consisting of the Oslo Carlsberg AS-B 518 000 323 926 369 576 45 650 4,49% Copenhagen Stock Exchange Benchmark Index (OSEBX) and the Casino Guichard Perrachon SA 352 100 240 762 211 246 -29 516 2,57% Paris MSCI All Country World. The benchmark index prior Oriflame Cosmetics AG 828 912 107 386 103 902 -3 484 1,26% Stockholm to 1/1/2010 was the Oslo Stock Exchange Bench- mark Index (OSEBX). Sodastream International Ltd 365 000 82 946 61 472 -21 474 0,75% NASDAQ Yazicilar Holding AS 689 169 23 544 41 583 18 039 0,51% Istanbul Minor items 15 631 17 590 1 959 0,21% Total Consumer staples 794 196 805 370 11 174 9,79% Roche Holding AG-Genusschein 80 198 173 752 177 914 4 162 2,16% Zürich Medi-Stim ASA 1 465 625 18 313 56 133 37 820 0,68% Oslo Børs Elekta AB - B shs 800 000 42 984 39 731 -3 253 0,48% Stockholm Photocure ASA 626 466 25 235 22 803 -2 432 0,28% Oslo Børs Minor items 22 672 20 501 -2 170 0,25% Total Health 282 956 317 083 34 127 3,85% Citigroup Inc 983 800 352 249 425 054 72 805 5,17% New York Danske Bank A/S 1 710 000 198 532 395 756 197 224 4,81% Copenhagen Credit Suisse Group AG 638 556 131 314 138 754 7 440 1,69% Zürich SBI Holdings Inc 1 139 000 96 634 123 164 26 530 1,50% Tokyo Tribona AB 2 851 004 94 342 103 419 9 078 1,26% Stockholm Sberbank of Russia Pref 9 620 000 139 234 64 980 -74 254 0,79% Moscow Hitecvision AS 793 668 7 193 53 176 45 982 0,65% Unlisted Korean Reinsurance Co 600 000 20 468 51 762 31 293 0,63% Seoul Raiffeisen Bank International AG 305 054 68 721 35 042 -33 679 0,43% Vienna Total Finance 1 108 688 1 391 107 282 418 16,91% Samsung Electronics Co Ltd Pref 82 850 494 978 577 026 82 047 7,01% Seoul SAP SE 497 100 212 798 274 048 61 251 3,33% Frankfurt PSI Group ASA 3 796 612 43 431 32 081 -11 349 0,39% Oslo Børs Minor items 22 682 20 099 -2 583 0,24% Total IT 773 889 903 255 129 366 10,98% Teliasonera AB 8 900 000 408 471 413 952 5 481 5,03% Stockholm Kinnevik Investment AB-B 736 009 169 794 184 164 14 370 2,24% Stockholm Total Telecom 578 265 598 115 19 851 7,27% Total equity portfolio* 7 052 882 8 136 190 1 083 308 98,89% Disposable liquidity 91 298 1,11% Total share capital 8 227 489 100,00%

Base price as of 30-06-2015 1 948,6041 * Figures in 1 000 NOK.

SKAGEN FUNDS HALF YEAR REPORT | 2015 13 Uphill struggle for emerging markets and SKAGEN Global commodities A world of opportunities The negative return in the second quarter was mainly due to the weak > Performance hurt by weak performance of several of the fund’s emerging markets companies as emerging markets and well as headwinds for the commodities segment. On the other hand, headwinds for Samsung several of the holdings within the financial sector contributed positively. Electronics and

commodities This bodes well for the future as the fund has a relatively high, but well-diversified exposure to global companies within the banking, insurance and real estate sector. > Citigroup and AIG among On a macro level, the stock exchange climate in the US was dominated by speculation the best contributors around the next interest rate hike by the Federal Reserve. After nine consecutive quarters of positive returns, the broad-based S&P 500 market index fell by 0.2% in the quarter. > The portfolio trades at Weak economic data for the first quarter was attributed to an unusually hard winter. an attractive discount Despite better employment figures from the US in the second quarter, the strength of the economic recovery remains unclear. Our view remains that the US stock market appears to the world index relatively fully valued, and the fund has maintained its underweight in the US, which currently amounts to 19% of the fund. 1 2 3 4 RISK 6 7 Following the stock exchange jubilation in the first quarter, the red return figures spread Fund start date 7 August 1997 to the European SXXP index, which declined 4.0% in the second quarter. An unexpected rise in interest rates from record lows in Germany in addition to renewed concerns Return since start 1154,25% around the possibility of a Greek default at the end of June dampened the enthusiasm. AUM EUR 4 018 million

Number of unitholders 87 385 The best and the worst The fund’s holdings in the US financial giants, Citigroup and AIG, were among the top positive contributors in the quarter. The market is finally starting to open its eyes to PERFORMANCE IN EUR 2Q 15* 12 M* the operational improvements that we have long since predicted. In addition, the huge potential for capital repayment via buybacks and dividends – another of our price-driving SKAGEN Global -3,7% 10,2% arguments – is becoming increasingly clear to other market participants. MSCI ACWI -3,5% 24,0% Samsung Electronics fell by 10% and was clearly the largest detractor from the * As of 30 June 2015. fund’s performance in the quarter. The market disregarded the improvement in profits from mobile phones and semiconductors since the previous quarter, as expectations had dislocated from reality. We believe that the long-term outlook is still good and the valuation is particularly attractive at present. Another company that is once again on the losing side is Norsk Hydro which has declined around 30% since the peak in winter due to a downturn in the aluminium market. We believe that the market has overreacted in this case and, thanks to a strong balance sheet, we think there is a good possibility for

SKAGEN GLOBAL 2Q 2015 (MILL NOK) PORTFOLIO MANAGERS Knut Gezelius, Søren Milo Christensen and 5 largest contributors 5 largest purchases American International Group Inc 198 Google Inc CLASS C 474 Chris-Tommy Simonsen Cheung Kong Property Holdings Ltd 152 Tyson Foods Inc 393 Citigroup Inc 134 Carlsberg AS-B 314 General Electric Co 94 Haci Omer Sabanci Holding AS 203 From the moor north of Skagen, 1885. Detail. By P.S. Krøyer, Lundin Petroleum AB 71 CK Hutchison Holdings Ltd 180 one of the Skagen painters (cropped). 5 largest detractors 5 largest sales Samsung Electronics Co Ltd Pref -317 Citigroup Inc -626 General Motors Co -138 American International Group Inc -280 Norsk Hydro ASA -132 Lenovo Group Ltd -276 Tyco International Plc -97 Technip SA -259 Tata Motors Ltd-A- DVR -94 Volvo AB -239

14 SKAGEN FUNDS HALF YEAR REPORT | 2015 Photo: iStockphoto Photo:

The average American drinks over 160 litres of soda a year, but chicken consumption per capita has actually increased by 10% over the past three years and is estimated to be 41kg in 2015. Against this background, it is possible that the market undervalues the long-term earnings potential of Tyson Foods. Photo: Bloomberg Photo:

higher dividends to shareholders. and less volatile cash flows. Food manu- Sabanci Holding The fund bought three new companies facturers specialised in pre-packaged food We have followed the adage “buy low, and exited four in the quarter, bringing therefore enjoy twice as high P/E multiples sell high” and brought the Turkish cong- the number of holdings in the portfolio to as protein manufacturers. lomerate Sabanci Holding back into the 59. The new companies are Tyson Foods, We think that the P/E of the stock will SKAGEN Global portfolio. Regular readers Sabanci Holding and Cheung Kong Property be revised upwards as Tyson Foods makes may recollect that SKAGEN Global divested Holding. the transition from protein manufacturer Sabanci Holding in the fourth quarter of to food producer. The market has not yet 2014. Since then the share price has fallen From protein to pre-packaged food priced in a multiple expansion. We cannot by 15% and the total return has lagged US Tyson Foods, established in 1935 and predict precisely when this will happen, but the index by around 25%, mainly due to with a market capitalisation of USD 17 bil- we consider it likely that it will happen in market turbulence related to the Turkish lion, is one of the world’s largest producers the next couple of years. As long-term inve- elections. The fall in share price has given of chicken and beef. Under the leadership stors we have the opportunity to buy at an us an opportunity to buy into the company of CEO Donnie Smith, Tyson Foods acqui- attractive price and get paid dividends whi- again at an attractive valuation. red food producer Hillshire Brands for USD le we wait for the appreciation. In addition, The family-controlled conglomerate has eight billion last year. The purpose of the the impending structural shift in American historically been good at allocating capi- acquisition was to strategically reposition eating habits will be favourable for Tyson tal, as illustrated by an average return on Tyson Foods, from being a cyclical protein Foods. The obesity epidemic in the US has equity of 16% for the underlying assets manufacturer to a stable food producer, reached alarming levels and has prompted (with the exception of the energy segment). whereby pre-packaged food represents the government to publish new consumer The assets include banking and insuran- a larger share of sales. We estimate that directives explicitly recommending more ce, in addition to energy and engineering pre-packaged food will constitute nearly protein and less sugar in food. in 12 Turkish companies. Our price target 40% of the profits by as early as 2017, a With this in mind, it is possible that the indicates a 40% upside based on organic marked increase from 15% in 2014. Meat market also underestimates the company’s growth in the underlying assets, a possible production is a cyclical market with relati- long-term earnings potential. Time will tell IPO of the energy segment and increased vely small margins, which means that pure whether Tyson Foods will be a feather in dividends from today’s relatively low 1.3% meat producers trade at a P/E of around SKAGEN Global’s cap. dividend yield. 10. Pre-packaged food has higher margins

SKAGEN FUNDS HALF YEAR REPORT | 2015 15 SKAGEN GLOBAL

No longer undervalued In May, portfolio company Cheung Kong Hutchison Holding spun off its property division to shareholders under the name During the quarter we raised our stake in Google to about 2.5% of the portfolio. With USD 60bn in cash and strong cash flow, Cheung Kong Property Holding. The market we see a limited downside and an upside of 30% from today’s levels. Pictured: An attendee at Google’s Annual Developers Conference on 28 May 2015 shows off his mobile device with an Android Pay icon, Google’s newly unveiled payment services. valuation of Cheung Kong Property Holding proved to be high and in our opinion the share is not undervalued at the listed price so we sold the position. Google ket is far too short-sighted and that the In the second quarter we sold our posi- During the quarter we increased our expo- shares do not price in the earnings growth tions in Technip, Talanx and Raiffeisen sure to the US search engine giant, Google, that lower capital costs will generate from Bank. Despite the sharp fall in oil prices, to around 2.5% of the portfolio. In absolute 2017-18 onwards. With net cash of USD 60 the French oil services company Technip terms, Google’s share price has remained billion and strong growth in free cash flow, has surprised the market positively so relatively stable over the past 12 months. Google has limited downside and at least far this year. We sold our last shares after We believe that in Google’s case, the mar- 30% upside from current levels. the price rose by around 30% and thus reached our target price. The German insurer Talanx has gene- HISTORICAL PRICE DEVELOPMENT SKAGEN GLOBAL rated an annual return of 25% since SKA- 100 100 GEN participated in the IPO in November 2012. After the share price increased by 80 SKAGEN Global 80 60%, we believe that the company is no 40 40 longer undervalued relative to its current

20 20 strategy. We also sold our position in Raif- feisen Bank in favour of more attractive 10 MSCI World AC Index 10 investment opportunities elsewhere in the portfolio. 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

SKAGEN GLOBAL KEY NUMBERS FOR THE LARGEST HOLDINGS (AS OF 30-06-2015) Well positioned

Company Holding size Price P/E 2015E P/E 2016E P/BV last Price target The portfolio reflects SKAGEN’s value-ba- CitiGroup 6,5% 55 10,0 9,3 0,8 75 sed investment philosophy and trades at Samsung Electronics 6,1% 993 000,0 6,5 6,0 0,9 1 500 000 an attractive discount to the world index. AIG 5,3% 62 12,6 11,0 0,8 90 General Electric 4,9% 26,6 19,7 16,7 2,5 34 Our 35 largest holdings have an average Nordea 3,5% 103,4 12,1 11,9 1,6 150 2016 P/E ratio of 10.6 compared with 14.6 Roche 3,1% 262,0 18,4 16,9 11,4 380 for the index, in other words a discount of LG Corp 2,8% 61 800 10,7 9,5 0,9 72 000 27%. Overall, SKAGEN Global has genera- State Bank of india 2,6% 263 9,8 8,0 1,2 400 DSM 2,5% 52,0 20,1 17,4 1,5 65 ted 10.2% return in the first six months of Microsoft 2,5% 44,2 17,2 16,0 4,0 58 the year and the fund is well positioned to Weighted top 10 40 % 11,3 10,2 1,2 39 % achieve its goal of a return of at least 15% Weighted top 35 81 % 11,9 10,6 1,2 34 % annually in absolute terms. Benchmark index 16,4 14,6 2,1

P/E may deviate from other sources when based on SKAGEN estimates.

16 SKAGEN FUNDS HALF YEAR REPORT | 2015 See the portolio in its entirety at SECURITIES PORTFOLIO SKAGEN GLOBAL AS OF 30 JUNE 2015 www.skagenfunds.com/global-portfolio

SECTOR DISTRIBUTION Acquistion Market- Unrealised Share of Stock Security Number value NOK * value NOK* gain/loss * fund exchange Consumer Energy 3,2% staples 3,7% Lundin Petroleum AB 3 293 160 367 913 445 497 77 585 1,26% Stockholm Cash 1,1% Telecom 4,3% Kazmunaigas Exploration GDR 3 529 139 415 879 274 890 -140 990 0,78% London Int BP Plc 4 269 875 213 135 223 364 10 229 0,63% London Finance Health BP Plc ADR 598 207 174 952 188 193 13 241 0,53% New York 26,3% 7,8% Total Energy 1 171 879 1 131 944 -39 935 3,21%

Koninklijke DSM NV 1 955 246 810 782 895 526 84 744 2,54% Amsterdam IT 12,0% Heidelbergcement AG 1 176 994 389 487 739 813 350 326 2,10% Frankfurt Industrials Norsk Hydro ASA 16 945 242 474 549 560 040 85 491 1,59% Oslo Børs 16,0% Akzo Nobel NV 892 610 292 845 515 296 222 451 1,46% Amsterdam Consumer UPM-Kymmene Oyj 3 099 638 291 644 433 019 141 375 1,23% Helsinki discretionary Raw Lundin Mining Corp 12 338 063 366 915 396 892 29 978 1,13% Toronto 12,8% materials 12,9% OCI Co Ltd 434 153 385 027 275 138 -109 889 0,78% Seoul Mayr-Melnhof Karton AG 303 520 140 593 274 254 133 661 0,78% Vienna Ternium SA ADR 1 994 417 298 074 272 565 -25 509 0,77% New York GEOGRAPHICAL DISTRIBUTION Lundin Mining Corp SDR 5 327 379 147 971 171 207 23 236 0,49% Stockholm Total Raw materials 3 597 887 4 533 750 935 863 12,87% Frontier Markets 2,0% South America 2,0% Japan 1,0% EMEA 2,1% General Electric Co 8 170 740 1 616 001 1 719 970 103 969 4,88% New York LG Corp 2 304 821 645 552 1 002 977 357 424 2,85% Seoul Cash 1,1% Peripheral EU CK Hutchison Holdings Ltd 6 515 098 539 504 753 052 213 549 2,14% Hong Kong 5,8% Koninklijke Philips NV 2 825 548 526 915 568 444 41 528 1,61% Amsterdam North Nordic America Tyco International Plc 1 751 162 198 083 531 204 333 121 1,51% New York 13,9% 35,7% Valmet Corp 3 106 627 212 961 273 629 60 668 0,78% Helsinki Prosegur Cia de Seguridad Sa 6 238 240 202 461 270 082 67 621 0,77% Madrid Eurozone Autoliv Inc 258 314 88 438 237 990 149 553 0,68% New York 14,2% China Communications Services Corp Ltd 41 861 881 150 954 166 527 15 573 0,47% Hong Kong Asia ex Autoliv Inc SDR 130 595 45 327 120 338 75 010 0,34% Stockholm Japan 22,3% Total Industrials 4 226 197 5 644 213 1 418 016 16,02% General Motors Co 3 315 380 473 410 867 059 393 650 2,46% New York Gap Inc/The 1 775 497 435 590 533 906 98 317 1,52% New York Kingfisher Plc 12 302 903 410 292 531 032 120 739 1,51% London Volvo AB 5 250 655 407 180 512 695 105 515 1,46% Stockholm Comcast Corp 1 077 693 147 207 506 456 359 249 1,44% NASDAQ Hyundai Motor Co Pref (2pb) 670 632 257 703 495 837 238 134 1,41% Seoul Tata Motors Ltd-A- DVR 11 563 913 231 336 372 642 141 306 1,06% Bombay Toyota Industries Corp 785 972 140 281 352 552 212 271 1,00% Tokyo Minor items 191 412 347 489 323 684 -23 804 0,90% Total Consumer discretionary 2 850 487 4 495 864 1 645 377 12,76%

Tyson Foods Inc 1 314 961 393 017 448 546 55 529 1,27% New York Carlsberg AS-B 460 833 314 302 328 892 14 590 0,93% Copenhagen Unilever NV-Cva 911 620 191 767 300 127 108 359 0,85% Amsterdam Yazicilar Holding AS 3 577 860 86 656 218 002 131 346 0,62% Istanbul Total Consumer staples 985 742 1 295 567 309 824 3,68% Roche Holding AG-Genusschein 495 108 597 625 1 101 354 503 728 3,13% Zürich Sanofi 964 732 601 027 754 694 153 667 2,14% Paris Teva Pharmaceutical-Sp ADR 1 074 283 331 351 499 446 168 095 1,42% NASDAQ Varian Medical Systems Inc 613 370 313 599 406 533 92 933 1,15% New York Total Health 1 843 603 2 762 026 918 423 7,84% Citigroup Inc 5 233 467 1 198 400 2 272 502 1 074 102 6,45% New York American International Group Inc 3 816 021 1 013 636 1 855 769 842 133 5,27% New York Nordea Bank AB 12 398 133 870 977 1 222 357 351 380 3,47% Stockholm State Bank of India 22 526 330 573 039 731 609 158 570 2,08% India Goldman Sachs Group Inc 439 836 391 585 724 709 333 123 2,06% New York NN Group NV 3 052 161 549 926 677 162 127 237 1,92% Amsterdam Storebrand ASA 13 625 168 468 375 440 638 -27 737 1,25% Oslo Børs EFG-Hermes Holding SAE 18 826 600 238 806 268 365 29 559 0,76% Cairo Columbia Property Trust Inc 1 297 237 254 227 251 180 -3 046 0,71% New York Irsa Sa ADR 1 763 696 146 619 248 250 101 630 0,70% New York Minor items 7 416 393 489 179 585 226 96 048 1,66% Total Finance 6 194 769 9 277 768 3 082 999 26,33% Samsung Electronics Co Ltd Pref 251 657 609 537 1 759 638 1 150 101 4,99% Seoul Microsoft Corp 2 505 570 437 371 870 543 433 172 2,47% NASDAQ Google Inc CLASS C 162 112 563 208 668 231 105 023 1,90% NASDAQ Lenovo Group Ltd 29 495 300 221 697 321 468 99 771 0,91% Hong Kong Samsung Electronics Co Ltd 35 003 316 100 312 529 -3 572 0,89% Seoul Google Inc CLASS A 45 315 79 242 193 197 113 955 0,55% NASDAQ Minor items 24 968 86 209 61 241 0,24% Total IT 2 252 123 4 211 813 1 959 690 11,95% China Unicom Hong Kong Ltd 39 506 972 374 491 489 118 114 627 1,39% Hong Kong Vimpelcom Ltd-Spon ADR 7 361 234 539 474 285 820 -253 654 0,81% New York First Pacific Co Ltd 42 834 923 270 660 284 286 13 626 0,81% Hong Kong Indosat Tbk PT 65 422 055 226 138 154 134 -72 003 0,44% Indonesia China Unicom Hong Kong Ltd ADR 1 144 875 105 570 141 601 36 030 0,40% New York Minor items 149 379 147 306 -2 073 0,41% Total Telecom 1 665 712 1 502 266 -163 446 4,26% Total equity portfolio* 24 788 398 34 855 211 10 066 812 98,93% Disposable liquidity 376 173 1,07% Total share capital 35 231 383 100,00%

Base price as of 30-06-2015 1 374,8063 * Figues in 1 000 NOK.

SKAGEN FUNDS HALF YEAR REPORT | 2015 17 SKAGEN Kon-Tiki Leading the way in new waters

> Our contrarian bet in unpopular Petrobras paid off. Photo: BloombergPhoto: > Three of our largest holdings A new position in the fund, Sberbank, is best in class among Russian banks. Pictured here, a customer sits in the reception of a Sberbank branch in Almaty, Kazakhstan. were a drag on performance.

> Working to refine the sell Staying the course discipline in the fund.

1 2 3 4 5 RISK 7 SKAGEN Kon-Tiki fell 4.9% during Q2, compared with a decline of 3.2% Fund start date 5 April 2002 for the emerging markets (EM) index, measured in EUR. Year-to-date

Return since start 518,92% the fund is up 5.8%, lagging the index by 5.9%.

Assets under management EUR 4 985 million

Number of unitholders 70 785 Three of our largest holdings, Great Wall and undervalued stocks will lead to satis- Motor, Hyundai Motor and Samsung factory returns in the long run. The portfo- Electronics—accounting for a combined lio consists of good companies trading at PERFORMANCE IN EUR 2Q 15* 12 M* 21% of the portfolio at the beginning of a solid discount to the market, and to our SKAGEN Kon-Tiki -4,9 % 2,0% the quarter—were a drag on performance estimate of intrinsic value. While we cannot MSCI Emerging Markets -3,2 % 16,5% in the second quarter. On the positive side, predict the investing crowd’s short-term our contrarian bet in Brazilian oil major preferences, we are confident that in the * As of 30 June 2015 Petrobras paid off handsomely. Hong Kong long run company fundamentals will be based asset manager Value Partners, and more important than fleeting popularity. Brazilian meat producer Marfrig also per- That being said, we are constantly look- formed well. ing for ways to improve our investment We are certainly not satisfied with process. recent performance, but continue to believe that our time tested approach of identifying unpopular, under-researched

SKAGEN KON-TIKI KEY NUMBERS FOR THE LARGEST HOLDINGS (AS OF 30-06-2015)

Company Holding size Price P/E 2014 P/E 2015E P/BV last Price target Samsung Electronics 8,0% 993 000 6,4 6,0 0,9 1 500 000 Hyundai Motor 7,7% 102 000 3,6 3,9 0,4 200000 PORTFOLIO MANAGERS State Bank of India 4,1% 262,8 11,5 8,0 1,2 450 Kristoffer Stensrud, Knut Harald Nilsson, Mahindra & Mahindra 4,1% 1 282 24,1 12,8 2,9 2000 Cathrine Gether, Erik Landgraff and Sabanci Holding 3,8% 10 9,9 8,4 1,1 14 Bharti Airtel 3,5% 420 32,4 21,0 2,7 450 Hilde Jenssen ABB 3,2% 175,1 21,1 14,6 2,9 250 Naspers 2,7% 1 895 68,1 37,9 10,0 2250 Great Wall Motor 2,6% 38 11,5 7,8 3,0 60 Skagen reef’s lightship, 1892. Detail. By Carl Locher, one of the Skagen painters. The picture is owned by Richter Gedeon 2,4% 4 200,0 31,7 15,3 1,4 7500 the Skagens Museum. (Cropped) SBI Holdings 1,9% 1 686 8,0 13,0 1,0 3 000 Hitachi 1,9% 806,8 16,1 9,5 1,3 1200 Weighted top 12 46 % 8,7 7,8 1,0 57 % Weighted top 35 75 % 11,6 8,4 1,1 57 % Benchmark index 13,8 12,3 1,6

P/E may deviate from other sources when based on SKAGEN estimates. 18 SKAGEN FUNDS HALF YEAR REPORT | 2015 SKAGEN KON-TIKI

SPRING CLEANING NEW POSITIONS:

One area of improvement that we are addressing is selling discipline. When to sell is While we exited a large number of posi- a notoriously difficult question, pitching your adherence to a set target price against tions in the quarter, we are always on the dangers of selling your winners and keeping the losers. For SKAGEN Kon-Tiki, the lookout for the next great investment there are three major reasons for selling a stock. opportunity. We entered three new positions, namely Sberbank, China Shipping First, in those cases where expectations serve us, and if we are consistent in updating Development and Eros International collide with reality in unexpected ways. our target prices they should be adhered to. Media. Experience has taught us that when our Challenges such as these are part of what investment thesis does not play out, the makes investing such a fascinating disci- Sberbank is best in class among Russi- stock should be sold even if it has a lower pline, and why it is arguably more art than an banks and could benefit as inflation valuation than when we first bought it. science. decelerates and the Russian economy sta- A good example is Aveng, the South Afri- To further complicate the picture, deci- bilises. We bought the preference shares can construction company. Despite realising sion-making can be impacted by flows. In when index funds were forced to sell as that our investment thesis was not playing particular, we have found that maintaining a result of MSCI index exclusion and the out as expected, we have been dragging selling discipline during periods of large preference shares traded at a historical our feet due to low valuation and hopes of inflows is crucial to avoid delays in dispo- discount to the ordinary shares. a reversal in the company’s fortunes. Not a sing of lower conviction ideas. China Shipping Development is a recipe for investment success. Putting your money where our mouth is, Shanghai-based shipping company focu- Second, if we find better investment we have focused on exiting smaller positions sed on Dry Bulk and Tank. Its shares are opportunities elsewhere, capital should where conviction—rather than size or liquidi- both A- and H-share listed, with the latter be redeployed to companies with a higher ty constraints—explains the sizing. We sold selling at a big discount (P/B 0.75x vs. risk-adjusted upside. out of Siem Offshore, Exxaro, Yingli and MRV 1.8x). We believe current valuation only Third—and this is the most difficult because of adverse developments relative factors in tanker improvement, despite one—we should sell when the stock app- to our investment case. signs that Dry Cargo is close to the bot- roaches our target price. Sounds easy, On a more positive note, Value Partners, tom. With no fleet growth this year or next, but the difficulty arises when you sell Skyworth, Harbin Electric and Kiwoom and Chinese coal and iron ore inventories great companies because of a run-up in reached their price targets, resulting in our at record lows, earnings could surprise on price. Factor in transaction costs, and exit. As a result, we have reduced the num- the upside. In the medium-to-long-term selling within a few points of our tar- ber of positions in the portfolio from 93 to we think that state-owned enterprise get price is not always the right answer. 88 during the quarter. (SOE) reform and thus improved gover- On the other hand, the market is there to nance will be important drivers of higher returns. Eros International Media is a leading HISTORICAL PRICE DEVELOPMENT SKAGEN KON-TIKI co-producer, acquirer and distributor of 80 SKAGEN Kon-Tiki 80 60 60 Indian language films. The company has a strong position in a growing industry, 40 40 and is led by an experienced team. Trading

20 20 at 14x next year’s earnings at the time of

MSCI EM Index our purchase, we did not pay much for our 1 10 favourable expectations.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

SKAGEN FUNDS HALF YEAR REPORT | 2015 19 Photo: BloombergPhoto:

Our contrarian bet in Brazilian oil major Petrobras paid off handsomely in the quarter. Oil drilling platform in Guanabara Bay in Brazil pictured here.

during the quarter. Value Partners is a how stock market prices fluctuate signi- WHAT WORKED… very good company in an industry with ficantly more than companies’ intrinsic significant long-term potential, and we value. Our top contributor in the quarter was Bra- expect it to be a beneficiary of increasing The main concerns around Great Wall zilian oil company Petrobras. A leading penetration of asset management services revolve around margin sustainability. With contender for the crown in any unpopu- in China and the surrounding region. Yet operating margins of 16%, the company larity contest, the company has faced a valuation remains a critical factor in any has enjoyed significantly higher profita- long list of issues including elevated cost SKAGEN investment, and after the stock bility than the typical level of 5-10% seen levels, corruption charges, and high debt more than doubled in a few weeks we among global car manufacturers. With levels. The list goes on. decided to exit the position at high prices. looming overcapacity in the Chinese auto Yet we could still identify a number of market, low R&D spending, and recently positives. First, Petrobras incurs a sub- …AND WHAT DIDN’T announced promotional pricing, margin stantial loss from importing petroleum that risk is certainly present. Combined with a it is required to sell at a lower (government “Many shall be restored that are now fairly rich valuation, this led us to reduce fixed) price at home. The decline in oil price fallen and many shall fall that are now in our position in Great Wall by one third at significantly reduced these losses. Second, honour.” high prices. there were signs that poor governance was likely to be addressed. So begins Security Analysis, Benjamin Few wins with Korean won Since purchase we have seen an impro- Graham’s seminal work on value inves- Our large Korean holdings, Hyundai Motor vement in results, key personnel changes ting. SKAGEN Kon-Tiki’s second quarter and Samsung Electronics, had a weak and a new strategic plan. While the com- performance demonstrates the timeless quarter. Disappointing sales figures led pany is still no beauty queen, the recent appeal of Horace’s old saying. Having been to a rough start of the year for Hyundai, share price development illustrates how a our top two contributors in the first quarter, resulting in a negative return of 20% on slight improvement in expectations goes a Great Wall Motor and Samsung Electro- our preference shares year-to-date. The long way when the starting point is close nics moved straight to the bottom of the relative strength of the Korean won has to zero. list during the second. While we pay little been a headwind when competing with the Hong Kong based asset manager Value attention to short term performance, such Japanese, but we had still expected new Partners was our second best performer large swings serve as a good reminder of model launches to have a stronger impact on sales over the past few quarters. At P/E 4x and P/B 0.5x, Hyundai has a SKAGEN KON-TIKI 2Q 2015 (MILL NOK) valuation rarely seen among global compa- 5 largest contributors 5 largest purchases nies. The question, then, is whether it has Petroleo Brasileiro Pref ADR 156 China Shipping Development 251 become a value trap. We believe that seve- Value Partners Group Ltd 146 Haci Omer Sabanci Holding AS 205 Marfrig Global Foods SA 145 Sberbank of Russia Pref 151 ral catalysts remain, including better sales Golar LNG Ltd 136 Golden Ocean Group Ltd 129 performance from model revamps, and UPL Ltd 95 Eros International Media Ltd 82 an improvement in corporate governan- 5 largest detractors 5 largest sales ce. We recognise that better operational Great Wall Motor Co Ltd -558 AP Moeller - Maersk A/S -905 Samsung Electronics Co Ltd Pref -512 Great Wall Motor Co Ltd -781 performance is likely to be the key driver Hyundai Motor Co Pref -415 Lenovo Group Ltd -777 of returns, and are—as always—carefully AirAsia Bhd -206 Shiseido Co Ltd -519 Tech Mahindra Ltd -195 Harbin Electric Company Ltd -389 monitoring the company’s performance.

20 SKAGEN FUNDS HALF YEAR REPORT | 2015 THE LONG RUN

In a world often dominated by macroeconomic and political events, and where an abundance of investors chase short-term gratification, SKAGEN Kon-Tiki offers a distinct approach. With our focus on value over momentum, long- term (measured in years) over short-term, and company fundamentals over headline-grabbing news, our methods are not always in vogue. Which is exactly why they work. In the long run. Photo: iStockphoto Photo:

See the portfolio in its entirety at SECURITIES PORTFOLIO SKAGEN KON-TIKI AS OF 30 JUNE 2015 www.skagenfunds.com/kontiki-portfolio

SECTOR DISTRIBUTION Acquistion Market- Unrealised Share of Stock Security Number value NOK * value NOK* gain/loss * fund exchange Energy 3,8% Health 4,3% Cash 2,1% Raw materials 6,1% Petroleo Brasileiro Pref ADR 9 864 888 506 969 636 444 129 476 1,46% New York Consumer GCL-Poly Energy Holdings Ltd 224 088 000 368 096 407 054 38 958 0,93% Hong Kong discretionary Tullow Oil Plc 8 461 624 793 317 358 112 -435 205 0,82% London 19,9% Telecom 6,8% Rec Silicon ASA 83 201 594 133 426 140 111 6 685 0,32% Oslo Børs IT 10,2% Minor items 541 097 111 577 -429 519 0,26% Finance Total Energy 2 342 905 1 653 299 -689 606 3,78% 18,2% Consumer staples UPL Ltd 10 294 488 191 091 681 540 490 449 1,56% India 12,8% Vale Sa Spons pref ADR 14 322 805 1 356 658 573 025 -783 633 1,31% New York Industrials Hindalco Industries Ltd 30 031 830 504 565 415 392 -89 173 0,95% India 15,9% OCI Co Ltd 600 000 455 623 380 241 -75 382 0,87% Seoul LG Chem Ltd Pref 259 179 178 915 343 102 164 187 0,79% Seoul Asia Cement China Holdings 48 522 500 178 365 188 592 10 227 0,43% Hong Kong GEOGRAPHICAL DISTRIBUTION Minor items 417 257 103 173 -314 084 0,24% Eurozone 2,4% North America 2,9% Total Raw materials 3 282 474 2 685 065 -597 409 6,14% Peripheral EU 0,2% Frontier Markets 4,2% ABB Ltd 8 530 512 769 826 1 416 021 646 195 3,24% Stockholm Cash 2,1% Japan 5,4% Hitachi Ltd 16 195 000 791 993 839 668 47 676 1,92% Tokyo South CNH Industrial NV 9 138 348 555 673 659 313 103 640 1,51% New York Asia ex America Japan 8,2% Bidvest Group Ltd 2 800 000 326 110 556 404 230 294 1,27% Johannesburg 47,3% Frontline 2012 Ltd 12 706 335 327 355 520 960 193 604 1,19% Unlisted Nordic 8,4% Golar LNG Ltd 1 298 301 471 325 479 278 7 954 1,10% NASDAQ AirAsia Bhd 108 497 800 414 918 348 392 -66 526 0,80% Kuala Lumpur Enka Insaat Ve Sanayi AS 23 092 016 217 528 345 821 128 293 0,79% Istanbul EMEA 18,9% Norwegian Air Shuttle ASA 900 000 84 407 292 410 208 003 0,67% Oslo Børs China Shipping Development 43 210 000 251 340 257 397 6 056 0,59% Hong Kong AP Moeller - Maersk A/S 18 000 144 957 256 294 111 338 0,59% Copenhagen LG Corp Pref 808 430 118 266 213 186 94 920 0,49% Seoul Empresas ICA S.A.B 32 729 853 448 729 200 008 -248 720 0,46% Mexico Golden Ocean Group Ltd 4 665 202 182 757 140 947 -41 809 0,32% NASDAQ Euronav SA 1 090 286 98 518 126 274 27 757 0,29% Brussels Golden Ocean Group Ltd 4 065 322 119 743 123 992 4 249 0,28% Oslo Børs Minor items 680 291 157 967 -522 324 0,36% Total Industrials 6 003 735 6 934 333 930 598 15,87%

SKAGEN FUNDS HALF YEAR REPORT | 2015 21 Acquistion Market- Unrealised Share of Stock Security Number value NOK * value NOK* gain/loss * fund exchange

Hyundai Motor Co Pref (2pb) 2 384 671 402 745 1 763 124 1 360 380 4,03% Seoul Hyundai Motor Co Pref (1p) 2 234 715 358 958 1 605 046 1 246 088 3,67% Seoul Mahindra & Mahindra Ltd GDR 8 005 385 186 510 1 278 594 1 092 084 2,93% London Int Naspers Ltd 950 050 278 067 1 166 623 888 556 2,67% Johannesburg Great Wall Motor Co Ltd 29 399 500 53 329 1 133 715 1 080 386 2,59% Hong Kong LG Electronics Inc Pref 3 050 000 823 954 492 887 -331 067 1,13% Seoul Mahindra & Mahindra Ltd 3 103 503 250 706 491 932 241 226 1,13% India DRB-Hicom Bhd 88 408 800 365 449 293 102 -72 347 0,67% Kuala Lumpur Apollo Tyres Ltd 13 028 865 109 290 274 183 164 893 0,63% India Minor items 175 311 180 403 5 092 0,41% Total Consumer discretionary 3 004 319 8 679 611 5 675 291 19,86%

X 5 Retail Group NV GDR 4 990 306 506 266 653 726 147 461 1,50% London Int Cosan Ltd 13 091 033 791 870 630 347 -161 523 1,44% New York Yazicilar Holding AS 8 837 139 222 040 538 454 316 415 1,23% Istanbul Distribuidora Internacional de Alimentacion SA 8 706 469 324 648 525 661 201 013 1,20% Madrid Familymart Co Ltd 1 407 900 389 252 509 379 120 128 1,17% Tokyo Marfrig Global Foods SA 33 457 200 525 979 482 868 -43 111 1,10% Sao Paulo Massmart Holdings Ltd 3 739 366 285 120 362 982 77 862 0,83% Johannesburg PZ Cussons Plc 7 625 746 127 931 342 736 214 805 0,78% London Kulim Malaysia BHD 50 827 600 160 451 264 952 104 501 0,61% Kuala Lumpur Cia Cervecerias Unidas SA ADR 1 538 270 280 090 256 822 -23 268 0,59% New York Cia Brasileira de Distribuicao - Pref 1 326 200 324 877 253 054 -71 823 0,58% Sao Paulo Casino Guichard Perrachon SA 316 924 250 764 190 151 -60 612 0,44% Paris Shiseido Co Ltd 951 600 102 371 169 882 67 511 0,39% Tokyo Podravka Prehrambena Ind DD 406 584 111 935 145 510 33 575 0,33% Zagreb East African Breweries Ltd 5 774 866 88 566 139 674 51 107 0,32% Nairobi Minor items 139 800 115 763 -24 037 0,26% Total Consumer staples 4 631 958 5 581 961 950 003 12,77%

Richter Gedeon Nyrt 8 936 510 970 296 1 043 540 73 243 2,39% Budapest China Shineway Pharmaceutical 36 934 000 280 298 434 026 153 728 0,99% Hong Kong Eis Eczacibasi Ilac Ve Sanayi 19 410 554 133 038 161 303 28 265 0,37% Istanbul Supermax Corp BHD 30 573 600 117 548 131 960 14 413 0,30% Kuala Lumpur Minor items 39 931 98 053 58 122 0,22% Total Health 1 541 111 1 868 882 327 771 4,28%

State Bank of India 55 690 910 1 265 479 1 808 728 543 248 4,14% India Haci Omer Sabanci Holding AS 56 050 322 1 216 783 1 662 335 445 552 3,80% Istanbul SBI Holdings Inc 7 759 600 603 587 840 733 237 145 1,92% Tokyo Moscow Exchange MICEX-RTS OAO 57 263 060 612 265 558 719 -53 545 1,28% Moscow Banco Do Estado Rio Grande Do Sul SA Pref 22 815 700 565 560 522 235 -43 325 1,19% Sao Paulo JSE Ltd 5 864 519 226 705 484 527 257 821 1,11% Johannesburg Korean Reinsurance Co 4 860 366 182 225 420 958 238 734 0,96% Seoul Kiatnakin Bank Pcl 37 429 463 334 353 307 022 -27 331 0,70% Bangkok EFG-Hermes Holding SAE 17 939 257 353 507 255 717 -97 790 0,59% Cairo Dragon Capital - Vietnam Enterprise Investments Ltd 9 000 000 111 229 203 934 92 705 0,47% Dublin Ghana Commercial Bank Ltd 18 001 604 88 821 158 427 69 606 0,36% Ghana Raiffeisen Bank International AG 1 376 967 270 180 158 391 -111 789 0,36% Vienna Sberbank of Russia Pref 21 400 000 151 067 145 663 -5 404 0,33% Moscow Nordnet AB 4 118 184 57 184 129 224 72 040 0,30% Stockholm Diamond Bank Plc 718 971 941 153 449 124 673 -28 775 0,29% Lagos Minor items 183 931 176 571 -7 359 0,40% Total Finance 6 376 324 7 957 856 1 581 532 18,21%

Samsung Electronics Co Ltd Pref 310 282 766 576 2 169 557 1 402 981 4,96% Seoul Samsung Electronics Co Ltd Pref GDR 382 663 376 532 1 335 256 958 724 3,06% London Int Tech Mahindra Ltd 8 784 608 354 450 518 818 164 368 1,19% India Lenovo Group Ltd 37 938 000 217 652 413 484 195 832 0,95% Hong Kong Total IT 1 715 211 4 437 115 2 721 904 10,15%

Bharti Airtel Ltd 29 648 206 1 130 346 1 539 379 409 033 3,52% India Kinnevik Investment AB-B 2 717 167 481 930 677 455 195 525 1,55% Stockholm Indosat Tbk PT 206 683 750 557 401 486 947 -70 454 1,11% Indonesia Sistema Jsfc 71 610 460 487 565 201 580 -285 986 0,46% Moscow Minor items 79 436 69 284 -10 151 0,16% Total Telecom 2 736 677 2 974 644 237 967 6,81%

Total equity portfolio* 31 634 714 42 772 766 11 138 052 97,87% Disposable liquidity 932 193 2,13% Total share capital 43 704 960 100,00%

Base price as of 30-06-2015 719,7447

* Figures in 1 000 NOK.

22 SKAGEN FUNDS HALF YEAR REPORT | 2015 SKAGEN m2 A share in the global property market

> Weak property market due to interest rate uncertainty in US and developments in Greece > Have used the opportunity to adapt Rainy quarter the portfolio SKAGEN m2 had a weak second quarter and by the end of June had lost > Easier now to find everything that the fund had gained in the first quarter. companies with lower valuations There are several reasons for the weaker rest rate hike were unfounded and inte- market for real estate stocks, including rest rates in fact fell. This continued until 1 2 3 4 RISK 6 7 the uncertainty around interest rate deve- the second quarter of 2015 when the US Fund start date 31 October 2012 lopments in the US, the ongoing negotia- 10-year yield started to move up again. tions in Greece and the focus on sky-high Volatility in interest rate developments Return since start 21,59% valuations in China. In addition, there are has been more challenging than the inte- AUM EUR 132 million general concerns around the valuation of rest rate hikes in themselves. An actual equities in a world in which central bank interest rate hike in the US would likely Number of unitholders 8 577 money is gradually beginning to disappear. be better for the real estate market than These factors, combined with nume- continued uncertainty. Negative news PERFORMANCE IN EUR 2Q 15* 12 M* rous stock exchange listings whose aim is usually results in a lift when the market to realise profits after a good year, as well is prepared for it. 2 SKAGEN m -11,8 % 16,2% as a general market that has not declined There has also been a shift from the US MSCI ACWI Real Estate IMI -9,1 % 24,7% since 2012, create a climate in which real to Europe as a result of monetary policy

* As of 30 June 2015. estate stocks languish. easing. This gave rise to record-low Euro- On the other hand, the recent develop- pean interest rates which in turn meant ments can be likened to rain after a long extremely cheap financing for our property dry spell; they have freshened things up. It companies. British Land and Unibail issu- is now easier for us as portfolio managers ed convertible bonds with a close to zero to find companies with lower valuations. percent yield and a conversion rate 30 percent above the prevailing market price. US weighed down China South City was the largest posi- The US real estate market was one of tive contributor in the quarter. This was PORTFOLIO MANAGERS the weakest in the period, and it under- primarily due to the fact that the company Michael Gobitschek and Harald Haukås performed the general global property was sold out of the portfolio before Chi- index. The six largest detractors from the nese equities started their decline in the fund’s performance in the quarter were quarter. The next two largest contributors Architect Ulrik Plesner`s first extension to Brøndum`s hotel. 1892. Detail. By Johan Peter von Wildenradt, one of the Skagen all US companies with a portfolio weight were the Spanish companies, Melia Hotels painters. The picture belongs to the Skagens Museum of between three and four percent each. and Axia. This was in spite of acceptable earnings and no specific company news. US property stocks got a substantial lift in 2014 after expectations of an inte-

SKAGEN FUNDS HALF YEAR REPORT | 2015 23 SKAGEN M2 Photo: BloombergPhoto: Photo: BloombergPhoto:

A similarity between Olav Thon and IRSA is that both companies have large majority owners that create value and that have worked with their special competence their whole life. Pictured here (l. to r.) Olav Thon and IRSAs majority owner Eduardo Elsztain.

Focus on value creation Independent of geography se have been sold to refinance the heavily The values in the property market are crea- Other examples are General Shopping and indebted company IBD in Israel. Although ted through daily operations as well as how IRSA. We recently exited General Shopping, investments in Israel involve more risks a company operates in the capital market. and have passively increased our exposure than the purely financial, the country has For the rest of 2015 the fund will focus to IRSA. General Shopping took up a loan in a relatively stable economy. IRSA’s primary even more on weeding out companies that US dollars to invest in Brazil. The company owner has over time shown an impressive are not capable of creating long-term value. continuously refers to its currency loss as ability to make opportunistic and extremely We have used the opportunity of this down- a non cash loss, which means that as long value accretive investments. turn to sell out of a number of companies as the loan is not paid off, the loss is not A similarity between Olav Thon and IRSA and ensure that the portfolio consists of realised. This behaviour gives cause for is that both companies have large majori- value-creating companies. concern and is reminiscent of others who ty owners that create value and that have We have, for example, exited Citycon live under an illusion when they have a lar- worked with their special competence their and used the money to increase our posi- ge unrealised loss. It is not difficult to see whole life. Another similar company is Spa- tion in Olav Thon. Both companies own and that the company will be backed into a cor- nish hotel company, Melia, whose domi- operate shopping malls in Scandinavia. ner in meetings with creditors. This means nating owner holds 60%. Although Melia Citycon was priced above the value of its that it will have to sell property to repay has only delivered an annual return of 5% assets while Olav Thon was priced at a dis- the interest rate and principal on the loan. over the past 19 years, it is one of the few count. It seemed like a simple choice, but IRSA, on the other hand, owns some of companies with property exposure in Spain valuation was not the only reason for our the best properties in Argentina and has that has given any return at all. decision. Equally important was the long- managed to manoeuvre wisely in a country In Hong Kong we sold out of CSI Proper- term performance of the companies in the in political turmoil. The company had large ties and bought Keck Seng. CSI was sold capital market. investments in Manhattan, but some of the- after the company bought back its own Since listing, Olav Thon has never raised equity in the stock market, but has built up SKAGEN m2 2Q 2015 (MILL. NOK) its company by generating good earnings and paying less in dividends. This mentality 5 largest contributors 5 largest purchases of building the company stone by stone China South City Holdings Ltd 3,3 Axia Real Estate SOCIMI SA 11 Melia Hotels International 1,3 Keck Seng Investments 9 has been extremely lucrative for long-term Axia Real Estate SOCIMI SA 0,8 Grivalia Properties Reic AE 8 (and recently) short-term shareholders. The Phoenix Mills Ltd 0,4 Olav Thon Eiendomsselskap ASA 6 CSI Properties Ltd 0,3 Emlak Konut Gayrimenkul Yatirim Ortakligi AS 4 opposite has been the case for Citycon, which has distributed all its cash flow in 5 largest detractors 5 largest sales HCP Inc -10,2 Melia Hotels International -15 dividends and growth has been financed by Brandywine Realty Trust -9,8 Shimao Property Holdings Ltd -15 issuing expensive equity. This means that General Growth Properties Inc -8,3 China South City Holdings Ltd -13 Ashford Hospitality Trust -8,2 Ticon Industrial Connection Pcl-Nvdr -12 the company has become food for brokers CBL & Associates Properties Inc -7,8 Citycon Oyj -11 and it has accrued expensive costs.

24 SKAGEN FUNDS HALF YEAR REPORT | 2015 SKAGEN M2 Photo: Meliá Alicante, Meliá Hotels International Hotels Meliá Alicante, Meliá Photo:

The second largest positive contribution to the fund’s shares at a large discount, which triggered creation is taking place that will benefit performance came from Spanish Melia Hotels. Similar to an increase in share price, at which point shareholders in the long term. our holdings in Olav Thon and IRSA, Melia has a majority owner. the company carried out an equity issue We have in this report tried to share at a large discount. Instead we invested some of our thoughts with our unit holders in Keck Seng, which owns several hotels who have followed the developments we in Vietnam and the US amongst other have witnessed so far this year. The com- countries. The value of each of the two panies referred to above are examples of hotels in the US equals the market value the increased focus we are bringing to the of the entire company. Although the shares fund which will hopefully have a positive are not traded in large volumes, as was the impact on our results. case with Olav Thon, a continuous value

HISTORICAL PRICE DEVELOPMENT SKAGEN m2

20 20 MSCI All Country World Index Real Estate IMI

17 17

14 14 SKAGEN m2

11 11 11.2012 03.2013 07.2013 11.2013 03.2014 07.2014 11.2014 03.2015 07.2015

SKAGEN M2 KEY NUMBERS FOR THE LARGEST HOLDINGS (AS OF 30-06-2015)

Div. Yield EBITDA Company Holding size Price P/NAV last 2015e 2015e/EV Global Logistic Properties Ltd 4,3% 2,53 102 % 2,0% 5,6% Columbia Property Trust Inc 4,1% 24,61 80 % 4,9% 6,0% HCP Inc 4,0% 36,63 112 % 6,6% 6,3% Olav Thon Eiendomsselskap 4,0% 142,50 80 % 1,2% 6,2% Mitsui Fudosan Co Ltd 3,9% 3 427,00 107 % 0,8% 5,3% General Growth Properties Inc 3,9% 25,76 90 % 2,6% 5,4% Ashford Hospitality Trust 3,5% 8,22 80 % 5,8% 9,6% Brandywine Realty Trust 3,4% 13,39 85 % 4,5% 7,6% PS Business Parks Inc 3,3% 72,35 95 % 2,8% 6,0% SL Green Realty Corp 3,2% 110,15 90 % 2,1% 4,6% Weighted top 10 38 % 92 % 3,3% 6,2% Weighted top 35 85 % 3,4% 6,5% Benchmark index 3,3%

SKAGEN FUNDS HALF YEAR REPORT | 2015 25 2 See the portfolio in its entirety at SECURITIES PORTFOLIO SKAGEN m AS OF 30 JUNE 2015 www.skagenfunds.com/m2-portfolio

GEOGRAPHICAL DISTRIBUTION Acquistion Market- Unrealised Share of Security Number value NOK * value NOK* gain/loss * fund* Stock exchange EMEA 2,3% Peripheral EU 2,7% Cash 1,1% South America 5,3% FINANCIALS North America Japan 6,0% Global Logistic Properties Ltd 3 347 000 45 748 49 466 3 718 4,27% Singapore 32,4% Columbia Property Trust Inc 245 000 43 101 47 439 4 338 4,10% New York Nordic 6,1% HCP Inc 162 100 47 508 46 717 -791 4,03% New York Olav Thon Eiendomsselskap ASA 324 000 40 727 46 170 5 443 3,99% Oslo Børs Euro- Mitsui Fudosan Co Ltd 204 000 40 500 44 927 4 427 3,88% Tokyo zone General Growth Properties Inc 220 000 37 207 44 589 7 382 3,85% New York Asia ex 17,8% Japan Ashford Hospitality Trust 629 000 40 850 40 655 -195 3,51% New York 26,5% Brandywine Realty Trust 375 000 38 970 39 521 551 3,41% New York PS Business Parks Inc 66 500 36 232 37 854 1 623 3,27% New York SL Green Realty Corp 43 100 32 707 37 354 4 647 3,23% New York Apartment Investmest & Management Co 127 000 30 637 37 101 6 463 3,20% New York Soho China Ltd 7 208 500 37 437 36 942 -496 3,19% Hong Kong CBL & Associates Properties Inc 257 000 34 796 32 454 -2 343 2,80% New York Deutsche Wohnen AG 171 067 23 368 31 079 7 711 2,68% Frankfurt British Land Co Plc 310 000 23 094 30 604 7 510 2,64% London Mercialys SA 148 471 20 839 26 109 5 270 2,25% Paris CA Immobilien Anlagen AG 188 000 24 997 25 794 797 2,23% Vienna SM Prime Holdings Inc 7 100 000 19 620 24 740 5 120 2,14% Philippines Nomura Real Estate Office Fund Inc 685 22 800 24 431 1 631 2,11% Tokyo Shangri-La Asia Ltd 2 156 000 22 601 23 673 1 073 2,04% Hong Kong Melia Hotels International 220 000 18 379 23 079 4 700 1,99% Madrid Dic Asset AG 319 000 21 669 22 422 752 1,94% Xetra Phoenix Mills Ltd 478 945 16 935 22 396 5 461 1,93% India Emlak Konut Gayrimenkul Yatirim Ortakligi AS 2 560 000 21 120 20 748 -373 1,79% Istanbul BR Properties SA 700 000 26 335 18 646 -7 689 1,61% Sao Paulo First Real Estate Investment Trust 2 229 406 15 326 18 102 2 776 1,56% Singapore Westgrund AG 442 106 14 548 17 715 3 167 1,53% Xetra Irsa Sa ADR 125 519 11 463 17 667 6 205 1,53% New York Gecina SA 16 000 14 445 15 628 1 183 1,35% Paris Mapletree Logistics Trust 2 345 242 15 559 15 481 -78 1,34% Singapore Bekasi Fajar Industrial Estate Tbk PT 63 806 900 21 426 15 033 -6 393 1,30% Indonesia Affine SA 94 000 11 844 13 667 1 823 1,18% Paris Ananda Development PCL-Nvdr 15 915 800 9 760 13 629 3 869 1,18% Bangkok BR Malls Participacoes SA 355 700 15 938 12 996 -2 942 1,12% Sao Paulo Atrium Ljungberg AB 120 621 12 052 12 441 389 1,07% Stockholm Ascendas India Trust 2 324 000 9 588 12 150 2 562 1,05% Singapore Unibail-Rodamco SE 5 975 9 910 11 979 2 069 1,03% Amsterdam Axia Real Estate SOCIMI SA 114 000 11 105 11 919 814 1,03% Madrid Vista Land & Lifescapes Inc 10 686 100 10 098 11 834 1 737 1,02% Philippines Oberoi Realty Ltd 348 152 9 752 11 710 1 958 1,01% India Ashford Inc 16 800 11 732 11 650 -82 1,01% New York Entra ASA 149 523 10 835 10 915 80 0,94% Oslo Børs CapitaLand Ltd 500 000 8 515 10 223 1 708 0,88% Singapore Bumi Serpong Damai PT 9 186 500 8 925 9 036 111 0,78% Indonesia Keck Seng Investments 1 200 000 9 240 8 999 -241 0,78% Hong Kong Ticon Industrial Connection Pcl-Nvdr 2 701 720 11 150 8 802 -2 349 0,76% Bangkok Summarecon Agung Tbk PT 9 019 400 6 494 8 686 2 192 0,75% Indonesia Etalon Group Ltd GDR 433 718 9 416 6 313 -3 103 0,55% London Grivalia Properties Reic AE 119 790 7 813 6 280 -1 533 0,54% Athens Rockwell Land Corp 20 000 000 8 187 5 930 -2 257 0,51% Philippines Parque Arauco SA 349 321 3 977 5 249 1 272 0,45% Santiago Total Financials 1 057 278 1 138 944 81 665 98,37%

INTEREST INSTRUMENTS General Shopping Finance 1 000 000 5 429 6 298 868 0,54% Euroclear Total Interest Instruments 5 429 6 298 868 0,54%

Total equity portfolio 1 062 708 1 145 241 82 533 98,91% Disposable liquidity 12 670 1,09% Total share capital 1 157 911 100,00%

Base price as of 30-06-2015 146,5403 * Figures in 1 000 NOK.

26 SKAGEN FUNDS HALF YEAR REPORT | 2015 SKAGEN Focus Hunting for exceptional Hunting for exceptional investments

> The highly concentrated, investments global equity fund SKAGEN After its first month in existence, the fund has deployed capital into 28 Focus was launched on investments and has identified a variety of strong risk-reward cases in 26 May 2015. a broad range of industries and geographies. > As of the end of June, the fund had 28 holdings A short introduction is in order as this is the industries and geographies. These invest- first update from SKAGEN Focus. The fund ments offer a combination of unique compa- > A variety of strong risk/ is a highly concentrated equity fund with a ny-specific factors, which over time should reward cases have been global mandate. The overall objective is to result in substantial deviations versus the select only a few investments with an excep- underlying market in terms of performance identified in a number of tional risk/reward profile from an absolute and composition. sectors/geographies return perspective – you will not see us By the end of June the fund had returned and cap-sizes. deploy capital into our 345th best idea. -7.6% in EUR. During the same period the The contrarian opportunities we seek are, index had generated a return of -4.7%. With for example, companies ignored by their its highly concentrated portfolio structu- 1 2 3 4 5 RISK 7 local investor base for various reasons. As re, large deviations versus the underlying Fund start date 26 May 2015 global generalists we can more objectively market are to be expected. As much as we analyse a company’s merits. Sometimes the all wished for the opposite absolute result, Return since start -7,62% sector might be out of favour, other times this has been a good development as we are AUM EUR 88 million the geography. At times, and only at times, able to accumulate identified positions at the actual company is having short-term lower prices. At the end of the month, 27% Number of unitholders 2 317 fundamental issues. was invested in small caps (below USD 2bn We met many of you, our investors, during market cap), 25% in mid-caps (USD 2-10bn PERFORMANCE IN EUR 2Q 15* 12 M* a recent road show for the fund. A couple of market cap) and 40% in large caps (over USD the questions that came up repeatedly were; 10bn market cap). The fund had an 8% cash SKAGEN Focus n/a** n/a** “Why do you like less-than-perfect composition in a diversified basket of currenci- MSCI ACWI n/a** n/a** panies?” or “Why not just buy that stable es at the end of the month, which is being growing company that has provided a steady slowly deployed. * As of 30 June 2015. ** Fund was launched on 26 May 2015 return year after year the last 5 years?” Our answer: we do not like controversy, crisis Where the money is or less-than-perfect companies; we like the The fund has a 7.6% position in the US-ba- pricing they generate. We require a minimum sed insurance company American Internatio- of 50% upside in a company’s share price to nal Group (AIG). This, our largest position, be interested. Why? Simply put, we demand brings to mind a 1951 quote accredited to a margin of safety. A great company does not the criminal W Sutton on why he robs banks; equal a great investment. “Because that’s where the money is.” Con- We are responsible for 770 MNOK of capi- trary to many sectors today, the insurance tal that clients have entrusted to us as of sector stands out in the out-of favour cate- June 30. About 40% of this capital comes gory. We are literally buying a dollar of cash from associated people, including the mana- for 80 cents for a respectable operation with PORTFOLIO MANAGERS gers of the fund. So in true SKAGEN tradition, decent earnings due to today’s low interest Filip Weintraub and Jonas Edholm we are very closely aligned with our clients. rates. Any upward change in interest rates The fund has currently deployed capital would increase the value generation of our

Krøyer´s dog, Rap, 1898. By P S Krøyer, one of the Skagen into 28 investments, in a broad range of company as well as its valuation multiple. painters. The picture belongs to the Skagens Museum ) cropped).

SKAGEN FUNDS HALF YEAR REPORT | 2015 27 Photo: BloombergPhoto: Photo: BloombergPhoto:

The storyline we always look for: Rock bottom and upward. US insurer AIG is the largest holding in the fund. Many years, lawsuits and testimonials have passed since AIG was at the epicentre of the financial crisis. Today we see several triggers that show substantial upside in the next two years. As an indicator, in early July, there was a merger announced in the industry between ACE and Chubb, at substantially higher multiples than AIG is currently trading at.

AIG is in the midst of a restructuring phase after the bailout by the a 3.2% weight in AerCap. We believe that the company generates US government. The sale of non-core assets and use of deferred tax sustainable returns of 11-12% with substantial opportunities to grow assets will release significant capital in the mid-term which could be over the next few years which, if true, makes the current valuation a used to return capital to shareholders. The market seems to assume bargain. Serving as one of the catalysts for the investment case, AIG that the current low profitability will be everlasting and gives little would sell down its holding, and as such induce a liquidity event in credit for the improvements to come. The valuation of the stock is low the shares of AerCap, which could mean an index inclusion for the compared to its tangible book value and we see substantial upside company. In early June AIG announced a transaction which would in the shares over the next two years. partly be bought by AerCap through a USD 750m share buyback One of the non-core assets in AIG is a substantial stake in AerCap (7% of the market cap). In this transaction, the fund also increased Holdings – the world’s largest air leasing company with a fleet of its holding in the company. 1200 aircrafts and another 340 on order. At the end of June we had

The fund utilises a self-developed exposure risk management sys- indicates that the fund has investment risk in some perceived com- tem, based on fundamental risk factors attached to each investment modity nature businesses (for instance semiconductors through case. In practice, this is a monitoring system aimed at assessing Hynix). In Eco System/Catalyst the largest risk factor is Corporate “how our investment theses can go wrong”. At the end of the month, Governance – which we believe we are being paid to carry. Also the largest balance sheet factor was Acquisition Risk highlighting a rather substantial risk factor is Yield Curve which highlights the overall conservative nature of the balance sheets of the fund’s sensitivity to movement in interest rates for some positions within positions as acquisition risk partly stems from excess cash on the financials – like AIG described above. The fund currently has rela- balance sheet. tively low geopolitical risk according to the exposure system at The top Income Statement risk was Price Competition, which the month’s end.

28 SKAGEN FUNDS HALF YEAR REPORT | 2015 SKAGEN FOCUS

Citizen Financial is the 13th largest regi- Australia-based South32 is a mining com- Jenoptik is a German company active in onal bank in the US. As a result of a long pany that was demerged from BHP Billiton the field of optoelectronics. Jenoptik has period of mismanagement and under-in- in May 2015. As a stand-alone entity we refocused its strategy on increasing its vestment by previous owner, RBS, Citi- see major potential for cost reduction and international presence, while reducing zens’ profitability metrics significantly lag increased efficiencies across its opera- its reliance on the lower margin optical its peers and capital far exceeds its peers. tions. The company has a strong balance defence segment. The company has a high Current mediocre profitability has the sheet and will generate a substantial free free cash flow yield and might engage in potential to double in the mid-term. The cash flow in the mid-term – yet it is one value-enhancing acquisitions and potenti- stock trades at low levels to book value of cheapest mining companies of its size, al sale of its defence business in the mid- and has potential to generate a substantial probably due to being new to investors. term. The company trades at a substantial return over time. discount that we believe is unjustified.

SK Hynix is a Korea-based maker of China Telecom is the world’s largest wire- Omega Protein is the largest US producer semiconductors, well positioned to reap line and broadband provider. Ongoing 4G of Omega-3 fish oil and fish meal products. rewards in case of a DRAM structural reco- investments will pay off when this moves The shares are greatly undervalued on very. The market assigns a discounted to the mass market. The sell-off of Tower Co current earnings, probably due to a mis- valuation to the shares due to the cyclical would impact mid-term earnings positive- perception of product volume cyclicality. nature of the business and exaggerated ly. The stock trades at a steep discount to Efforts to grow the human nutrition busi- concerns on the supply side of the market. other telecom operators globally. Notwith- ness as well as an aim to swim up the value Industry consolidation has led to better standing the “China regulator and govern- chain with the branding of its products, investment discipline. Also, the capacity ment” risk, however, at these low multiples and expanding its protein-based offerings dynamic has become more predictable. it is an interesting investment proposi- could stabilise the company’s earnings SK Hynix trades at single digit multiples, tion. In addition, we get one of the largest going forward. If the company is successful despite current superior returns on inve- “last-mile” optic broadband networks in in its strategy execution, the shares trade sted capital. the world, for basically nothing. at 70% discount to similar companies.

Final comments Despite relatively elevated valuations in specific segments of the “For it is in the essence of his (the long-term investor’s) behaviour market, for instance in so called high yielders, we have managed that he should be eccentric, unconventional and rash in the eyes to identify attractive risk/reward situations in a variety of sectors/ of average opinion. If he is successful, that will only confirm the geographies and cap-sizes. We again want to highlight that these general belief in his rashness; and if in the short run he is unsuc- are very stock specific situations with a diversified set of value cessful, which is very likely, he will not receive much mercy”. It drivers which over time will result in large deviations versus the then continues: “Worldly wisdom teaches us that it is better for underlying market. reputation to fail conventionally, than to succeed unconventionally”. As a final comment it is perhaps worthwhile reviving Keynes’ We completely subscribe to the first part of the quote, and have comments on how to invest from a long-term perspective written no respect for the latter. in the 1930s:

SKAGEN FUNDS HALF YEAR REPORT | 2015 29 See portfolio in its entirety at SECURITIES PORTFOLIO SKAGEN FOCUS AS OF 30 JUNE 2015 www.skagenfunds.com/focus-portfolio

SECTOR DISTRIBUTION Acquistion Market- Unrealised Share of Security Number value NOK * value NOK* gain/loss * fund* Stock exchange Health 2,8% Energy 5,7% Whiting Petroleum Corp 85 000 21 857 22 491 634 2,93% New York Cash 8,3% Consumer discretionary GCL-Poly Energy Holdings Ltd 11 650 000 24 748 21 162 -3 586 2,75% Hong Kong Finance 6,4% Total Energy 46 605 43 653 -2 952 5,68% 25,3% Telecom 7,3% South32 Ltd 3 110 000 41 462 33 650 -7 812 4,38% Sydney Raw Pan American Silver Corp 335 000 24 053 22 562 -1 491 2,94% NASDAQ materials Total Raw materials 65 515 56 212 -9 303 7,31% 7,3% Jenoptik AG 337 000 33 363 32 119 -1 244 4,18% Xetra Industrials 13,4% Komatsu Ltd 160 000 26 071 25 263 -808 3,29% Tokyo Rentech Inc 2 395 000 20 683 19 409 -1 274 2,53% New York Consumer IT 10,1% AirAsia Bhd 5 570 100 23 182 17 886 -5 296 2,33% Kuala Lumpur staples Solazyme Inc 332 000 8 298 8 385 87 1,09% NASDAQ 13,5% Total Industrials 111 597 103 062 -8 535 13,41% Hyundai Motor Co Pref (2pb) 37 000 26 796 27 356 560 3,56% Seoul GEOGRAPHICAL DISTRIBUTION Fila Korea Ltd 20 000 15 153 15 632 479 2,03% Seoul Hyundai Motor Co GDR 10 173 4 178 3 662 -516 0,48% London Peripheral EU 3,0% Oceania 4,4% Fourlis Holdings SA 131 533 3 366 2 812 -555 0,37% Athens Cash 8,3% Total Consumer discretionary 49 494 49 462 -32 6,43% Nordic 5,3% North Carlsberg AS-B 57 000 41 411 40 680 -731 5,29% Copenhagen America Japan Omega Protein Corp 295 800 30 762 31 884 1 122 4,15% New York 34,6% 11,5% Stock Spirits Group Plc 977 000 22 990 23 176 186 3,02% London China Child Care Corp Ltd 5 405 000 8 974 7 350 -1 624 0,96% Hong Kong Eurozone Total Consumer staples 104 136 103 090 -1 046 13,41% 11,9% Magforce AG 365 000 19 097 21 433 2 335 2,79% Xetra Asia ex Japan 21,0% Total Health 19 097 21 433 2 335 2,79% American International Group Inc 120 000 55 344 58 357 3 013 7,59% New York Citizens Financial Group Inc 183 000 38 168 39 033 865 5,08% New York SBI Holdings Inc 359 000 40 229 38 897 -1 332 5,06% Tokyo Aercap Holdings NV 68 500 25 407 24 832 -575 3,23% New York CIT Group Inc 64 000 22 901 23 445 544 3,05% New York Uniqa Insurance Group AG 140 000 10 052 9 913 -139 1,29% Vienna Total Finance 192 102 194 477 2 375 25,30% SK Hynix Inc 125 000 42 385 37 232 -5 153 4,84% Seoul Ubiquiti Networks Inc 84 000 20 109 20 884 775 2,72% NASDAQ Sandisk Corp 42 000 22 407 19 454 -2 953 2,53% NASDAQ Total IT 84 901 77 571 -7 330 10,09% China Telecom Corp Ltd 6 780 000 36 268 31 306 -4 962 4,07% Hong Kong Softbank Group Corp 53 000 24 635 24 553 -81 3,19% Tokyo Total Telecom 60 903 55 859 -5 044 7,27% Total equity portfolio* 734 349 704 817 -29 532 91,70% Disposable liquidity 63 831 8,30% Total share capital 768 648 100,00%

Base price as of 30-06-2015 96,0048 * Figures in 1 000 NOK.

30 SKAGEN FUNDS HALF YEAR REPORT | 2015 FIXED INCOME COMMENT Long-term interest rates: Up, sideways or down? It came as a surprise to us that the long-term policy rates rose in the second quarter, and the increase was substantial. The yield increases on the most secure government bonds pulled up the long-term interest rates generally.

The US ten-year bond yield increased from reflected the better growth prospects in is experience from other economies that 1.9% to 2.4% while the German equiva- the advanced economies. The market saw have practised zero interest rate policy. lent rose from 0.2% to 0.8%. The interest through the weak first quarter figures and If we look at the developments in the UK rate in these countries thereby returned priced in expectations of higher growth and Switzerland, we see that inflation has to levels last seen in October and Novem- both in the US and the Eurozone. This declined at the same time as monetary ber of last year. We had positioned our may be correct. So far the current indica- policy has been extremely expansive and bond fund SKAGEN Tellus in line with our tors generally give an indication of better economic growth healthy. expectation that the long-term interest growth in the advanced economies beyond If any one country stands out, it must rates would either remain stable or fall. 2015 than was the case in the first quarter. be the US. Inflation here has also admit- So how do we see things developing An important factor here is likely lower tedly been low – so far this year core infla- further? Will the interest rates continue to energy prices due to a greater supply of oil. tion has grown at an annualised rate of rise, will they remain at around the same On the other hand, we believe that 1.3% – but it has been low a good while level we see today or will they decline the heightened inflation expectations without yet showing signs of stabilising again? are transitory; it is most likely that the- around zero. Compared to what has hap- Active bond fund management – i.e. re will be another downward correction. pened in Japan and the other economies trying to generate excess returns for Inflation will wane, and gradually this will mentioned above, we believe it is merely a unit holders over time by having a view have an impact on expected inflation. We matter of time before inflation falls further on whether interest rates will rise or fall, are therefore of the opinion that so-called towards zero in the US also. A trigger may both generally and in various markets – expansive monetary policy has the oppo- be if the Fed increases the interest rate implies that one has an opinion on what site effect in the long run. Without going towards the end of the year. is most likely to happen in future. Often into the theory, we refer to experience. In The short-term policy of a slightly tigh- this entails having a view that deviates Japan, many years of a zero interest rate ter monetary policy in the US is slightly from the consensus. This appears to be policy have not resulted in a sustained lower inflation. If the Fed then stops after the case now when most analysts are of increase in inflation. an increase of 25 basis points, or retreats, the opinion that the policy rates will rise Japan has for years been brushed asi- then they’ll be back to a zero interest rate further. We still believe they will fall. de a peculiarity, but the same economic policy. Overall, both the long-term effect of mechanisms apply there as in other deve- the Fed policy since 2009, and the short- Interest rates and inflation will fall loped economies. And now we are also term effect of a slightly tighter monetary The reason that we believe interest rates beginning to see the same developme- policy, point to lower inflation. will fall further is due to a combination of nts in other advanced economies. In the The conclusion when it comes to the our view on growth prospects and our view Eurozone, core inflation has so far this long-term nominal interest rates is there- on inflation developments. The long-term year had an annualised rate of 0.4%. One fore that lasting low inflation will in time interest rates can be broken down into a may well claim that this is because eco- rub off on inflation expectations. This will real rate and compensation for expected nomic growth has been sluggish, but we in turn cause the long-term interest rates inflation. The upturn in the long-term inte- do not share this view. Switzerland is an to fall as we do not believe there is further rest rates last quarter was due to the fact example where inflation is negative. One acceleration in economic growth to be pri- that the real rates increased and expected may object that although the economy ced into the long-term real interest rates. inflation picked up both in the US and in has seen fairly good growth, inflation is Germany. The US 10-year policy rate incre- currently effected by a strengthening cur- ased by about 50 basis points, i.e. 0.5 rency earlier this year. This is not a view percentage points. Of this, the real rate we subscribe to either. contributed 30 basis points and higher expected inflation 20 basis points. The Building on observations developments were more or less the same One reason why we are sceptical to the in Germany, but starting from a lower level. typical explanations around inflation deve- The increase in the real rates probably lopments in the Eurozone and Switzerland – Torgeir Høien Portfolio Manager SKAGEN Tellus

SKAGEN FUNDS HALF YEAR REPORT | 2015 31 SKAGEN Tellus A doorway to global interest rates

> Interest rates increased in the quarter, resulting in lower bond prices > The fund was not optimally positioned for Headwinds the interest rate hike SKAGEN Tellus did not have a good second quarter. The fund was not > We have sold optimally positioned for the increase in interest rates that we saw in our bonds in the Euro- the period. This resulted in a loss, both in absolute terms and relative zone periphery awaiting to the fund’s benchmark index. clarity around Greece

When interest rates rise, bond prices fall, and vice versa, and the effect is all the greater 1 2 4 RISK 5 6 7 the longer the bond’s term to maturity. At the start of the second quarter, the bonds in Fund start date 29 September 2006 the SKAGEN Tellus portfolio generally had a long term to maturity. When the interest rates increased, this resulted in lower bond prices, which in turn pulled down the value Return since start 65,75% of each fund unit. The aphorism “a rising tide lifts all boats” certainly holds true in AUM EUR 153 million the globalised fixed income market. When interest rates increase on the most secure Number of unitholders 2 894 government bonds, such as the German and US treasury bonds, the general level also rises. That was what we witnessed in the second quarter. SKAGEN Tellus did not and does not have German bonds in its portfolio. We did have PERFORMANCE IN EUR 2Q 15* 12 M* a position in a ten-year US treasury bond, however, and the US ten-year interest rate rose from 1.93% at the start of the second quarter to 2.39% at the time of writing. This SKAGEN Tellus -8,08% 7,03% interest rate rise resulted in an unrealised loss for SKAGEN Tellus. We have not sold our JP Morgan GBI Broad US bond because we believe that interest rates will fall again. We also realised a loss on -5,23% 13,42% Index Unhedged the fund’s investments in long duration bonds issued by other countries’ governments.

* As of 30 June 2015. We have not reduced our positions in these either, barring in the Eurozone – see below. Please read our fixed income commentary for a view on the long-term interest rates. The long-term interest rates rose yet further on bonds issued in the so-called Eurozone periphery where the fund held positions in Portugal, Italy, Spain and Slovenia. The interest rates increased both as a result of the general interest rate increase and the sustained unrest surrounding the situation in Greece. We had expected that the uncertainty in Greece would only to a small extent affect the other countries in the Eurozone but this turned out not to be the case. By the end of the second quarter it was clear that Greece had defaulted on a loan PORTFOLIO MANAGERS from the IMF and faced a referendum regarding to what extent Greece should accept Torgeir Høien and Jane Tvedt the creditors’ demands on a new rescue package. The outcome of the poll was unclear at the time of writing, and the fall-out effects of Greece on the rest of the Eurozone are equally ambiguous. We therefore chose in the last few weeks of the quarter to sell our Interior. Brøndum’s annex, ca 1920. Detail. By Anna Ancher, one of the Skagen painters. bonds issued in the Eurozone periphery. We are prepared to buy in again, but we await The picture is owned by the Skagens Museum (cropped). clarity around future developments. We are not prepared to gamble on what the Greek government may decide from day to day. SECURITIES PORTFOLIO FOR SKAGEN TELLUS AS OF 30 JUNE 2015

Security Maturity Coupon value Face *** Cost price *** Market Price Accrued interest *** Market *** value Market value incl. accrued interest *** Unrealised gain/loss *** of Share fund

GOVERNMENT BONDS Brazilian Government 10.01.2028 10,25 20 400 58 683 267,13 2 500 54 494 56 994 -4 190 4,25 % Chilean Government 05.08.2020 5,50 4 410 000 54 659 1,31 1 199 57 635 58 834 2 976 4,39 % Colombian Government 14.04.2021 7,75 13 400 000 48 232 0,33 664 44 788 45 451 -3 444 3,39 % Croatia Government International Bond 30.05.2022 3,87 8 300 74 798 878,74 239 72 936 73 175 -1 862 5,46 % European Bank Recon & Dev 19.03.2018 5,75 800 000 103 386 12,09 1 594 96 714 98 308 -6 672 7,33 % French Government 25.05.2020 0,00 15 000 129 408 863,17 0 129 476 129 476 68 9,66 % German Government 11.10.2019 0,25 7 000 61 789 887,38 125 62 117 62 242 328 4,64 % Lithuanian Government 01.02.2022 6,62 5 500 42 570 934,68 1 182 51 407 52 589 8 837 3,92 % Mexican Government 20.11.2036 10,00 60 000 38 345 68,73 83 41 240 41 324 2 895 3,08 % Netherlands Government 15.01.2020 0,25 13 600 119 697 881,07 0 119 825 119 825 129 8,94 % New Zealand Government 17.04.2023 5,50 8 000 54 358 612,57 485 49 006 49 491 -5 352 3,69 % Peruvian Government 12.08.2037 6,90 18 000 41 063 238,34 1 168 42 902 44 070 1 839 3,29 % Turkish Government 08.03.2023 7,10 26 250 71 311 260,14 1 542 68 286 69 829 -3 025 5,21 % US Government 31.08.2016 0,50 20 800 137 570 784,74 277 163 226 163 503 25 656 12,20 % US Government 30.06.2017 0,62 8 000 63 152 783,48 0 62 679 62 679 -473 4,68 % US Government 15.02.2025 2,00 20 900 170 152 760,98 1 222 159 046 160 267 -11 106 11,95 %

Total Bond Portfolio 1 269 173 12 282 1 275 776 1 288 058 6 603 96,08 % Disposable liquidity 49 051 3 371 49 265 52 636 215 3,92 % TOTAL 1 318 224 15 653 1 325 041 1 340 694 6 817 100,00 %

Effective underlying return 3,12 % Effective yield to clients* 2,32 % Duration** 4,84

* Effective underlying return adjusted for managment fee. ** Duration is a simplified expression of how much the price of the security will change if the interest rate changes by one percentage point. *** Figures in 1000 NOK

Effective interest is the average annual return of an interest bearing security until maturity. Securities are valued at market price as of 31.06.2015 Bonds and notes for which there are no market maker prices are at all times valued against the applicable yield curve.

Unit price as of 30.06.2015 128,7959

SKAGEN FUNDS HALF YEAR REPORT | 2015 33 SKAGEN Credit EUR Picking the best bonds from the global orchard Photo: BloombergPhoto:

Indian-British Jaguar Land Rover, owned by Tata Motors, has now returned to the Credit portfolio. The company has financial ratios > A good quarter that are considerably better than its credit rating (BB-) implies. > The Greek unrest led to wider credit spreads in Unrest creates June > No direct exposure opportunities to Greece During the second quarter we found a number of interesting companies to invest in. The recent unrest in the market has made valuations more attractive.

SKAGEN Credit had a good start to the quarter with the credit spreads narrowing and all 1 2 RISK 4 5 6 7 being generally well. Last month, however, concerns around Greece grew and the credit spreads on several of the fund’s investments widened. The unrest particularly made bonds Fund start date 30 May 2014 issued by companies in emerging markets less attractive. There has also been a tendency Return since start -0,08% that the more risky the bonds have been, the more they have fallen in value – irrespective AUM (feeder fund) EUR 5 million of whether the commotion surrounding Greece actually affects them. The fund has no direct exposure to Greece and generally has a small proportion of the portfolio invested in AUM (master) EUR 23 million companies from so-called peripheral Eurozone countries. Number of unitholders 30 Switzerland-based INEOS is one of the world’s largest petrochemical companies with operations and sales around the world. The company has a strong market position with an PERFORMANCE IN EUR 2Q 15* 12 M* integrated production system and the customer base is diversified so they are not exposed SKAGEN Credit 0,95% -0,23% to just one sector. 60% of sales are in Europe and 20% in North America. In the spring, INEOS issued new bonds and extended their loans so they do not need to refinance these EURIBOR-3M 0,00% 0,07% for a long time. The fund has invested in one of their BB- rated euro bonds which matures * As of 30 June 2015 in 2023. The bond provides an attractive yield relative to its competitors and also relative to other European companies with a similar credit rating. Another new investment is the world’s leading meat processor, JBS, with operations primarily in Brazil and the US. JBS exports its products worldwide and the majority of its earnings come from North America and Australia. What makes JBS particularly interesting is that their bonds trade at a higher credit premium because the company is Brazilian. Compared to its US-based competitors with a similar credit quality, for example, JBS bonds provide a significantly higher yield. JBS is a clear example that the domicile of a company’s head office is significant and that it is possible to find undervalued bonds in line with SKAGEN’s investment philosophy. The bond in question has a BB-rating, is denominated PORTFOLIO MANAGERS in USD and matures in 2020. Ola Sjöstrand and Tomas An old friend of the fund that has now returned to the portfolio is Indian-British Jaguar Nordbø Middlethon Land Rover. The company has financial ratios that are considerably better than its credit rating (BB-) implies. The reason for the rating is the fact that they are owned by Indian Tata

Apple trees, 1907. By Michael Ancher, one of Motors which has a BB- rating. The beauty of this is that Tata Motors gets the bulk of its the Skagen painters. The picture is owned by the earnings from Jaguar Land Rover. SKAGEN Credit has invested in a USD-denominated bond Skagens Museum (cropped). that matures in 2018. SECURITIES PORTFOLIO FOR SKAGEN CREDIT AS OF 30 JUNE 2015

Security Currency Maturity Face value Coupon Market value EUR Share SKAGEN Credit EUR 387 858 5 095 528 98,77 Liquidity 63 475 1,23 Total share capital 5 159 003 100,00

Degree of currency hedging 94,86%, Share of SKAGEN Credit 21,93% SKAGEN Credit SEK/ NOK/EUR/GBP are feeder funds or collection funds that feed into the master fund, which oversees all portfolio investments. The following is an overview of the portfolio of the SKAGEN Credit master fund.

SKAGEN CREDIT MASTER FUND Share Security Currency Maturity Face value Coupon Market value EUR of fund Talisman Energy Inc GBP 05.12.2017 500 000 6,63 7 048 689 3,46 Gazprom OAO Via Gaz Capital SA USD 11.04.2018 800 000 8,15 6 827 623 3,35 Noble Group Ltd USD 29.01.2020 750 000 6,75 6 229 452 3,06 Petrobras Global Finance BV USD 01.03.2018 700 000 5,88 5 712 105 2,80 Seadrill Ltd USD 15.09.2017 700 000 6,13 5 001 761 2,45 Petrobras Global Finance BV USD 20.01.2020 100 000 5,75 795 612 0,39 Total Energy 31 615 243 15,52 SSAB AB EUR 10.04.2019 800 000 3,88 7 163 590 3,52 Braskem Finance Ltd USD 15.04.2021 775 000 5,75 5 846 690 2,87 Glencore Funding LLC USD 29.04.2019 475 000 3,13 3 779 377 1,85 Glencore Canada Financial Corp GBP 27.05.2020 250 000 7,38 3 680 669 1,81 INEOS EUR 01.05.2023 400 000 4,00 3 368 867 1,65 Lafarge SA EUR 13.04.2018 200 000 6,25 1 972 461 0,97 Total Raw materials 25 811 655 12,67 Color Group AS NOK 18.09.2019 6 000 000 6,61 6 118 220 3,00 Stena AB EUR 01.02.2019 620 000 5,88 5 968 107 2,93 Norwegian Air Shuttle AS NOK 03.07.2017 6 000 000 5,22 5 953 080 2,92 PostNL NV GBP 14.08.2018 350 000 7,50 5 307 216 2,60 Heathrow Funding Ltd GBP 10.09.2018 300 000 6,25 4 329 830 2,13 Tallink Group AS NOK 18.10.2018 3 000 000 6,51 3 133 197 1,54 Bombardier Inc USD 16.03.2020 300 000 7,75 2 450 359 1,20 Empresas ICA SAB de CV USD 04.02.2021 350 000 8,90 2 408 539 1,18 Total Industrials 35 668 547 17,51 Fiat Finance & Trade SA EUR 15.03.2018 500 000 6,63 4 893 484 2,40 Samvardhana Motherson Automotive systems Group BV EUR 15.07.2021 400 000 4,13 3 591 927 1,76 Jaguar Land Rover Automotive Plc USD 14.12.2018 400 000 4,13 3 212 488 1,58 Best Buy Co Inc USD 15.03.2021 300 000 5,50 2 490 545 1,22 Total Consumer discretionary 14 188 444 6,96

Safeway Ltd GBP 10.01.2017 500 000 6,00 6 701 938 3,29 Avon Products Inc USD 01.03.2019 400 000 6,50 3 130 239 1,54 JBS Investments GmbH USD 28.10.2020 300 000 7,75 2 591 690 1,27 Cosan Luxembourg SA USD 14.03.2023 300 000 5,00 2 213 034 1,09 Total Consumer staples 14 636 901 7,18

Danske Bank AS GBP 29.09.2021 500 000 5,38 6 795 472 3,34 Amlin Plc GBP 18.12.2026 500 000 6,50 6 555 006 3,22 Bank of Baroda - London USD 23.07.2019 750 000 4,88 6 385 259 3,13 Standard Chartered Bank GBP 03.04.2018 350 000 7,75 5 002 681 2,46 Tyrkiye Halk Bankasi AS USD 19.07.2017 550 000 4,88 4 533 996 2,23 Akbank TAS USD 24.10.2017 550 000 3,88 4 401 440 2,16 Insurance Australia Group Ltd GBP 21.12.2026 300 000 5,63 3 915 131 1,92 Diamond Bank Plc USD 21.05.2019 400 000 8,75 3 037 646 1,49 Akbank TAS USD 09.03.2018 300 000 6,50 2 569 976 1,26 Banco Est Rio Grande Sul USD 02.02.2022 250 000 7,38 1 994 219 0,98 American Tower Corp USD 15.02.2019 200 000 3,40 1 626 826 0,80 Total Financials 46 817 654 22,98 Rolta Americas LLC USD 24.07.2019 400 000 8,88 2 765 935 1,36 Total IT 2 765 935 1,36 Bharti Airtel International Netherlands BV EUR 10.12.2018 600 000 4,00 5 756 601 2,83 VimpelCom Holdings BV USD 01.03.2022 550 000 7,50 4 338 237 2,13 VimpelCom Holdings BV USD 01.03.2017 200 000 6,26 1 644 177 0,81 Total Telecom 11 739 015 5,76

EP Energy AS EUR 01.11.2019 675 000 5,88 6 735 260 3,31 EDP Finance BV USD 01.10.2019 750 000 4,90 6 198 338 3,04 EDP Finance BV EUR 21.09.2017 175 000 5,75 1 750 339 0,86 Total Utilities 14 683 937 7,21

TOTAL SECURITIES PORTFOLIO 197 927 331 97,15

Derivatives* IRS EUR 20210511 EUR 11.05.2021 600 000 7 813 - IRS USD 20210622 USD 22.06.2021 1 000 000 7 768 0,01 IRS USD 20190820 USD 20.08.2019 2 000 000 -207 624 -0,10 IRS USD 20180620 USD 20.06.2018 3 500 000 -208 739 -0,11 IRS EUR 20180620 EUR 20.06.2018 3 000 000 -246 369 -0,12 IRS GBP 20180129 GBP 29.01.2018 1 200 000 -313 732 -0,16 Total Derivatives -960 884 -0,47

Liquidity 6 776 326 0,03 TOTAL SHARE CAPITAL 203 742 773 100,00 Unit price as of 30-06-2015 9,9923

SKAGEN FUNDS HALF YEAR REPORT | 2015 35 FINANCIAL STATEMENT AS OF 30.06.2015 Financial statement

SKAGEN Income statement SKAGEN Vekst SKAGEN Global SKAGEN Kon-Tiki SKAGEN m2 Balanse 60/40 SKAGEN Tellus SKAGEN Avkastning (all figures in NOK 1000) 1H 2015 1H 2015 1H 2015 1H 2015 1H 2015 1H 2015 1H 2015 PORTFOLIO REVENUE AND COSTS Interest income and costs -811 -5 502 -17 567 488 2 325 24 083 25 981 Dividends 151 288 486 107 746 382 18 547 - - - Realised capital gain/loss 573 939 3 581 060 4 124 890 37 676 2 655 97 178 34 834 Change unrealised capital gain/loss -430 635 -1 348 194 -3 053 013 -68 558 4 117 -149 093 -56 559 Guarantee commission ------Broker's fee -3 804 -24 687 -24 246 -1 109 - -18 -16 Currency gain/loss 17 290 -26 845 -38 375 1 119 - -3 901 9 003 PORTFOLIO RESULT 307 266 2 661 938 1 738 071 -11 836 9 098 -31 752 13 243 MANAGEMENT REVENUE AND COSTS1 Management fee – fixed -41 756 -187 408 -434 641 -9 556 - -4 957 -4 709 Management fee – variable * -1 517 - 277 763 4 457 - - - ASSET MANAGEMENT RESULT -43 273 -187 408 -156 878 -5 099 - -4 957 -4 709 RESULT BEFORE TAX 263 993 2 474 530 1 581 193 -16 935 9 098 -36 709 8 534 Tax cost -4 265 -55 456 -64 178 -4 335 -279 - - NET INCOME FOR THE PERIOD 259 728 2 419 074 1 517 015 -21 270 8 819 -36 709 8 534

Balance sheet 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 ASSETS Norwegian securities at cost price 1 597 530 638 570 1 263 869 51 563 333 685 - 1 123 402 Foreign securities at cost price 5 455 352 24 149 829 30 370 846 1 011 145 26 500 1 269 173 356 100 Unrealised capital gains/loss 1 083 308 10 066 812 11 138 052 82 422 32 213 6 603 10 098 Accrued interest securities - - - 111 2 575 12 393 3 661 TOTAL SECURITIES PORTFOLIO 8 136 190 34 855 211 42 772 766 1 145 241 394 973 1 288 169 1 493 261 Dividend receivable 2 641 47 381 13 239 2 260 - - - Accrued interest bank ------TOTAL ACCRUED INCOME 2 641 47 381 13 239 2 260 - - - Deferred tax advantage - - - - 146 - - Accounts receivable – brokers - 209 388 88 361 9 214 - 326 822 203 959 Accounts receivable – management company 3 11 24 4 - 4 3 Tax receivable on dividends 6 630 46 476 26 705 729 - - - Other receivables - - - 604 - - 2 282 TOTAL OTHER RECEIVABLES 6 633 255 875 115 089 10 552 146 326 826 206 244 Bank deposits 105 419 329 685 876 791 14 057 2 254 40 711 395 972 TOTAL ASSETS 8 250 884 35 488 152 43 777 886 1 172 110 397 374 1 655 706 2 095 477 EQUITY CAPITAL1 Unit capital at par value 432 037 2 606 575 6 156 564 802 264 295 307 1 037 771 1 323 577 Premium -3 512 231 75 915 8 801 585 211 933 47 952 186 908 490 994 TOTAL PAID-IN EQUITY CAPITAL -3 080 194 2 682 490 14 958 149 1 014 197 343 259 1 224 679 1 814 571 Retained earnings 11 303 961 32 532 244 28 717 433 145 976 53 094 114 103 74 603 TOTAL EQUITY CAPITAL 8 223 767 35 214 734 43 675 582 1 160 173 396 353 1 338 782 1 889 174 DEBT Deferred tax - - - 1 655 - - - Accounts payable – brokers - 145 253 37 315 2 254 - 312 061 203 852 Accounts payable – management company 22 532 93 165 38 342 2 784 - 2 526 2 451 Other debt 4 585 35 000 26 648 5 244 1 021 2 336 - TOTAL OTHER DEBT 27 117 273 418 102 304 11 937 1 021 316 923 206 303 TOTAL DEBT AND EQUITY CAPITAL 8 250 884 35 488 152 43 777 886 1 172 110 397 374 1 655 706 2 095 477

Note: Divergence in price relative to the portfolios is due to accruals divergence as of 30.06.2015. * Calculated variable management fee as of 30.06.15: pursuant to the regulations, the definitive statement shall take place as of 31.12.2015 based on value developments during the rest of the year. In SKAGEN Global C and SKAGEN Global D, the statement shall take place on a quarterly basis. In SKAGEN Vekst, the variable management fee shall only be charged if the unit value as of 31.12 is higher than the unit value at the previous charge/statement (high watermark).

36 SKAGEN FUNDS HALF YEAR REPORT | 2015 FINANCIAL STATEMENT AS OF 30.06.2015

SKAGEN SKAGEN SKAGEN SKAGEN Income statement SKAGEN Høyrente Høyrente Inst. SKAGEN Krona** SKAGEN Credit Credit NOK Credit SEK** Credit EUR*** (all figures in NOK 1000) 1H 2015 1H 2015 1H 2015 1H 2015 1H 2015 1H 2015 1H 2015 PORTFOLIO REVENUE AND COSTS Interest income and costs 36 232 8 762 1 994 4 638 4 632 928 148,68 Dividends ------Realised capital gain/loss 44 -441 - 1 127 6 165 752 42,62 Change unrealised capital gain/loss -7 098 -768 -170 2 883 -4 284 -316 75,00 Guarantee commission ------Broker's fee -2 -3 -9 -20 -15 -13 -1,03 Currency gain/loss - - - 998 -3 565 -771 -166,73 PORTFOLIO RESULT 29 175 7 549 1 815 9 627 2 932 581 98,54 MANAGEMENT REVENUE AND COSTS1 Management fee – fixed -3 792 -579 -558 - -422 -106 -14,57 Management fee – variable * ------ASSET MANAGEMENT RESULT -3 792 -579 -558 - -422 -106 -14,57 RESULT BEFORE TAX 25 384 6 971 1 257 9 627 2 510 474 83,97 Tax cost ------NET INCOME FOR THE PERIOD 25 384 6 971 1 257 9 627 2 510 474 83,97

Balance sheet 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 ASSETS Norwegian securities at cost price 1 891 636 479 641 - 14 980 129 163 22 997 4 884,42 Foreign securities at cost price - - 515 492 161 409 - - - Unrealised capital gains/loss -4 418 -1 040 -441 16 635 1 781 99 39,57 Accrued interest securities 6 210 1 354 805 3 965 5 200 918 195,55 TOTAL SECURITIES PORTFOLIO 1 893 427 479 955 515 856 196 989 136 144 24 015 5 119,53 Dividend receivable ------Accrued interest bank ------TOTAL ACCRUED INCOME ------Deferred tax advantage ------Accounts receivable – brokers - - - - - 555 - Accounts receivable – management company - - - - - 9 0,03 Tax receivable on dividends ------Other receivables - - - 5 935 - - - TOTAL OTHER RECEIVABLES - - - 5 935 - 563 0,03 Bank deposits 997 869 382 296 60 555 2 652 2 012 473 75,88 TOTAL ASSETS 2 891 296 862 251 576 411 205 576 138 156 25 051 5 195,44 EQUITY CAPITAL1 Unit capital at par value 2 837 454 857 166 531 929 176 951 129 872 24 588 5 162,15 Premium 23 475 -1 645 4 405 3 275 809 123 -10,15 TOTAL PAID-IN EQUITY CAPITAL 2 860 929 855 520 536 334 180 225 130 682 24 712 5 152,00 Retained earnings 27 476 6 441 -3 082 23 598 508 -275 10,95 TOTAL EQUITY CAPITAL 2 888 404 861 962 533 252 203 823 131 189 24 436 5 162,95 DEBT Deferred tax ------Accounts payable – brokers - - 41 990 1 753 6 729 - 24,10 Accounts payable – management company 1 838 289 266 - 230 55 8,39 Other debt 1 054 - 902 - 8 560 - TOTAL OTHER DEBT 2 892 289 43 158 1 753 6 967 615 32,49 TOTAL DEBT AND EQUITY CAPITAL 2 891 296 862 251 576 411 205 576 138 156 25 051 5 195,44

SKAGEN FUNDS HALF YEAR REPORT | 2015 37 FINANCIAL STATEMENT AS OF 30.06.2015

1) Allocated between the respecitve unit classes Class SKAGEN Vekst SKAGEN Global SKAGEN Kon–Tiki SKAGEN m2 SKAGEN Tellus SKAGEN Credit EUR*** 1H 2015 1H 2015 1H 2015 1H 2015 1H 2015 1H 2015

Management fee – fixed A 40 494 178 314 303 051 9 541 4 502 12,89 Management fee – variable A 1 513 - -196 243 -4 449 Total management fee A 42 007 178 314 106 809 5 092 4 502 12,89 Management fee – fixed B 41 8 431 48 725 10 141 1,69 Management fee – variable B 4 - -41 698 -5 Total management fee B 45 8 431 7 027 4 141 1,69 Management fee – fixed C 1 221 661 6 592 5 314 Management fee – variable C - - -4 150 -3 Total management fee C 1 221 661 2 442 3 314 Management fee – fixed D 3 16 197 Management fee – variable D - -11 050 Total management fee D - 3 5 147 - - Management fee – fixed E 60 075 Management fee – variable E -24 622 Total management fee E - - 35 453 - - Total fixed and variable management fee All 43 273 187 408 156 878 5 099 4 957 14,57

1) Allocated between the respective unit classes Class SKAGEN Vekst SKAGEN Global SKAGEN Kon–Tiki SKAGEN m2 SKAGEN Tellus SKAGEN Credit EUR*** 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015

Unit capital at par value A 410 584 2 427 192 3 812 270 800 517 776 056 3 916,75 Premium A -3 887 255 -1 746 015 -4 271 439 211 444 105 830 -17,88 Total paid-in equity capital A -3 476 671 681 177 -459 169 1 011 960 881 886 3 898,87 Unit capital at par value B 582 162 780 682 366 1 063 60 022 1 245,40 Premium B 9 519 1 628 014 3 253 708 173 17 666 7,73 Total paid-in equity capital B 10 101 1 790 794 3 936 073 1 237 77 688 1 253,13 Unit capital at par value C 20 870 16 525 109 505 684 201 693 Premium C 365 506 192 995 645 925 316 63 412 Total paid-in equity capital C 386 376 209 519 755 431 1 000 265 105 Unit capital at par value D 79 246 190 Premium D 921 1 398 131 Total paid-in equity capital D - 1 000 1 644 320 - - Unit capital at par value E 1 306 234 Premium E 7 775 260 Total paid-in equity capital E - - 9 081 494 - - Total paid-in equity capital All -3 080 194 2 682 490 14 958 149 1 014 197 1 224 679 5 152,00

SKAGEN SKAGEN Vekst SKAGEN Global SKAGEN Kon-Tiki SKAGEN m2 Balanse 60/40 SKAGEN Tellus SKAGEN Avkastning 1) Allocated between the respective unit classes 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 Class Number of units issued A 4 105 839 24 271 917 38 122 695 8 005 166 2 953 070 7 760 559 13 235 767 Base price per unit as of 30.06.2015 in NOK A 1 903,7022 1 350,9664 709,0170 144,0833 134,2268 128,7959 142,7358 Number of units issued B 5 822 1 627 801 6 823 656 10 634 600 224 Base price per unit as of 30.06.2015 in NOK B 1 907,0721 1 350,3793 712,3182 144,1104 131,0777 Number of units issued C 208 705 165 245 1 095 055 6 837 2 016 927 Base price per unit as of 30.06.2015 in NOK C 1 905,9232 1 354,3851 709,8862 144,1984 129,0531 Number of units issued D 787 2 461 896 Base price per unit as of 30.06.2015 in NOK D 1 355,0459 710,1284 Number of units issued E 13 062 337 Base price per unit as of 30.06.2015 in NOK E 709,6699

SKAGEN SKAGEN SKAGEN SKAGEN SKAGEN Høyrente Høyrente Inst. SKAGEN Krona** SKAGEN Credit Credit NOK Credit SEK** Credit EUR*** 1) Allocated between the respective unit classes 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 30.06.2015 Class Number of units issued A 28 374 539 8 571 659 5 319 289 1 769 507 1 298 723 245 881 391 675 Base price per unit as of 30.06.2015 in NOK**** A 101,8008 100,5670 100,2491 115,1893 101,0116 99,3913 9,9923 Number of units issued B 124 540 Base price per unit as of 30.06.2015 in NOK**** B 10,0302 Number of units issued C Base price per unit as of 30.06.2015 in NOK C Number of units issued D Base price per unit as of 30.06.2015 in NOK D Number of units issued E Base price per unit as of 30.06.2015 in NOK E

38 SKAGEN FUNDS HALF YEAR REPORT | 2015 RETURN AND RISK MEASUREMENTS

Return and risk NOTICE Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager’s measurements skill, the fund’s risk profile and subscription and management fees. The return may become Returns in euro (all return figures beyond 12 months are annualised) negative as a result of negative price develop-

As of 30.06.2015 YTD % Last Last 2 Last 3 Last 5 Last 7 Last 10 Since ments. There are no subscription costs for our Year Years Years Years Years Years Start funds. SKAGEN Vekst A 6,6% 4,4% 11,8% 9,8% 7,5% 3,3% 7,5% 14,4% MSCI Nordic/MSCI AC ex. Nordic* 13,2% 18,8% 18,8% 16,4% 14,4% 6,0% 9,2% 10,3% SKAGEN Vekst A has a fixed management fee of SKAGEN Global A 10,2% 10,2% 13,5% 14,9% 11,8% 8,2% 9,5% 15,2% 1% per annum. Returns exceeding 6 % p.a. are MSCI World AC** 11,7% 24,0% 20,2% 18,2% 14,2% 10,0% 6,8% 4,3% shared 90/10 between the unitholders and the SKAGEN Kon-Tiki A 5,8% 2,0% 8,7% 7,1% 5,7% 6,8% 11,3% 14,8% management company. A charge of the variable MSCI Emerging Markets 11,7% 16,5% 12,7% 8,3% 5,7% 6,0% 9,0% 8,6% management fee may solely be made if the unit SKAGEN m2 A 3,3% 16,2% 7,9% 7,6% value as at December 31st exceeds the unit MSCI All Country World Index Real Estate IMI 7,1% 24,7% 14,8% 13,7% value at the previous charge/settlement of the SKAGEN Focus A -7,6% -7,6% variable management fee (the high watermark). MSCI World AC -4,7% -4,7% SKAGEN Tellus A 1,5% 7,0% 5,2% 5,4% 4,4% 7,4% 5,9% J.P. Morgan GBI Broad Index Unhedged in EUR*** 4,8% 13,4% 7,3% 2,2% 2,8% 6,9% 5,0% SKAGEN Global A has a fixed management fee SKAGEN Credit EUR A 2,4% -0,2% -0,1% of 1% per annum. Better value development 3 Month EURIBOR 0,0% 0,1% 0,1% measured in percent in the fund’s net asset value compared with the MSCI AC World Index * Effective 1/1/2014, the fund’s investment mandate changed. Read more on page 13. The benchmark index prior to 1/1/2010 was OSEBX and prior to 1/1/2014 it was OSEBX / MSCI AC (50/50). (in NOK) is shared 90/10 between the unithol- ** The benchmark index prior to 1/1/2010 was the MSCI World Index. ders and the management company. *** The benchmark index prior to 1/1/2013 was Barclay’s Capital Global Treasury Index 3-5 years. SKAGEN Kon-Tiki A has a fixed management fee of 2% per annum. Better value development measured in percent in the fund’s net asset value compared with the MSCI Emerging

Risk and performance measurements Markets Index (in NOK) is shared 90/10 between the unit holders and the management As of 30.06.2015 SKAGEN Kon-Tiki A SKAGEN Global A SKAGEN Vekst A SKAGEN Tellus A company. However, the total annual manage- MEAN VARIANCE ANALYSIS LAST 5 YEARS ment fee charged may not exceed 4% of the Standard Deviation NAV 13,8% 11,7% 13,5% 6,6% fund’s average annual asset value. Standard Deviation Benchmark 13,5% 9,3% 12,5% 8,4% Tracking Error 4,8% 4,8% 5,8% 5,6% SKAGEN m2 A has a fixed management fee of Information Ratio Arithmetic -0,01 -0,43 -1,07 0,27 1.5% per annum. Better/worse value develop- Beta 0,96 1,15 0,97 0,58 ment measured in percent in the fund’s asset Correlation 0,94 0,92 0,90 0,74 value compared with the MSCI ACWI Real Alpha 0,18% -4,06% -5,88% 2,68% Estate IMI (in NOK) is shared 90/10 bet- Jensen's Alpha 0,16% -3,98% -5,90% 2,46% R2 87,86% 84,18% 81,08% 54,27% ween the unit holders and the management Sharpe Arithmetic 0,36 0,91 0,50 0,57 company. The total management fee charged Sharpe Ratio Benchmark 0,37 1,37 1,04 0,27 constitutes a maximum of 3 % and a minimum of 0.75% per year. GAIN LOSS ANALYSIS LAST 5 YEARS SKAGEN Focus A has a fixed management fee of Consistence 48,33% 43,33% 38,33% 56,67% 1.6% per annum. Better/worse value develop- Consistence Market is Up 36,36% 46,34% 34,21% 36,67% ment measured in percent in the fund’s asset Consistence Market is Down 62,96% 36,84% 45,45% 76,67% Relative Gain 98,74% 103,95% 91,57% 92,37% value compared with the MSCI World AC TR Relative Loss 99,32% 126,93% 130,84% 75,61% Index (in NOK) is shared 90/10 between the Positive Index Divergence 6,48% 5,81% 5,43% 8,21% unit holders and the management company. Negative Index Divergence 6,65% 7,87% 11,62% 6,77% The total management fee charged constitutes Percentage Positive Index Divergence 49,37% 42,47% 31,86% 54,79% a maximum of 3.2% and a minimum of 0.80 Percentage Positive Index Divergence Market Up 38,16% 49,28% 32,03% 28,18% % per year. Percentage Positive Index Divergence Market Down 59,99% 30,57% 31,48% 82,21% Relative Gain Loss Ratio 0,99 0,82 0,70 1,22 SKAGEN Global A, SKAGEN Kon-Tiki A, SKAGEN Focus A and SKAGEN m2 A may be charged a VALUE AT RISK LAST 5 YEAR variable management fee even if the fund’s Value at risk ex post NAV 5 years -7,7% -5,8% -5,5% -2,9% return has been negative, as long as the fund Value at risk ex post Benchmark 5 years -6,9% -3,6% -6,1% -3,3% has outperformed the benchmark. Conversely, Relative value at risk 5 years -2,5% -3,3% -2,9% -3,3% the fund may have a positive return without being charged a variable management fee, as long as there is no outperformance of the benchmark. The fixed management fees are calculated daily and charged quarterly. The variable management fees are calculated daily and charged annually.

The annual management fee is 0.8% for SKA- RIGHT OF CANCELLATION GEN Tellus A. The management fee is calculated When you buy fund units, according to the Right of Cancellation Act (Act no. 105 of 2001-12-12, ref. §22b, litra a), clients have no right daily and charged quarterly. of cancellation. However, when subscriptions are sent to us by mail/fax or are carried out via the Investor client at VPS (My Account), you are entitled to information about the fund and the management company immediately after the purchase. The information is avail- Please refer to the product sheets and prospec- able in the fund’s product sheet (simplified prospectus) and the general commercial terms. Statutory information is sent to unit holders tuses for a detailed description of the cost, etc. in the welcome letter immediately after the first subscription. Subsequently, unit holders can find all information on our website www. skagenfunds.com as well as in the annual report. They are available upon request from SKAGEN Funds or at www.skagenfunds.com

SKAGEN FUNDS HALF YEAR REPORT | 2015 39 Head Office: SKAGEN AS Post Box 160, 4001 Stavanger Norway Tel: +47 51 80 37 09 Fax: +47 51 86 37 00 Company reg number: 867 462 732 [email protected] www.skagenfunds.com

UK Office: SKAGEN AS Stavanger 6th Floor Head Office High Holborn House 52-54 High Holborn London WC1V 6RL United Kingdom www.skagenfunds.co.uk FSA Firm No.: SKAGEN AS 469697 London Branch Company No: FC029835 UK establishment No: BR014818

Dutch Office: Museumplein 5 D 1071 DJ Amsterdam The Netherlands www.skagenfunds.nl Registration number: 52328686

Customer Services is open from Monday to Friday from 8 am to 9 pm Amsterdam Branch (CET). Please visit us at our office, send an e-mail or call us and we will do our best to help you. Editorial team Parisa Kate Lemaire, editor Ole-Christian Tronstad Trygve Meyer Michael Metzler Anna S Marcus Vevika Søberg Front page: Artists on Skagen South Beach, 1882. By Peder Severin Krøyer, one of the Skagen painters. The picture is owned by the Skagens museum. Cropped.

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