Annual Report 2014

ANNUAL REPORT 2014 IN AN UNUSUAL YEAR WE STICK TO OUR INVESTMENT PHILOSOPHY, NO MATTER WHICH WAY THE WIND BLOWS www.skagenfunds.com LEADER Everything is relative You may get the impression on reading the Annual Report that 2014 was a disappointing year for unit holders in SKAGEN’s funds. That is only partially true. Retrospection is rarely an entirely straight- the markets in which the funds have their the text you are now reading is written by forward and unambiguous exercise. There mandates. This is something we did not a new Managing Director, who has taken are many ways in which to describe the achieve in 2014. It is highly unusual and over from Harald Espedal. Likewise, Knut equity year 2014 – it all depends on your not something that we are satisfied with. Gezelius is now lead manager of SKAGEN point of view. I would describe last year As active, value-based managers our Global following the departure of Kristian as an unusual one. As always, there were most important task is to provide long- Falnes. Harald and Kristian’s contributions a few unexpected events which ended up term world class returns. The portfolio to SKAGEN cannot be overstated. As key characterising the markets and, through managers strive each day to find the best figures in the company, they have worked them, our funds. What was unusual was companies and securities to provide unit tirelessly to provide unit holders with the that several of these events occurred more holders with the best returns, also relati- best possible returns and service over or less simultaneously. vely speaking. In practice this means that many years. We are extremely grateful for The impact of Russia and the Ukraine they look for quality investments in places their contribution and wish them both the crisis will be thoroughly covered in the where others do not think of searching. best of luck in their future endeavours. portfolio managers’ report. I just want to Just as some leave, others begin. That is briefly highlight that although SKAGEN’s Active and proud of it how it is in SKAGEN also and we are extre- portfolio managers are good at taking cal- We spend a lot of time talking about our mely fortunate to have so many new talen- culated risk, the political escalation in Rus- investment philosophy and take every ted colleagues on board, one of whom is sia came as a surprise to us. The fact that opportunity to refer to our three Us – portfolio manager Filip Weintraub, who has the management of Korean car manufactu- Undervalued, Under-researched and Unpo- recently returned to SKAGEN. Filip was pre- rer, Hyundai, then decided to pay far more pular investments. In 2014, active manage- viously responsible for managing the SKA- than market price for a property in Seoul, ment went out of fashion while so-called GEN Global fund, which he did with great also came as a bolt from the blue. Hyun- index management was very much à la success. We look forward to launching a dai is a large holding in our portfolios and mode. An index fund does not invest pre- new fund in 2015 with Filip as portfolio the property deal had a significant impact cisely like an index, for example the S&P manager. We wish Filip a very warm wel- on us. Now it appears as though Hyundai 500. Index funds with a large weighting come back. In my view the organisation has made up its losses in a matter of weeks. in large US companies most likely had a never been stronger or more competent. Portfolio managers and finance profes- good year. In SKAGEN we call this average You can read more about SKAGEN’s tran- sionals the world over are familiar with the management. sition to its future ownership structure in term ‘black swan’; an event or occurrence We occasionally receive questions the Board of Directors’ report. that deviates beyond what is normally from clients and others about why we In our Annual Report for 2013 we wrote expected of a situation and that would be don’t launch index funds. The answer is that 2014 would be a year of substantial extremely difficult to predict. While Rus- quite simply that we believe that we can fluctuations. We didn’t realise how right we sia and Hyundai were not exactly black outperform the markets. When everyone would be. Thank you for your confidence. swans, they were at least very dark grey chases the average, this will in time result in my opinion. in bubbles in the market. There will the- refore always be a need for someone to Everything is relative carry out independent analysis and not If you take the return figures in isolation, blindly follow the crowd. The advantage SKAGEN’s funds performed reasonably from our point of view is that when lots well in 2014. The equity funds provided of people are moving in unison, this unit holders with a return after fees of provides good long-term opportunities between three and 25 percent while the for active value-based managers like us. fixed income funds gained up to 14 percent, measured in euro. Nonetheless, the Changes relative return was poor. SKAGEN’s funds This year has also been a slightly unusual aim to deliver a better return than their res one for clients and employees in SKAGEN – Leif Ola Rød pective benchmark indexes, i.e. better than in another way. One notable change is that Managing Director 2 SKAGEN FUNDS ANNUAL REPORT | 2014 CONTENT 7 24 16 Photo: BloombergPhoto: US popularity. 2014 was dominated by a strong dollar and impressive US performance. Absolutely strong year. SKAGEN m2 gained All smiles. Satya Nadella and Microsoft had a Pictured: US Fed-chair Janet Yellen having her picture taken with attendees at an IMF meeting in 26%, though still slightly lagged its bench- good year with a return of 27.5%. Microsoft was October 2014. mark . Pictured: Central Hong Kong where the fifth largest contributor m2 made an investment in Soho China Ltd. to SKAGEN Global in 2014. LEADER EQUITY FUNDS CSR update Everything is relative > 2 SKAGEN Vekst > 12 A year of socially beneficial Leif Ola Rød Overexposed to Oslo projects > 34 Stock Exchange Headwind for active value investing in 2014 > 4 SKAGEN Global > 16 Ole Søeberg Headwind from the US ANNUAL FINANCIAL STATEMENT SKAGEN Kon-Tiki > 20 Ownership structure > 37 A year of political change PORTFOLIO Board of directors´ report > 38 Financial statement > 42 MANAGERS´ REPORT SKAGEN m² > 24 Notes > 45 Remarkably strong 2014 Auditor´s report > 66 INTRODUCTION FIXED INCOME SKAGEN seeks to the best of its ability to ensure Year of the horse has been wild > 7 thatall information given in this report is correct, – Now we look foward to the FUNDS however,makes reservations regarding possible er- year of the peaceful sheep rorsand omissions. Statements in the report reflect theportfolio managers’ viewpoint at a given time, SKAGEN Tellus > 28 andthis viewpoint may be changed without notice. Fixed income comment > 11 Solid return ”Exflation” The report should not be perceived as an offer orrecommendation to buy or sell financial instru- SKAGEN Avkastning > 29 ments. SKAGEN does not assume responsibility Good returns in a low interest for direct or indirect loss or expenses incurred- rate climate through use or understanding of the report. SKA- GEN recommends that anyone wishing to invest in our funds contacts a qualified customer adviser by SKAGEN Credit > 30 telephone on +47 51 80 38 58 or by email at con- Rocky start but bright prospects [email protected]. Unless otherwise stated, all performance data in this report relates to class A units and is net of fees. Unless otherwise stated all figures quoted in this report are in euro, except for the Financial Statement and Notes, which are in Norwegian kroner. SKAGEN Funds only has authorisation to market its money market funds SKAGEN Høyrente and SKAGEN Høyrente Institusjon and combination fund SKAGEN Balanse 60/40 in Norway and SKAGEN Krona in Sweden. Information regarding these funds is included in the official accounts and audited information hereto. Other information regarding these funds from the Norwegian version of the report has been excluded from this English language publication. The Annual Report 2014 was originally prepared in Norwegian. This is a translated version that is published with reservations regarding possible errors and omissions as well as erroneous translation. In case of conflict between the Norwegian and the English versions, the Nor- wegian version shall prevail. The Norwegian version of the Annual Report 2014 is available at www.skagenfondene.no. SKAGEN FUNDS ANNUAL REPORT | 2014 3 LEADER – CIO Headwind for active value investing in 2014 SKAGEN will stick to the narrow path of value investing despite current preferences for expensively valued growth companies. 2014 stands out as a very unusual year. sed investor, while a euro-based investor Game over for value? The vast majority of actively managed had a return of 19.4 percent in 2014. In Has the active and value-based investment funds such as SKAGEN’s did not fare rela- short, the big winner in 2014 was the US. style been left in the dust of growth and tively well in 2014. Nor did value stocks. Similarly, the MSCI Value index gene- the index fund bullet train? 2014 could The lack of performance has not only rated 3.7 percent in US dollars while the suggest as much since a large majority impacted SKAGEN; the vast majority of MSCI Growth index returned 5.9 percent. of active value funds underperformed.

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