Skagen funds Market report October 2012

T H E A R T O F C O M M O N S E N S E

6 Back from oblivion

US IT companies once

again appear in the

portfolios.

10 New twist

SAP reshapes

companies’ use of

customer data.

29Aiming the bazooka

The European Central

Bank has decided it will

do whatever it takes.

Interest rate therapy

5Kristoffer Stensrud

Market ReportN U M B E R 3 O C T O B E R 2 0 1 2 S K A G E N F U N D S . C O M

Room for moreIncreasing urbanisation and a sound local knowledge are the most important drivers

for creating good long term returns in SKAGEN’s new property fund. SKAGEN m²

focuses on mispriced, listed property companies from around the world.

READ MORE ABOUT THE ACTIVELY MANAGED PROPERTY FUND ON PAGES 11-13

2

S K A G E N F U N D S M A R K E T R E P O R T N U M B E R 3 O C T O B E R 2012

T H E A R T O F C O M M O N S E N S E

6 Back from oblivion

US IT companies once

again appear in the

portfolios.

10 New twist

SAP reshapes

companies’ use of

customer data.

29Aiming the bazooka

The European Central

Bank has decided it will

do whatever it takes.

Interest rate therapy

5Kristoffer Stensrud

Market ReportN U M B E R 3 O C T O B E R 2 0 1 2 S K A G E N F U N D S . C O M

Room for moreIncreasing urbanisation and a sound local knowledge are the most important drivers

for creating good long term returns in SKAGEN’s new property fund. SKAGEN m²

focuses on mispriced, listed property companies from around the world.

READ MORE ABOUT THE ACTIVELY MANAGED PROPERTY FUND ON PAGES 11-13

Photo: iStockphoto

SKAGEN FUNDS MARKET REPORT NO. 3 2012 Contents

3 SKAGEN Funds – Returns

4 Leader

5 Interest rate therapy

6 SKAGEN Global’s entry onto the NASDAQ stock exchange

10 SAP overhauls its vast systems

11 SKAGEN launches new equity fund

12 SKAGEN on m2

14 Notices

15 Ethical guidelines

16 Portfolio managers’ report

29 Fixed income commentary

31

Risk and return measurements

32 Portfolios

39 Quarterly financial statement

CO N T E N T S

SKAGEN Funds invests in Undervalued,

Under-researched and Unpopular compa-

nies all over the world. SKAGEN AS was

established in Stavanger in 1993 and is one of

Norway’s leading fund managers.

Postal address:

SKAGEN AS

Postbox 160

4001 Stavanger, Norway

www.skagenfunds.com

Telephone no.:

+47 51 21 38 58

Editorial team:

Parisa Lemaire, news editor

Tore Bang, technical editor

Nick Henderson, journalist

SKAGEN seeks to the best of its ability to ensure

that all information given in this report is cor-

rect, however, makes reservations regarding

possible errors and omissions. Statements in

the report reflect the portfolio managers’ view-

point at a given time, and this viewpoint may

be changed without notice.

The report should not be perceived as an offer or

recommendation to buy or sell financial instru-

ments. SKAGEN does not assume responsibility

for direct or indirect loss or expenses incurred

through use or understanding of the report.

SKAGEN recommends that anyone wishing to

invest in our funds contacts a qualified custo-

mer adviser by telephone on +47 51 21 38 58 or

by email at [email protected].

Portfolio management team behind SKAGEN’s new global property fund, SKAGEN m².

Long-awaited upturn: Money printing from the Fed and ECB lifted stock markets, particularly European companies.

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New Windows: Steve Ballmer and Microsoft have high ho-pes for their new operating system. SKAGEN has invested in the software giant and a number of other IT companies.

29

11 6

3


SKAGEN Funds -ReturnsThe following tables show the returns for SKAGEN’s

funds versus their respective benchmarks in euro.

The figures are updated as of 28 September 2012.

EQUIT Y FUND SKAGEN KON-TIKI

EQUIT Y FUND SKAGEN GLOBALEQUIT Y FUND SKAGEN VEKST

BOND FUND SKAGEN TELLUS

Portfolio manager: Kristoffer Stensrud Start: 5 April 2002

Portfolio manager: Kristian Falnes Start: 7 August 1997Portfolio managers: Ole Søeberg and Geir Tjetland Start: 1 December 1993

Portfolio manager: Torgeir Høien Start: 29 September 2006

■ SKAGEN Vekst ■ OSEBX/MSCI AC (50/50)

Return past 12 months Average annual return since start

0

5

10

15

20

25

30

20,6 %

30,9%

15,1 %

9,7%

0

5

10

15

20

25

30

■ SKAGEN Kon-Tiki ■ MSCI Emerging Markets Index (Daily Traded Net Total Return)


21,4 %22,1 %

-10

0 0

10

20

30

17,3 %

9,1%

-10

20

30

10

0

5

10

15

20

25

30

■ SKAGEN Global ■ MSCI World Linked Index


26,3 %25,8%

15,6%

2,1%

0

5

10

15

20

25

30

■ SKAGEN Tellus ■ Barclays Capital Global Treasury Index 3 - 5 years (euro)

Return past 12 months

6,64 %

13,56 %

Average annual return since start

6,36 %

-20

-10

0

10

20

-20

-10

0

10

20

6,73 %

O U R F U N DS

Unless otherwise stated all figures quoted in this report are in euro, except for the quarterly financial statement, which is in Norwegian kroner.

SKAGEN Funds only has authorisation to market its money market funds SKAGEN Høyrente and SKAGEN Høyrente Institusjon in Norway and SKAGEN

Krona in Sweden. SKAGEN Avkastning has a limited market area. Information regarding these funds is included in the official accounts but is

excluded elsewhere.

The quarterly financial statement was originally prepared in Norwegian. The translated version is published with reservations regarding possible

errors and omissions as well as erroneous translation. In case of conflict between the Norwegian accounts and the English translation, the former

shall prevail. The Norwegian version of the quarterly financial statement is available at www.skagenfondene.no

4


L E A D E R

It is always a regret to discover that financial

sector participants have feet of clay. Never

more so than the recent revelation that LIBOR

rates have been fixed for some considerable

period. This comes atop Lehman, Madoff, and

an ever-lengthening list of those who have

failed in their fiduciary responsibility. The

damage to trust is incalculable.

Strengthened risk management

Here in SKAGEN fiduciary responsibility lies

at the heart of the trust that we seek to forge

and temper with our investors. Transparency

and honesty are vital. We are aided in this

by the update of the Norwegian securities

fund act which came into force this year.

Besides transposing UCITS IV regulations,

the new legislation also explicitly requires

increased accountability through unit holder

plebiscite, and strengthens the risk function

in SKAGEN. The latter sees an independent

risk team reporting directly to the SKAGEN

Board outside the normal chain of command.

There has been some reorganisation as a

result, and personnel have been added to our

business support and compliance team. This

will not compensate for the LIBOR scandal.

We do hope it will offer some reassurance to

our unit holders that we take these matters

seriously indeed.

New fund - SKAGEN m2

We are pleased to announce the inception

of a new fund. The first equity fund for some

ten years. SKAGEN m2 is an actively managed

global property fund that will invest in mispri-

ced listed property companies the world over.

The fund will implement the same tried and

tested investment philosophy and process as

our other equity funds. And it will draw from

the pool of talent that comprises SKAGEN’s

investment platform. We see property as a

long-term value proposition with stable cash

flow, a built-in inflation hedge, and good liqui-

dity when the instruments are listed. This is

not a sector fund. It is evident, however, that

listed property behaves differently over the

longer-term to other equities. It is this and

the underlying yield that we wish to access

for our investors. Articles are from page 11.

New faces

We have also added new personnel to the

International team in both the Netherlands

and Stavanger. André van Muijlwijk joins our

Amsterdam team and Petter Sandtorv joins

the Stavanger team. Both men are seasoned

client advisors and look forward to supporting

our non-Scandinavian investors.

A mixed third quarter

SKAGEN Global recovered nicely in the third

quarter and ended the period up 9 percent,

versus 5.6 percent for the benchmark index,

measured in euro. SKAGEN Kon-Tiki ended

the quarter marginally ahead of its bench-

mark with a gain of 6.2 percent versus 6.1

percent for the benchmark. The discrepancy

between large liquid companies on the Oslo

Stock Exchange and the small companies

in the SKAGEN Vekst portfolio continues to

increase. So although the fund’s absolute

performance of 3.27 percent in the third

quarter is acceptable, its 5.55 percentage

point lag behind its benchmark index is far

from satisfactory. Historically the small and

medium-sized companies, which are now far

cheaper based on central key figures, have

made a strong comeback when the stock

market has risen again. We saw this both in

1992/93 as well as in 2002/03 and believe

we will see it again. Meanwhile, our global

bond fund SKAGEN Tellus continued to do

well in the period and ended the quarter up

3.80 percent, versus 1.23 percent for the

benchmark index.

While we sit in a relatively low return envi-

ronment, high liquidity and the growing appe-

tite for further stimulus might generate the

required equity revaluation.

A matter of trust; and a matter for celebration

Strengthened risk management: Here in SKAGEN fiduciary responsibility lies at the heart of the trust that we seek to forge and temper with our investors. Source: iStockphoto

LEADER

Timothy Warrington, Head of International, SKAGEN Funds

tcsw skagenfunds.com

5


CO M M E N T

For equity investors, the lamentable sum-

mer weather was partially compensated by

elevated temperatures in most stock markets.

The message from the European Central Bank

chief, Mario Draghi, that all means necessary

would be used to save the eurozone, meant

that European stocks experienced the stron-

gest lift. The global emerging markets and

Japan fared the worst this summer.

No news is good news

To what may we attribute the optimism we

experienced in the summer? Following a bad

month of May with the heightened uncerta-

inty around the global economy and future of

the eurozone, expectations about the future

were at rock bottom. The lack of bad news in

the summer may therefore have been enough

to cause share prices to once again converge

towards the value creation taking place in

companies.

But there has been no general upturn in

share prices. Investors have flocked to pre-

dictable companies, preferably with stable

dividend policies. This is of course due to

the fact that the fixed income market is now

enticing people with its negative risk-free

interest rates. It is precisely the lower interest

rates – or lack thereof – that has given rise

to a degree of optimism detectable in the

stock markets over the past year. The major

macroeconomic challenges, and regulations

which force long-term investors into low inte-

rest rate investments, admittedly weigh hea-

vily on the other side of the scales.

In the short term, the stock markets look

slightly vulnerable. The price upturn we expe-

rienced in the summer was, as mentioned

above, selective. Sales have also been low

on a global basis.

Consumer confidence indicators from all

four corners of the world have been in part

inconclusive, in part negative – particularly

in China. We note that local Chinese stocks,

which are not subject to global market con-

sensus, developed consistently weakly.

We are now entering a two-month period

which has, historically speaking, not been

favourable for equity investors. When dark-

ness falls, and bright expectations are repla-

ced by gloomier realities, this tends to deal

a blow to the general mood and the stock

market. Equity investors can, however, take

heart from the fact that good returns can be

obtained from companies’ earnings. Premi-

ums relative to so-called risk-free interest

rates are still at a historically high level, and

the risk of inflation is still some way off.

Equity investors can draw comfort from

the fact that expectations about companies’

earnings and the global economic activity are

low. There are in fact several bright spots to

be found on the autumn horizon. The appetite

for economic stimulus is on the rise across

the globe.

and organisational form the future euro-

zone will take, the ECB’s categorical

defence of its existence appears to have

removed a great deal of the uncertainty.

stimulus packages from China. Given the

current political vacuum, however, it looks

like we may be in for a longer wait.

improving, the imminent presidential

election is creating uncertainty.

It would appear, therefore, that in the short

term stimulus will have to continue to come

from the central banks. This was partially con-

firmed by chairman of the Federal Reserve,

Ben Bernanke, at his speech at Jackson Hole.

In my opinion, therefore, there is an upside

risk to be found in the autumn’s stimulus

packages which balances out any downside

risk which may come from negative impulses

influencing the world economy.

Global liquidity is extremely high, and the

pressure to achieve (higher) returns is increa-

sing. This may eventually result in a revalua-

tion of equities as an asset class.

It is interesting to note that companies

with predictable and stable earnings have

become increasingly popular over the past

couple of years – following ten years of weak

returns. These types of companies were sig-

nificantly overvalued following the equity

boom in the 1990s. And it was precisely these

companies’ consistent value creation over

many years that contributed to the revalua-

tion of stocks as an investment object in the

1980s and 90s.

History, as it is often remarked, tends to

repeat itself.

This article originally appeared in the

Norwegian financial daily, Dagens Næringsliv.

Interest rate therapyLow interest rates can help combat autumn blues.

Kristoffer Stensrud

6


T H E M E

Microsoft, Oracle, Yahoo and Google. These

are shares that evoke uneasy memories of

the dotcom bubble and the many billions of

dollars that went up in smoke at the turn of

the millennium. Over the past couple of years,

however, these stocks have found their way

into the value-based portfolio of SKAGEN

Global.

And – in some cases – their contribution

to the fund’s result has been very good.

Only the price is right

Justifying the purchase of a stock is all to do

with the price, that is, how much you have to

pay for the company’s future earnings and/or

equity. During the course of the decade follo-

wing the turn of the millennium, the price tags

of the most overvalued tech shares fell by

70-80 percent. From being extremely popular

and overvalued, they have become extremely

unpopular and undervalued.

As portfolio manager of SKAGEN Global,

Torkell Eide, puts it: “As earnings from large

IT companies are currently priced at around

a fifth of peak levels, the risk of negative

surprises is substantially reduced. Unlike

previously, the stock market no longer sets

great store by future growth in earnings for IT

companies; quite the reverse in fact. That is

a good starting point for value-based inves-

tors.”

Windows was not dead

Two years ago unit holders in SKAGEN Glo-

bal were made acquainted with the IT pride

of the 1990s, Microsoft, which was at that

time the most valuable company in the world.

Concern that the death of the PC, and with it,

that of the company’s cash cow, Windows,

was imminent, meant that Microsoft was very

unpopular among investors.

When SKAGEN Global first bought Micro-

soft, the price for expected earnings for 2011

had come down to a single-digit level and

that got SKAGEN’s value calculator flashing.

Since then the share price has risen by around

20 percent. A good deal of the short-term

potential has been taken out, but the launch

of Windows 8 could cause both the earnings

SKAGEN Global’s entry onto the NASDAQ stock exchangeWho would have believed a decade ago that SKAGEN Global would today be invested in several stocks

listed on the technology stock exchange NASDAQ, and that the proportion of US stocks would be almost

35 percent, versus five percent at that time.

When the bubble burst: Nervous stockbrokers at the New York Stock Exchange after the dotcom bubble burst. The photo was taken in June 2001, three months after the stock exchange had reached its highest peak ever.

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7


T H E M E

and share price to gather speed again.

That a lot of value can be found in Win-

dows 8 is substantiated by feedback from our

biggest holding in the equity funds, Samsung

Electronics.

At a technology trade fair in Berlin in

August, the Korean technology giant pre-

sented several Windows 8 products, under

the name Ativ. These include a smart phone,

tablet, two notebooks and an ultrabook. The

two notebooks function both as tablet and

laptop with detachable keyboards. The tablet

and two hybrids have the same capacity as

moderately powerful laptops.

Torkell Eide believes that Microsoft is

strong on two fronts. First, its position in

the corporate market is extremely solid and

products like Word, Excel, PowerPoint and

Outlook continue to dominate. Second, within

operating systems for PCs, Microsoft is leader

and the company is as well positioned as

Google and Apple in the tablet storm currently

raging, according to Eide.

Mobile, web and cloud

The risk associated with Microsoft’s deve-

lopment going forward is twofold according

to Eide. In the retail market the company will

face a significant challenge gaining market

share within the mobile and tablet segments.

The company’s initiatives came somewhat

late, so the Windows family has had tough

competition from Apple and Google.

In order to maintain its dominance on the

corporate side, as key suppliers of servers

and software, the company must succeed

with its cloud strategy. So far things look

fit for purpose, but the high innovation rate

means that they need to keep their eye on

the ball which is moving increasingly quickly.

At the end of September the Microsoft

position constituted around 1.1 percent of

SKAGEN Global.

FANTASTIC JOURNEY IN COMCAST

SKAGEN Global’s second largest IT hol-

ding is Comcast. Comcast is no typical IT

company in the traditional sense of the

term. That is why the company is regis-

tered under the Consumer Discretionary

sector rather than Information Techno-

logy in the fund’s portfolio.

Comcast is world leader within media

and entertainment, via cable TV and is,

amongst other things, a majority owner

in NBC Universal (51%, with the option

to buy the rest of the company). The

Comcast share has experienced a fan-

tastic journey in the four years in which

SKAGEN Global has been a shareholder.

The fund’s position has doubled in value

and over the past year the share price

is up almost 60 percent, measured in

US dollars.

Despite Comcast’s strong share

price development, Torkell Eide does

not believe that the share is expensive.

“The company has managed to combine

high and predictable cash flows with

an attractive growth profile. Based on

current earnings the share may appear

cheap, but the price tag is falling at the

same time as growth in the cash flow is

being used to buy back their own shares.

That being said we continuously assess

the pricing and size of the position in

the fund against other alternatives. We

therefore reduced our position in Com-

cast somewhat in September and the

holding now constitutes 1.8 percent of

the portfolio,” says Eide.

The biggest challenge for Comcast

going forward will be to ensure that cli-

ents are still willing to pay for television

services. The threat is new innovative

services such as Apple TV.

ORACLE IS BIGGEST

SKAGEN Global’s largest holding among US IT companies is software maker Oracle,

which constituted 3.5 percent of the fund at the end of the quarter. The market

value of the stockholding was NOK 1.2 billion.

Oracle is currently priced at 12 times this year’s expected earnings, which is

still historically low. Portfolio manager Torkell Eide has a price target for the stock

which is 40 percent higher. As he puts it, “The company has a solid position in a

market with good growth. The cash flow is strong and the balance sheet likewise,

with net cash more than ten percent of the market value.”

For Oracle the biggest challenge going forward will be the changes that are now

taking place in the way data is stored. Products such as the integrated database,

HANA, from main competitor SAP is one such example.

For more information about Oracle, read the article in Market Report 1/2012.

Profited from Comcast: Comcast is the best contributor absolutely and relatively speaking among the Nasdaq companies in the SKAGEN Global portfolio.

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Samsung bets on Windows 8: During the technology trade fair in Berlin, Samsung Electronics launched a portfolio of products adapted to Windows, including a smart phone and tablet.

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8 T H E M E

Yahoo out – Google in

After a long period of considerable pressure

on the share price, SKAGEN Global bought into

the falling internet star Yahoo last autumn.

Taking as our basis a moderate valuation of

the company’s stockholdings in Yahoo Japan

and the Chinese Alibaba Group, at the time we

believed that we had bought the company’s

core operations extremely cheaply.

When expectations about what the above-

mentioned stockholdings could achieve if sold

were not fulfilled, SKAGEN Global exited Yahoo

this spring. The investment never accounted

for more than half a percent of the fund. The

assets resulting from the sale were invested

in Google shares.

During internet’s infancy in the 1990s, it

was the Yahoo search engine that dominated.

Google indisputably reigns supreme now, howe-

ver. The fact that a new verb – to google – has

officially entered the English language says it

all. Google’s operating system within mobile

telephony, Android, is also a world leader.

According to a global survey carried out

by consulting company, Universum, Google is

also the company that most engineering and

economy students want to work for. Microsoft

comes out well too, taking third and fourth place

among the above-mentioned student groups

respectively.

A successful swap

The switch from Yahoo to Google has so far

proved successful. In the course of just a few

months the Google share price is up almost 30

percent. The company is priced at 14.5 times

this year’s expected earnings, adjusted for

the cash position. Google was first listed in

2004, and so did not take part in the crazy IT

upturn at the end of the 1990s, or the ensuing

downturn

According to Torkell Eide the investment

case for Google lies in the fact that the com-

pany can demonstrate good growth within

search and media (YouTube), and is well pro-

tected through brand and technology. In addi-

tion the company has been clever at using its

technological advantage to innovate within

fields from operating systems to mapping

services. This provides Google with several

sources of increased earnings.

The fact that Apple has now developed

its own mapping service, and no longer uses

Google’s, is not something that Eide believes

will have a noticeably negative effect. Apple

is a hardware company while Google is a soft-

ware company. The fact that the most common

complaint about Apple’s new iPhone 5 has

been its poor mapping function also weighs

in Google’s favour.

Threatened by social web forums

The fear of increased competition from

Facebook as an advertising platform did

put the Google share under some pressure

for a period. For the time being the fear has

been exaggerated, however. That is not to

say that social web forums are not a threat

to the how advertising money will be spent

going forward.

Given its size, Google will have to accept

that the authorities will increasingly want to

understand, and, in some extreme cases,

restrict the company’s market power within

certain areas.

The Google holding constitutes 0.8 per-

cent of the SKAGEN Global portfolio.

History repeats itself

Although the good old IT shares from the

1990s have come down to appetising levels,

including for value managers such as ours-

elves, there are still plenty of unpalatable

companies on the Nasdaq stock exchange.

Bought Motorola: Google, represented here by Chairman of the Board Eric Schmidt, has bought up mobile producer Motorola. It was particularly the large number of patents the company owns that attracted Google’s interest.

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9


T H E M E

Because, yes, history always repeats itself. It

is well known that equity investors’ memories

are short; some don’t have any at all.

That is why it is still possible for IT compa-

nies – with revolutionary products and ideas

– to sell faith, hope and love at a high price.

The cliché that “this time is different” is still

alive and well. Two good examples of such

are the listing of deal-of-the-day company

Groupon and Facebook.

The business idea behind companies that

can offer their products and services on the

Groupon website at discounted prices was

priced at 90 billion dollars at the time of lis-

ting last autumn. One year later shareholders

have lost over 80 percent of their money. The

company had to book a loss of over USD 350

million in 2011. Although the second quarter

of the year ended just in the black, the top line

growth did not give much cause for celebra-

tion and the share price fell a full 27 percent

on the day the figures were presented.

Facebook admittedly earns money, but

a listing price of 38 dollars per share in May

represented a P/E multiple of 80 for this year’s

expected earnings. Expectations about the

future were in other words sky high.

A halving of the share price in the course

of just a few months, aided by the fact that

earnings expectations have been adjusted

downwards, is not enough to tempt SKAGEN

Global into Facebook.

Fortune halved: Facebook founder, Mark Zuckerberg, and the other Facebook shareholders saw their Facebook assets halved in the course of just a few weeks.

Tore Bang

tb skagenfunds.com

10


Major companies rarely change the rules of

the game. Yet when they do, their size and

market position can transform how things

are done. For example, Apple’s iPad is only

two and a half years old and has already had

a major impact on many people’s daily lives.

“The German software giant SAP is cur-

rently reshaping companies’ day-to-day use

of customer and process data. This will create

considerable value for companies, customers

and SAP itself as a software and service provi-

der. Nonetheless, the share price is relatively

low compared to previous highs. Therefore,

SAP is now included in SKAGEN Vekst, where

it has already been one of the quarter’s best

performers,” says portfolio manager Ole

Søeberg.

SAP is currently transforming business

efficiency and decision-making speed

although the shares are priced at the same

level as in the early 1990s, just after the IT

bubble burst. On the face of it, a P/E multi-

ple of 15 times expected 2013 earnings is

not inexpensive, but compared to its market

strength, the new services’ potential and the

historical pricing of this particular company,

the valuation is low.

The end customers of a fashion store, tra-

vel agency or supermarket will not be aware of

how SAP is transforming their daily lives, yet

this is happening. By opening up the systems,

databases can be analysed faster; in a matter

of seconds, rather than days. This will make

it possible to optimise the goods stocked

on supermarket shelves and how customer

databases are organised, and to customise

offers to customers when they book flights or

hotels online. SAP calls its new system HANA

and claims – possibly rather simplistically –

that the analysis is 3,600 times faster than

a traditional database analysis.

All large companies aim to use their

resources as efficiently as possible. The

systems have come into their own during

the financial crisis, when companies have

been able to protect their revenue by rapidly

adapting to the change in demand. Once the

systems have been implemented and are up

and running, companies need only spend a

little time on administration and other non-

core activities. In other areas, SAP has made

it easier for sales staff to use the systems

during flights and on the road. SAP has also

not lost any time in creating cloud solutions

that companies can use online, instead of

investing in their own hardware.

Stable customer base

Although a few companies are common to

all of SKAGEN’s equity funds, most are uni-

que to each fund. The SKAGEN investment

philosophy also allows for healthy disagre-

ement on companies and sectors between the

equity funds. Some managers thus believe

in a future for American banks and financial

services companies, while others are more

reluctant to let the villains of the financial

crisis make a comeback in their portfolios.

This freedom to disagree is particularly

apparent when you look at how SKAGEN Glo-

bal portfolio managers have chosen to have

a major investment in the American company

Oracle, while SKAGEN Vekst focuses on SAP.

Oracle and SAP are arch rivals, almost to the

same extent as Coca-Cola and Pepsi. Both are

providers of IT systems for accounting, pro-

duction management and resource planning.

Oracle’s strong points were described in

Market Report no. 1/2012 by portfolio mana-

ger Torkell Eide and journalist Mark Houben.

SAP has similar qualities to Oracle, including

a very stable customer base. SAP is priced

higher, but according to Ole Søeberg also has

a clear opportunity to generate more value.

As always, investing in a company entails

risks. These include slow customer adaption

to new software and competitors adapting

and catching up faster than anticipated. SAP

state that they have a 1-2 year lead, which

means that value and long-term customer

relations will be built up on the SAP platform

before its competitors have seriously joined

the fray.

German Chancellor Angela Merkel checks out a new microscope with SAP software at the Cebit tradefair this year.

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SAP overhauls its vast systemsThe software giant SAP has kept up with the times and now has excellent opportunities to

increase its market share by transforming how companies use customer data. SKAGEN

Vekst’s portfolio team believe SAP is a compelling business with an attractive valuation.

cje skagenfondene.dk

oso skagenfondene.dk

SAP has around 190,000 companies as its custo-mers. They pay an annual fee to use the software, as well as ad hoc charges for assistance and other services. Overall, this generates an annual reve-nue of around EUR 15 billion. This is a lucrative business, and many customers are tied to SAP by long-term contracts. Operating income accounts for approximately one third of total revenue, which means that the margins are favourable, and SAP is a debt-free company with ample liquidity.

11


SKAGEN m² is an actively managed global

property fund that will invest in mispriced

listed property companies around the world.

“Listed property companies are rela-

tively easy to value and have predictable

cash flows. Despite this, such companies

are frequently mispriced. We believe that by

applying our proven investment philosophy,

experience and investment process we will

be able to create good returns for our unit

holders,” says Peter Almström, lead portfolio

manager of the SKAGEN m² team.

The global market for listed property

companies consists of approximately 2000

companies. They carry out various property-

related operations, such as the management

and development of shopping malls, offices,

storage facilities and apartments. The market

is growing rapidly, driven by the urbanisation

of emerging markets, for example.

A characteristic of the global property mar-

ket is that it is local, compared to other sec-

tors which have over the past decades increa-

singly been priced on a global level. This often

leads to mispricing. For a fund manager like

SKAGEN, that seeks to find companies that

are undervalued, under-researched and unpo-

pular with potential to increase in value, this

mispricing raises interesting opportunities.

Since SKAGEN was founded in 1993 we

have only launched three equity funds. All

three have performed better than their bench-

mark indices in the long term.

“We only start funds in which we oursel-

ves would invest and where we can apply our

investment philosophy. Since we only rarely

launch new funds, this launch is very excit-

ing for us,” says Harald Espedal, Investment

Director and Managing Director.

The portfolio team

SKAGEN m² will be managed by Peter Alm-

ström, Michael Gobitschek and Harald

Haukås. They have complementary skills and

competence from property investing, corpo-

rate finance and global financial markets, and

in-depth knowledge of SKAGEN’s investment

philosophy and process.

SKAGEN launches new global equity fundFor the first time in ten years SKAGEN will be launching a new

equity fund – the global property fund SKAGEN m².

not pay dividend

Return IMI

www.skagenfunds.com/m2

FACTS ABOUT SKAGEN m2

Michael Gobitschek has worked in SKAGEN since 2005, and has direct experience of SKAGEN’s investment phi-losophy and process through his work with institutional clients and analytical responsibilities in the portfolio team. Michael has an MSc in financial economics from the University of Stockholm.

Peter Almstrøm has over 25 years of experience working with property, fund management and finance. He has an MSc in surveying and economics and was portfolio manager of the Carnegie Global Real Estate Fund before joining SKAGEN.

Harald Haukås has worked in SKAGEN since 2006, both as an analyst and more recently as portfolio manager of SKAGEN’s combination fund, SKAGEN Balanse 60/40. Harald has a PhD in mathematical statistics and has pre-viously worked with risk analysis.

12


T H E M E

Stensrud on SKAGEN m2

Kristoffer Stensrud shares his thoughts around the launch of SKAGEN’s first equity

fund in more than ten years – the global property fund SKAGEN m2.

Large cities like Mumbai, Singapore and Hong Kong suffer from an almost chronic shortage of space, and have since the 1960s undergone phenomenal development. Pictured here is the Central District in Hong Kong, where the average rental costs have risen in seven of the past eight years.

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Given the debt problems in Southern Europe,

the recession in the UK, weaker growth in

China and generally slower growth in the

world, the autumn of 2012 seems to be an

excellent time to start a new fund. It is now

that we are seeing mispricing in the market

and this presents us with good opportunities,

according to SKAGEN portfolio manager and

founder, Kristoffer Stensrud.

It was in November 2011 that Peter Alm-

ström, who over 25 years experience from

property and finance, made the phone call.

At that time, Kristoffer Stensrud had not con-

sidered starting a property fund, yet his inte-

rest was stirred when he heard Peter’s idea

– namely, applying SKAGEN’s investment phi-

losophy to global property shares. The result

is SKAGEN m², the first equity fund SKAGEN

has launched in over ten years. The fund will

invest in listed securities with property-rela-

ted operations.

Property traditionally stands for long-term

value. It usually generates predictable cash

flow and is a good hedge against inflation.

Listed property is good for investors since

it is both liquid and offers transparent pri-

cing. Combining this with SKAGEN’s com-

pany-focused investment philosophy was

something Kristoffer Stensrud immediately

found very interesting.

“SKAGEN’s global approach combined

with property companies and local markets

is a good starting point for generating excess

value. That is something that a typical sector

fund does not have. There is a world of unde-

tected opportunities out there.”

Common sense

The investment philosophy that SKAGEN and

Kristoffer Stensrud have had such success

with is value based; that is it differentiates

between the price of an asset and the intrinsic

value. SKAGEN’s portfolio managers seek

individual companies that guarantee qua-

lity in the long term, but which due to the

stock market’s short-termism can currently

be bought at a low price. These companies

should be characterised by being under-

valued, under-researched and unpopular.

Common sense and simplicity – understan-

ding the companies one invests in – are key

factors.

The view is that it is in companies – and

not in sectors or regions – that the value crea-

tion takes place. It is impossible to predict

when stock exchanges will peak or bottom

out, but companies should be competitive,

have a fundamental growth potential or a

unique resource base. These well-managed

and profitable companies are occasionally

misunderstood by the market which thereby

creates the discrepancy between price and

value. Kristoffer Stensrud reiterates that the

focus is to find companies that are wrongly

priced in the markets.

It is therefore important to follow each

13


company thoroughly and still retain a dis-

tance from the market as a whole. The very

fact of being located in Stavanger, far from

the world’s financial centres has previously

been a success factor.

Will SKAGEN m2’s managers just stay in

Stavanger?

“Property is slightly different from other

companies. I believe that managers need to

be on site from time to time to visit investment

objects and kick the tires as it were. Or at

least use Google street view,” jokes Stensrud.

“We don’t want to end up buying ghost towns.

A lot of those have been sold over the years!”

Explosive urbanisation

Big cities like Mumbai, Singapore and

Hong Kong suffer from an almost chronic

shortage of land. From the 1960s onwards,

these have undergone a phenomenal deve-

lopment and in cities which could almost

be called peripheral, property prices have

increased a thousand-fold.

“It is not inconceivable that we see the

same type of development in other cities and

countries,” says Kristoffer Stensrud in his

usual laconic fashion.

And when opportunities arise, you need in

part to be able to evaluate and in part to have

someone onsite locally to be able to take care

of things. The pricing of property is influenced

by local factors rather than by macroeconomic

events, unlike oil, for example, which is priced

in a global market.

“Working with local businesses is an

advantage – they have contacts and know-

ledge that is often what determines whether

the company will succeed in generating added

value,” elaborates Stensrud.

There is a widespread perception that lis-

ted property shares behave more like other

listed stocks than like a direct ownership in

property. In the short term, this is true, but

over a three to five year period, it is gene-

rally the underlying property’s cash flow that

determines the price of the property share.

For the long-term investor, property shares

therefore function well as an investment.

They open up attractive long-term returns at

a moderate risk.

Uncertain climate – often favourable

In many places, including in Stensrud’s

native Norway, house prices have continued

to rise. That they will fall here too, there is no

doubt, he says. That has always been the

case in the past.

And despite – or perhaps because of – the

turmoil in the financial markets, debt pro-

blems in Southern Europe, the recession in

the UK, weaker growth in China and gene-

rally slower global growth, autumn 2012 is an

excellent time to start a new fund, according

to Kristoffer Stensrud.

“Crashes and crises are par for the course,

and being a first mover is never a good thing.

It is better to wait and see what others have

done. After crashes is when you can find

gems in all the rubble. When the dotcom

bubble burst in 2002, confidence in shares

was low and the emerging markets underva-

lued. That is when we launched SKAGEN Kon-

Tiki, and it was not a bad time at all to invest

in technology shares, for example.

Kristoffer Stensrud says he is not paying

attention to other fund management com-

panies currently closing down their property

funds. SKAGEN’s portfolio managers are free

to go against the tide in turbulent times and

are able to invest in select companies when

others are forced to sell. At the same time, he

stresses that SKAGEN m² does not resemble

a lot of the funds that have become so notori-

ous recently. Unlike SKAGEN m², these funds

have built on customers’ capital invested in

directly owned properties. When customers

wanted to withdraw their money, the funds

have experienced problems with liquidity

since the property market is sluggish, and

being forced to sell property in a short space

of time can easily create a downward spi-

ral. They were in fact unlisted companies,

he says.

“SKAGEN m2 consists of listed shares, so

investors can quickly trade in the fund. There

is a match between liquid assets and liquid

finances. This is an important difference.”

You have over the years launched all of

SKAGEN’s equity funds. How does it feel

not to be launching this one?

“It’s quite all right,” he laughs. “It’s time-

consuming enough taking care of SKAGEN

Kon-Tiki. And I can’t always be involved in

everything, can I?”

1313T H E M E

”Crashes and crises are par for the course,

and being a first mover is never a good thing.”

Anna S. Marcus

asm skagenfondene.se


André van Muijlwijk (41) will join SKAGEN’s

Dutch office on 15 October 2012 as a client

relationship manager. André has been active

in the fund industry for fifteen years, of which

eight were spent at MeesPierson (now ABN

Amro MeesPierson), three at Rabobank and

four at the Dutch branch of the Swiss private

bank and asset manager, Lombard Odier. At

the latter position he set up fund distribu-

tion for the Investment Management unit.

Together with his team he was responsible

for building the brand and developing the

sales and marketing strategy.

André holds the title of VBA, which is

the Dutch equivalent of Chartered Financial

Analyst. He has a degree from the Business

School for Economic Studies in Rotterdam.

The SKAGEN office in Amsterdam, which

was opened in September last year, is cen-

trally located on the Museumplein overlooked

by the Van Gogh museum and the illustrious

Rijksmuseum, and is headed up by Michiel

Krauss. Mark Houben is responsible for com-

munications and client relations.

“It is common sense to try to view the world

from a different perspective,” says Åge

Westbø about why SKAGEN is the main part-

ner of the Nuart festival.

The international art festival, Nuart, was

established in Stavanger in 2001. Street art

and urban art are the main focus of the annual

festival which brings together some of the

world’s leading artists in the genre. SKAGEN

has entered into an agreement with the fes-

tival in order to try to gain new insights. “We

must keep reminding ourselves that it is com-

mon sense to see the world from different

perspectives. Street art is just such a remin-

der,” says SKAGEN-founder, Åge K. Westbø.

Street art is a growing phenomenon which

attracts a whole range of creative artists and

their fans, particularly younger ones. Street

art aims to challenge the prevailing view by

defining and reflecting alternative move-

ments and future directions within urban

culture and contemporary art. For SKAGEN it

is important to communicate with the younger

generation to learn about and understand the

challenges they face.

The festival opened on 29 September and

runs until 18 November.

SKAGEN’s Nuart page:

www.skagenfondene.no/nuart

Festival homepage: www.nuart.no

N E W S14

André van Muijlwijk

Petter Sandtorv joined the Stavanger-based

international team on 1 October. His tasks will

include client services and partner relations

for the international market as well as inter-

national business development.

Petter is educated as a bank economist

and stockbroker. He is also an authorised

financial advisor in Norway. He has more than

28 years experience from the banking and

finance industry.

Petter joined SKAGEN in 2005 and before

joining the International team he was based

in Bergen, working as a wealth manager advi-

sing Norwegian institutional and high net

worth clients. Prior to joining SKAGEN, he

spent 15 years working as a stockbroker.

New man in Amsterdam

SKAGEN and street art

Petter Sandtorv

Writing on the wall: Stavanger is becoming a display window for some of the world’s best street artists.

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Strengthening the International team

15


SKAGEN has chosen to implement its own

ethical guidelines as we believe this best pro-

tects our unit holders’ interests. Our goal is

to draw our own conclusions on the basis

of objective, ascertainable facts and not on

the basis of sentiments, rumors or interest

groups.

SKAGEN will not knowingly invest in:

-

matically break basic human rights, inclu-

ding torture, deprivation of liberty, forced

labour and the worst forms of child labour

and other exploitation of children.

the local population or the elected form of

government in their home country or in the

countries they operate.

of their activities may incur significant and

uncalculated liabilities related to health

related claims or environmental abuse.

their business within activities that society

increasingly wishes to protect itself against,

such as tobacco, pornography, gaming and

lottery companies.

-

ruption and bribes.

mass destruction, land mines and cluster

bombs as part of their business.

To achieve the best possible risk adjusted

return for our unit holders, SKAGEN seeks to

reduce unnecessary economic risk by eva-

luating investments against the above men-

tioned points. Some investments demand

careful consideration as at times we find that

potential gains are not always proportionate

to the risks. Such companies can typically

have strong earnings, but are subject to ope-

rational risk and could face more stringent

future statutory regulations. We emphasize

issues that may have significant implications

on a company’s value, whether directly or

indirectly, for instance through weaker repu-

tation.

Our guidelines form an integral part of our

analysis, both prior to and after we invest in

a security; we believe that each case should

be considered individually and based on

its unique characteristics. In our opinion, a

company’s intentions and current actions

count more than their record.

SKAGEN is working with several external

providers as part of the investment process

to gain a broad knowledge base within envi-

ronmental, social, and corporate governance

(ESG) issues. If it becomes apparent that

SKAGEN has invested in companies that, in

spite of intentions and declared purpose,

break our ethical guidelines, the funds’ hol-

dings will be sold. Any such disposal shall be

carried out in a manner that does not forfeit

values for our unit holders.

UNPRI

In 2012, SKAGEN signed the UN’s Princip-

les for Responsible Investment (UNPRI). Our

goal is to improve our understanding and

management of complex issues, risks and

value drivers related to responsible investing.

Access to UNPRI’s comprehensive knowledge

base and support network will undoubtedly

contribute toward these aims. Additionally,

we believe that UNPRI can provide a fram-

ework for our ethical guidelines relating to

environmental, social, and corporate gover-

nance (ESG).

Negative screening and blacklists

SKAGEN does not manage index or index-like

funds; accordingly, we do not screen invest-

ment universes or indexes. We do not at any

time operate with blacklists, negative filtra-

tion or exclusion.

Important information

SKAGEN cannot guarantee that we are familiar

with all issues of substantial importance to

a company’s ethical behaviour. New ethical

issues and facts will be continuously evalua-

ted, in the same way as other information that

comprises our investment process.

N E W S

Ethical Guidelines

SKAGEN is a value based fund manager which actively selects securities using our

proprietary investment process. An integrated part of this process is consideration of

whether an investment is compatible with our ethical principles.

16


P O R T F O L I O M A N AG E R S R E P O R T

Key figures from the global economy in the third quarter made for disappointing reading on the whole, particularly from the growth engine, China. And in Southern Europe social unrest poses a threat to much-needed reforms.

In order to stimulate greater risk appetite among investors, the central bank heads Ben Bernanke of the Fed and Mario Draghi of the ECB signaled that they will print as much money as required going forward, in the form of bond purchases.

The stock markets saw a long-awaited upturn with the hard-pressed European companies in the driver’s seat.

On the reporting front, SKAGEN Global has never before experienced so many positive surprises in the second quarter of the year.

The price that investors are willing to pay for liquidity has resulted in a record gap in valuation between large and smaller companies on the Oslo Stock Exchange. We expect the small unpopular companies to experience a renaissance in the next phase of the stock market upturn.

There will still be uncertain times ahead. This will provide long term investors such as ourselves with good opportunities.

Our equity funds are still priced at a large discount to their respective benchmark indexes.

Money printing lifts stock markets

US cars into SKAGEN Global: After US carmaker General Motors (GM) was saved by the state mid-financial crisis in the au-tumn of 2008, the company rebounded on the stock market in 2010. Although GM is now profitable, the company remains unpopular. The fact that it is undervalued too means that it is a good fit in the SKAGEN Global portfolio.

Offensive central bank heads: Both Ben Bernanke (Fed) and his European counterpart Mario Draghi (ECB) have indicated that they are willing to buy mortgage bonds and bonds in debt laden countries such as Italy and Spain in large quantities should the need arise.

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Downturn for luxury in Asia: British luxury goods maker Burberry (not in our portfolios) shocked the market with a substan-tial reduction in sales in Asia, and warned of tougher times for those relying on rich Asians.

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17



Central bank heads Mario Draghi of the ECB

and Ben Bernanke of the Fed delivered stimu-

lus packages that have reduced risk aversion

in the financial markets. Stocks are still priced

cheaply and are rising in value despite social

unrest in southern European countries.

Stocks are cheap. We have said this repea-

tedly over the past year and will keep repea-

ting the message as long as it holds true.

Due to low pricing, stocks are an attrac-

tive investment opportunity in spite of the

obvious uncertainties in the global economy.

The best proof of this is the return this

year. The global stock index has given a return

of 13.9 percent in the past nine months,

despite recurring signs of panic about the

debt situation in a number of European

countries and their governments’ difficulty

handling the situation. The world’s biggest

economic engine, China, also experienced

disappointing economic development over

the summer. Nonetheless, stocks have risen.

The reason for this is quite simple. Stocks

are fundamentally cheap and companies are

able to create value despite uncertainty and

difficult conditions. The average return on

equity for companies in the global market

index is 11.9 percent. Regardless of the valua-

tion method used, stocks are being traded at

historically low multiples in our view.

Growth in buybacks

This becomes even clearer when one compa-

res stocks with the extremely popular bond

market, where yields have been traded down

to very low levels. Thus, investors earn more

in dividends from their stocks than interest

from their bond investments, which is a his-

torical rarity.

Companies have strong balance sheets,

helped by record-high profit margins and a

cautious approach to major new investments.

Another thing investors can take note of is

the strong growth in companies’ share buy-

backs. This also demonstrates that they con-

sider their own shares to be cheap.

Looking at the individual regions and sec-

tors in the stock market, European companies

are currently priced cheaply. China was pre-

viously priced at a significant premium, but

this has now transformed into a discount. On

a sector basis, investors are generally willing

to pay much more for companies with stable

cash flows due to the economic uncertainty.

However, we do not share this willingness,

so we only have small amounts invested in

medicine and consumer staples.

History tells us that it has been best to

invest at times of obvious great uncertainty

and concern with a resultant low pricing of

stocks. We do not believe it will be any diffe-

rent this time, which will benefit patient and

long-term equity investors.

Fed-Ben and ECB-Mario chart a course for

the stock market

During the third quarter, the stock market con-

tinued its positive development from the start

of the year, following a weak period in the

second quarter. The global market index rose

by 5.0 percent measured in euro over the past

three months, while the Emerging Markets

and the Oslo Stock Exchange’s main index

rose by 6.0 and 12.0 percent, respectively.

The primary focus was again on the cen-

tral banks and they delivered exactly what

investors had hoped for. The European and

US central banks both launched new initiati-

ves to stimulate economic growth and reduce

risk premiums in the capital market.

Thus stock prices rose despite slowing

growth in China, renewed social unrest in

southern Europe and disappointing key eco-

nomic figures.

All of our equity funds made gains in the

third quarter, while SKAGEN Global and SKA-

GEN Kon-Tiki beat their benchmark indexes

and the fixed income funds all performed

well. The development of the individual funds

is described from page 20 onwards.

Buying back their own shares: Microsoft founder and chairman, Bill Gates, has been a frequent buyer of his own cheap shares on behalf of the company. Shown here playing with his good friend Warren Buffett at Berkshire Hathaway’s annual shareholder gathering in Omaha, Nebraska. Like SKAGEN Global, Warren Buffett also sees Microsoft as an attractive company. But given his close friendship with Bill Gates, and for fear that people will think that he knows more than he does, Buffett has not taken the risk of buying Microsoft shares.

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18



Southern European problems

Rising yields throughout the summer on Ita-

lian and Spanish national debt once again

sparked a political process in Europe.

After a great deal of speculation and signs

of internal disagreement in the European

Central Bank, Mario Draghi introduced yet

another initiative to curb market concerns

about the southern European countries’ abi-

lity to manage their national debt.

Judging from the decrease in yields on

Spanish national debt and the accompanying

increases in the world’s stock markets, the

initiative worked. It bought time and reduced

panic and risk premiums in the capital mar-

kets. However, the ultimate solution to the

European problem will be found in structural

reforms. As is clearly illustrated by virtually

every news report, politicians in the southern

European countries face a challenge in con-

vincing themselves and their countrymen that

painful reforms are the right way forward. This

task is complicated by the period of high but

unsustainable growth in these countries that

followed the introduction of the euro, after

which they have been subject to unexpected

and drastic cutbacks.

Federal Reserve Chairman Ben Bernanke

also introduced new measures in an attempt

to stimulate economic growth and increase

inflation expectations in the world’s largest

economy. The somewhat limited price reac-

tion by the stock market following the announ-

cement is not a reflection of disappointment

in the market. The plan was already priced

into stocks, as it was foreshadowed in pre-

vious statements by Bernanke.

Just as in Europe, American politicians are

facing the challenge of high national debt,

which sooner or later must be addressed,

despite the increasingly difficult framework

in which the political system and Congress

operate.

As a stock investor, one can hope that the

two political parties in the United States can

finally agree to begin this process after the

upcoming presidential election.

When you meet American companies, the

recurring message is that new investments

are hindered by the high level of uncertainty

about the future framework of the economy.

The latest quarterly economic indicators pro-

vided some bright spots, such as the appa-

rent turnaround in the housing market, which

is essential to lasting improvement in the US

economy.

Paralysed politicians

It is difficult to explain to outsiders that bad

economic news can be good news for prices in

the financial markets. However, bad economic

news often increases the markets’ expecta-

tion of an imminent intervention by the central

banks. We have seen this mechanism have a

strong impact in the past quarter.

Fundamentally speaking, there is

obviously nothing positive about the weak

data we have seen in Europe over the past

quarter. Unfortunately, however, politici-

ans have been seemingly unable to make

the necessary but unpopular decisions until

they are absolutely forced to do so. Undou-

btedly, politicians fear for their re-election,

but the crisis has also revealed the difficultly

of intergovernmental decisions within the

euro framework, as a number of traditional

tools for eliminating economic tensions are

eliminated by the single currency.

In the past three years we have seen a pat-

tern in which the lack of necessary measures

to improve the situation in Europe has led

Source: JPMorgan Markets 28 sept 2012

China

Asia excl. Japan

Emerging markets

Latin America

Japan

USA

Developed countries

Euro area

-7 -5 -3 -1 1 3 5 7 9 11

Regional GDP growth percent 20112012e7,6

9,3

6,17,4

4,75,8

2,94,2

2,0-0,7

2,11,8

1,21,3

-0,51,5

SLOWING GROWTH IN THE WORLD ECONOMY

Economic growth in the euro area is expected to be negative this year while the growth rate in the emerging markets is cle-arly falling, in particular in China. The US and Japan can both boast of higher growth (2011 was particularly weak for Japan due to the earthquake outside Tokyo).

Source: Bloomberg, Goldman Sachs Global ECS Research

Share buybacks Number

01 02 03 04 05 06 07 08 09 10 11 12

900

800

700

600

500

400

300

200

100

0

EUROPEAN COMPANIES BULK BUYING THEIR OWN SHARES

Having reached their lowest level in 2009-10, share buybacks among European companies are back up to old highs.

Source: Bloomberg

2-year interest rates, 2012 Percent

Jan Feb Mars April May June July Aug Sep

6,5

5,5

4,5

3,5

2,5

1,5

7,0

Italy

Spain

INTEREST RATES IN CRISIS COUNTRIES SPAIN AND ITALY FALLING

After the head of the European Central Bank, Mario Draghi put his foot down and promised to do what it takes to save the euro, Spanish and Italian interest rates have declined substantially.

19



to mistrust in the capital markets. The sub-

sequent stress in the markets and high risk

premiums have forced the central banks to

act to relieve the immediate negative conse-

quences. Germans know that they are being

pulled in the direction of having to guaran-

tee the debt of weaker nations, but balk at

this solution. Meanwhile, the countries are

also being pulled in the direction of a fiscal

policy union.

Growth in China disappoints

The economic development in China also att-

racted attention during the period. We recei-

ved a steady stream of data confirming that

growth in China is slowing. For example, the

annual growth rate for imports and exports

is currently hovering around zero.

Through our business visits to Asia in the

past quarter, we have also confirmed a clear

picture of slowing growth in the Chinese eco-

nomy. This is particularly evident in the larger

cities such as Shanghai and Beijing, where

economic development has already reached

a level where continued strong growth seems

unrealistic. The problem for a number of com-

panies is that the supply of goods and ser-

vices has not been adjusted in line with the

lower growth in demand.

This has resulted in unpleasant surpri-

ses for consumer-related companies that sell

expensive branded products in China. We

have not invested in this sector, however, as

a result of high company valuations.

The Chinese government’s typical answer

for weak economic data has been invest-

ments in infrastructure and encouraging

increased investments in the private sector,

for example through changes in regulation of

the property market and orders to the state-

owned banks to increase lending growth.

Things have been very quiet this time

around. The Chinese government seems to

be content with lower economic growth than

it has previously accepted. The Chinese also

appear to have decided to stay the course

towards a stronger role for private consump-

tion and service in the nation’s economy, at

the expense of major capital investments.

The big test of this will come if the continued

economic lull leads to massive redundan-

cies, as was the case during the 2008-09

financial crisis.

The lack of activity in China’s capital-

intensive industries has had a significant

impact outside of the country. Most visible

is the continued drop in prices for a number

of raw materials, and thus for the companies

involved in these sectors, as outlined in the

reports on our equity funds. Oil is doing bet-

ter than raw materials; the reason for this is

somewhat unclear to most, but an expecta-

tion of unrest in the Middle East could be a

factor.

The slower growth in China is also evident

in the domestic stock exchange – where few

foreigners are permitted to invest – which

once again this year looks to end among the

worst performing in the world. The time when

Chinese stocks were traded at a high premium

to the rest of the world is a thing of the past.

Most Chinese companies are traded today

with a “China discount”. The reason for this

is usually a fear of bad corporate governance,

while the state-dominated companies have

proven to value the realisation of political

goals above value creation for shareholders.

1 600

1 400

1 200

1 000

800

600

800

700

600

500

400

300

S&P GSCI (right)

S&P500 (left)

2009 2010 2011 2012

Source: Capital Economics

QE 1

QE 2QE 3

QUANTITATIVE EASING STIMULATES THE STOCK MARKET

A move by the Federal Reserve to buy government bonds (QE) has pushed up prices of US shares (S&P in red) and commo-dities (blue). The effect of quantitative easing on the stock market appears to be waning.

Source: Morgan Stanley Research, MSCI, 4 okt 2012

35

30

25

20

15

10

5

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

MSCI World

MSCI EM

P/E-number Times

13,5

11,3

P/E NUMBERS ARE MOVING TOWARDS THEIR HISTORIC AVERAGE

Share prices have risen more than companies’ earnings over the past year so that the price you pay for the latter has risen (P/E). The discount that companies in emerging markets are priced at relative to those in the developed market has also increased.

Source: Morgan Stanley Research, MSCI, 4 okt 2012

18

16

14

12

10

8

6

4

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

MSCI World

MSCI EM

Return Percent

13,6

11,9

THE RETURN ON COMPANIES’ EQUIT Y HAS PEAKED

The effi ciency gains that companies attained after the fi nancial crisis struck in the autumn of 2008 have been taken out and return on equity is on its way down, though from a high level. It will be increasingly important to achieve top line growth going forward, without costs going through the roof.

20



The price of liquidity

Low turnover and investor preference for liquid

stocks has impacted performance on the Oslo

Stock Exchange and many other stock markets

around the world over the past few years (see

graph). Investors have avoided putting money

into stocks of high quality companies, where

the price of both earnings and book value is

low, but where liquidity in the shares is poor.

Given the extremely uncertain times in the

world economy, with risk on/risk off being the

theme tune of the stock market, investors have

paid a relatively high premium for liquid sha-

res. Rather than being guided by the value

development and results from companies,

investors have hopped back and forth, dancing

to the tune of central bank chiefs, whether they

be Ben Bernanke or Mario Draghi.

Is alpha dead?

Some people maintain that alpha is dead

(measured by risk adjusted excess return);

that it is not possible for active managers to

attain results beyond what is achieved by

the market, taking risk into account. Informa-

tion about companies is increasingly easy to

access. Anyone can access the web and track

down all kinds of financial data about various

companies listed on stock exchanges the world

over. Not to mention competitor analysis, deve-

lopment in market shares – you name it – all

free of charge.

If alpha is dead, this indicates that the stock

market is converging towards becoming effi-

cient. That is, that all available information at

all times is baked into share prices, so that the

stock market is always right when it comes to

the pricing of companies.

How then to explain the increased volatility

in the stock markets? Over the past five years

fluctuations on the world’s most liquid and

thoroughly analysed stock exchange – the US

one – have been substantially higher than has

been the case historically.

For example, the number of days when the

stock market has moved up or down by more

than two percent has risen dramatically. We

are talking here about daily share price fluc-

tuations that are higher than the total annual

return you would get from lending money to the

US government for ten years. In 2011 equity

investors experienced correspondingly high

price fluctuations almost every third market

day (on average).

Expensive to trade

Another problem that arises for us equity

investors when volumes dry up, is the price

we have to pay to trade. In the less liquid sha-

res on the Oslo Stock Exchange the cost of

switching around a portfolio can be significant,

due to the major difference between the buy

and sell prices (spread).

For investors of a certain size, large spreads

can have an inhibitory effect on the desired

allocation and optimization of the portfolio.

Not being able to carry out trades at the right

price means that you can end up holding onto

shares you wish to sell – but not at any price.

Likewise, investment ideas die because the

cost of replacing an existing investment with

a new one is too high.

Not appreciated

SKAGEN Vekst has an equity portfolio with

a clear overweight of small and medium-

sized companies, primarily on the Oslo Stock

Exchange. It is within this segment of Norwe-

gian stocks that we find the most attractively

priced companies. Developments over the past

year have caused the relative gap to large com-

panies to grow ever greater.

The OBX index, for example, which repre-

sents the 25 most traded companies on the

Oslo Stock Exchange, has provided over 40

percent better returns since the start of 2010

than the index for small and medium-sized

CONTRIBUTORS THIRD QUARTER

LARGEST PURCHASES/SALES JULY-SEPTEMBER

g g

SKAGEN VekstPERFORMANCE (EUR) JULY-SEPT 2012* YEAR TO DATE*

SKAGEN Vekst 3.3% 11.8%

MSCI/OSEBX Index 8.8% 17.8%

*As of 28 September 2012

SKAGEN Vekst team

Portfolio managers Ole Søeberg ,Geir Tjetland and Beate Bredesen

SKAGEN VEKST KEY FIGURES FOR THE LARGEST HOLDINGS

21



companies, OSESX.

General information about companies has

admittedly become public property, but infor-

mation must still be analysed, interpreted and

processed before a decision can be made. We

still believe in the philosophy of buying one

euro for fifty cents.

It is curious that the strong share price

development of the subsidiary of the Fred

Olsen companies Bonheur and Ganger Rolf,

Fred Olsen Energy (52%), has not been reflec-

ted in the share prices of the parent compa-

nies. Likewise, Wilhelmsen Holding has not

taken part in the upturn of the share price of

its subsidiary Wilhelm Wilhelmsen ASA (73%).

This phenomenon is well illustrated by the

graphs.

Although in the case of several of our

investments in the portfolio it may seem as

though alpha has been unwell for several

years, we believe that the rumours about the

death of alpha are wildly exaggerated.

Much of the gap between how the stock

market prices a company today and what we

believe is the right price can be attributed to

liquidity, or more precisely the lack of it. The

wealth tax which is very specific to Norway

also plays a role in dissuading family-control-

led companies from seeking to optimize valua-

tion in their listed instruments.

Given these conditions our clear view is that

the high discount for several of our medium-

sized and small companies on the Oslo Stock

Exchange cannot last forever. So although we

have lost ground against the benchmark index

for a time, we expect to be paid slightly further

down the road – when investors are less con-

cerned with liquidity and set greater store by

being able to get one euro for 50 cents. Equity

investing is not solely about identifying the

next Apple or Samsung.

Cannot blame the market

We cannot of course blame the market for

SKAGEN Vekst’s poor results in the third quar-

ter, but merely note that the larger companies

on the Oslo Stock Exchange attained on aver-

age 12 percent better returns than the small

and medium-sized companies.

When it comes to the largest negative con-

tributors to the fund’s result in the quarter,

there is no way of avoiding our Norwegian

exposure within the supply sector. Siem Off-

shore and DOF in particular detracted as their

share prices fell 14 and 12 percent respecti-

vely. The rate development throughout the

summer never got the lift that is usual for this

time of year and disappointed investors redu-

ced their stakes.

In our opinion DOF is a misunderstood com-

pany on the Oslo Stock Exchange. It is percei-

ved as a supply company by investors, on a par

with companies such as Farstad Shipping and

Siem Offshore. Over the past few years DOF

has focused increasingly on activities within

subsea, and this is where the lion’s share of the

earnings now comes from. We believe that the

stock market will also come to understand this

gradually and price the company substantially

higher than it is today.

The fund’s largest investment, Kongsberg

Gruppen, experienced a slight decline in the

period despite positive news flow with the

announcement of several new contracts. The

stock markets do not seem to be willing to

price the good news into the stock as many of

the orders will only be visible in the financial

statements from 2015 onwards.

Odfjell, one of the fund’s smaller invest-

ments, had a dismal performance and ended

the quarter down 31 percent. This is due to

the unfortunate combination of an accident

which impacted the partially owned terminal

in Rotterdam (51%), with the ensuing increased

costs, as well as the weaker than expected

development of their chemical tanks.

The Brazilian electricity producer, Eletro-

bras, also performed weakly. For a more in-

depth description, please read the SKAGEN

Kon-Tiki report on page 26.

Up substantially in cruise

Of the positive contributors we would first of all

like to draw attention to Royal Caribbean Cru-

ise Line (RCL). We substantially added to our

position throughout the summer and at the end

of the quarter, RCL was the fund’s third largest

investment (4.5%). The RCL share is trading at

a 25 percent discount relative to book equity

Source: Oslo Stock Exchange

Turnover and number In thousands (’000)

2000 2002 2004 2006 2008 2010 2012 (YTD)

100

90

80

70

60

50

40

30

20

10

0

14

12

10

8

6

4

2

0

Number/day (left)

2,410,1

2,310,3

1,89,4

2,29,7

3,613,5

6,021,7

10,335,2

9,966,9

6,162,7

7,275,8

6,090,0

4,389,0

12,948,6

Turnover/day, NOK bill. (right)

SHARE TRADING PLUMMETS ON THE OSLO STOCK EXCHANGE

Total Return

Jun ´10 Sep ´10 Dec ´10 Mar ´11 Jun ´11 Sep ´11 Dec ´11 Mar ´12 Jun ´12 Sep ´12

120

100

80

60

40

20

0

-20

Wilh. Wilhelmsen Holding–B

Wilh. Wilhelmsen ASA

Wilh. Wilhelmsen Holding–A

Source: Bloomberg

AND THE PRICE OF WWL ASA HAS DEPARTED FROM THAT OF WWL HOLDING

Source: Bloomberg

Total Return

2007 2008 2009 2010 2011 2012

40

20

0

-20

-40

-60Bonheur ASA

Ganger Rolf ASA

Fred Olsen Energy ASA

GANGER ROLF AND BONHEUR LAG FAR BEHIND SUBSIDIARY FRED OLSEN ENERGY

22



and at 13 times this year’s expected earnings.

The outlook for the cruise sector in general

and RCL in particular seems to be extremely

good. There are historically few orders of new

cruise ships for delivery over the next few

years. The most important market for RCL, the

US, appears to be improving while the poten-

tial in Europe is good – when the crisis mood

abates. We anticipate a significant improve-

ment in return on equity in RCL going forward.

Petrobras was also a good contributor

through the quarter (see SKAGEN Kon-Tiki

page 26).

Despite the legal noise around competitors

and business connections between Apple and

Samsung Electronics, the latter performed

extremely well (see SKAGEN Kon-Tiki, page 26)

Our investments in the Fred Olsen compa-

nies Bonheur and Ganger Rolf also contributed

nicely, but as mentioned above, the discount

to the underlying values is high. This should

vouch for a continued share price develop-

ment for the Fred Olsen twins.

Full speed ahead with SAP and Continental

Last but not least we must highlight two relati-

vely new investments in SKAGEN Vekst; the Ger-

man software company SAP (see article on page

10) and German tyre maker Continental. Both

contributed significantly to the fund’s result.

Continental was up over 16 percent. At the

end of September its largest shareholder, the

privately owned Schaeffler Group, sold 10 per-

cent of the outstanding shares, thus reducing its

stake in Continental to 49.9 percent. We used

the opportunity to increase our exposure in Con-

tinental, which we believe to be a high quality

company with a still low price tag.

Schaeffler, somewhat unluckily, bought the

Continental shares in an offer that expired two

days after Lehman collapsed in 2008 and hence

got more shares than they intended, given the

price and market conditions. With the recent

sale the overhang in Continental is gone.

We continue our work to concentrate the

SKAGEN Vekst portfolio. During the third quarter

we bid farewell to 18 companies. At the same

time we increased the concentration of the 12

largest investments from 33 to 36 percent.

Read more about the fund on page 32

SKAGENFUNDS.COM/SKAGEN-VEKST

Good contribution from cruise: The best contribution to SKAGEN Vekst in the third quarter came from Royal Caribbean Cru-ise Line, which now constitutes 4.5 percent of the portfolio.

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Discount growing: The significant increase in the share price of Fred Olsen Energy (FOE) has not been reflected in the share prices of Bonheur and Ganger Rolf, which own 51 percent of the shares in the rig company. The wind mill operations of the two Fred Olsen companies have not yet taken off.

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23

Surprisingly strong

SKAGEN Global performed well in Q3, both in

absolute terms and relative to its benchmark

index. Generally speaking, we were helped

by the quarterly figures from our portfolio

companies, which were much better than we

or the market expected.

With a price increase of 43 percent, Vim-

pelcom was Q3’s best contributor (see table).

The company reported very strong operatio-

nal improvement; increased data use and a

general improvement in margins were the

main reasons that cash flow (EBITDA) reached

12 percent. The flat performance in Italy

should also be viewed positively, conside-

ring the prevailing conditions in that country.

The decrease in margins in the Ukraine was

higher than expected, however.

Both of the major shareholders in Vimpel-

com, the feuding rivals Telenor and Altimo,

increased their ownership interests in the

company. The dispute between the two, and

the related legal injunction from a Russian

court against the payment of dividends from

the Russian subsidiary, continues to put a

damper on the share price. A solution to the

dividend problem may give a further boost

to the Vimpelcom share price.

Citigroup hits back

After a disappointing Q1, the market was

surprised positively by Citigroup’s results

for Q2, and by the end of the quarter the

American bank’s shares had increased by

20 percent. Citi Holding has continued to

make divestments (all assets that are not

part of the bank’s core activities are gathered

in Citi Holding) such that the ‘bad bank’ now

accounts for just 10 percent of Citigroup’s

balance sheet.

A price tag of eight times this year’s expec-

ted earnings and 0.5 times book equity

should indicate sustained sound price deve-

lopment for Citigroup.

SCA transformation

Swedish SCA returned an operating profit

for Q2 that exceeded both expectations and

the equivalent period last year; the shares

increased 19 percent as a result.

The sale of its packaging companies and

the acquisition of Georgia Pacific’s European

personal care activities mean that the mar-

ket no longer perceives SCA as a cyclical,

commodities-based company. SCA now ranks

as one of the world’s leading companies for

personal care products.

As a result of this transformation, we have

changed SCA’s sector classification in the

portfolio from Commodities to Consumer

Staples. If the company leverages the added

value represented by the Swedish forest esta-

tes (2.6 million hectares), the shares could

make some more ground. Today, the forest

areas represent a small share of revenue, but

may be worth as much as SEK 50 per share.

Weak power and mining

Q3’s weakest contributor was the Brazilian

electricity company Eletrobras. The ordinary

shares fell by 14 percent, while the preference

shares were down 4 percent. The price drop

was a consequence of a proposal from the

Brazilian government in relation to the terms

for power concessions that expire in 2015-

2017 (see further comment under SKAGEN

Kon-Tiki, page 26).

Cliff Natural Resources, the American coal

and iron ore mining company, was no gold-

mine for the fund either. Operational develop-

ment in Q2 was weak, while iron ore prices

plummeted by 25 percent. Increased supply

and lower demand from China are a bad com-

bination and the share price ended down 19

SKAGEN Global

Portfolio managers Kristian Falnes, Torkell Eide, Søren Milo Christensen and Chris-Tommy Simonsen.

PERFORMANCE (EUR) JULY-SEPT 2012* YEAR TO DATE*

SKAGEN Global 8.98% 13.3%

MSCI AC 5.64% 13.9%


SKAGEN Global team

SKAGEN GLOBAL KEY FIGURES FOR THE LARGEST HOLDINGS


LARGEST PURCHASES/SALES JULY-SEPTEMBER



24 P O R T F O L I O M A N AG E R S R E P O R T

percent. In view of the poorer earnings out-

look, we halved our stake in the company.

With a moderate price drop of 2 per-

cent in US dollar terms, Microsoft came in

third on the list of Q3’s poorest performers.

Microsoft’s results were satisfactory and the

shares are still cheap at ten times this year’s

expected earnings. How future product laun-

ches, headed by Windows 8, are received

will determine the valuation going forward.

The fact that Microsoft, with its relatively

stable share price performance, is among the

fund’s poorest performers in Q3, illustrates

the valuation upswing that has taken place

across the board. In other words, the majority

of our portfolio companies have demonstra-

ted positive price movements.

American insurance and capital management

A new company in the portfolio is the Ameri-

can insurance group American International

Group (AIG). In the wake of the financial crisis,

which saw AIG make heavy losses on deriva-

tives, the company had to accept a bail-out

from the Federal Reserve Bank to survive.

Recently, the US Treasury has significantly

reduced its stake in AIG, and is now down to

a position of around 15 percent. We bought

shares in AIG both prior to and in conjunction

with the last major Treasury divestment.

AIG is one of the world’s largest insurance

corporations for both general (Chartis) and

life insurance (Sun America). A chequered

history, public ownership, and a return on

equity as low as 6 percent mean that AIG’s

shares are priced at a considerable discount

to book equity. We believe that in the course

of two to three years, this company should

be able to achieve a double-digit return on

equity and a price target equivalent to book

equity of 60 dollars per share does not seem

unrealistic. The share price at the turn of the

quarter was 33 dollars.

Another new but far smaller American

financial services company in the portfolio

is the capital management company, Fortress

Investment Group. The company’s share price

solely reflects the value of the current fixed

fees. With several funds delivering good rela-

tive yields, the outlook for variable, results-

based fees is bright. We therefore consider

this company to be significantly undervalued.

‘Government Motors’

General Motors (GM) – popularly called

Government Motors – is a new entrant to the

portfolio. Like AIG, GM also had to be bailed

out by American taxpayers in the autumn

of 2008. High debt and bad management

were a losing combination in the throes of

the financial crisis, when its capital dried

out completely. Today, GM is run on a much

better footing, and the company has delive-

red sound profitability for ten consecutive

quarters. The balance sheet is strong with

net cash reserves.

GM has two main challenges that, together

with public ownership (32 percent), have led

to negative share price development since the

company was re-listed two years ago.

Firstly, the company’s European activities,

with Opel playing a key role, are producing

high losses and there is great concern about

GM’s ability to prevent this haemorrhaging.

Secondly, the company has considerable

uncovered pension obligations, carried at 25

billion dollars on its balance sheet. However,

today’s cash reserves are more than enough

to pick up this ‘tab’.

With a market share of around 12 per-

cent, the company, which is a joint venture

(50/50% ownership with Chinese partner), is

a leader in China, operating at good profitabi-

Cultivating hygiene: Swedish SCA is no longer viewed by investors as a cyclical commodity company, but rather as one of the world’s leading companies in hygiene products.

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No gold mine: Weak operational developments and iron ore prices – which have fallen 25 percent – resulted in a 19 percent drop in share price for US iron ore company Cliff Natural Resources in the quarter. We halved our position in the company on the back of the weaker earnings outlook.

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25

lity. The North American market, representing

around 60 percent of total revenue, is still the

most important to GM’s future. Operations in

this market are also satisfactory. After GM

lost domestic market share over a sustained

period, it now seems to be stabilising at just

below 20 percent.

A steady flow of new model launches in

the next few years should bolster both pro-

fitability and market position. The USA’s car

fleet now has an average age of 11 years and

car sales have a long way to go to reach the

levels seen before the onset of the financial

crisis.

We consider a price tag for GM equivalent

to seven times this year’s expected earnings,

including high losses in Europe, to be att-

ractive. Earnings growth, government share

divestment and the introduction of dividend

payments are natural triggers for a re-rating

of GM’s shares.

We have also bought into an American

automotive component manufacturer, TRW

Automotive Holdings. Roughly 60 percent

of this company’s revenue is from the gro-

wing automotive safety segment. The share

is underpriced in relation to current earnings,

while a strong balance sheet gives scope for

increased buy-back of own shares and/or

distribution of higher dividends to sharehol-

ders.

Chinese mobile switch

In recent months we have reduced our holding

in China Mobile, in favour of its competitor,

China Unicom. This year the former achieved

40 percent better share price performance

than its competitor. Even though China

Mobile is by no means priced highly, China

Unicom has a network position that makes it

better equipped to increase its share of the

growing Chinese 3G market.

After strong share price performance we

have reduced our holdings in Unilever, Pfi-

zer, Hannover Re, Gjensidige, Comcast and

Aberdeen Asset Management. All of these

companies have approached our fundamen-

tal price targets. Raisio and Osaka Securities

Exchange were sold completely from the port-

folio. Most of the shares in the latter were

sold in conjunction with a bid from the Tokyo

Stock Exchange.

Even after Q3’s strong price develop-

ment, the portfolio is still priced attracti-

vely, in terms of both current earnings and

book equity. SKAGEN Global’s unit price is

now approaching the ”all time high” of NOK

864 on 13 July 2007 but in the last five years

the companies have generated considerable

value and are currently priced significantly

lower than in 2007. If today’s portfolio were

priced at the 2007 P/E of 12.3x, SKAGEN

Global’s unit price would be around NOK

1,400.


SKAGENFUNDS.COM/SKAGEN-GLOBAL

Switched Chinese mobile: After a relatively stronger share price development for China Mobile we have gradually reduced our position in the share and instead bought into China Unicom, which is better positioned in the growing Chinese 3G market.

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26



SKAGEN Kon-Tiki

Acceptable

In a third quarter characterised by further

stress in the Eurozone and continued doubts

about economic growth in China, SKAGEN

Kon-Tiki achieved acceptable results.

We were punished for our underweight

position in commodities and overweighting

of pharmaceuticals which were the quarter’s

respective losing and winning sectors. Geo-

graphically, the Chinese equity market conti-

nued its weak growth, led by domestic equi-

ties (A-shares), which are not available to

overseas investors. Egypt, India and South

Korea produced positive surprises. Previous

loss-making markets this year, such as Rus-

sia and Brazil, also delivered good returns.

Crucial to development in emerging mar-

kets in future will be the action taken by seve-

ral countries to stimulate the economy and

improve the structure.

Investors are a little more selective

We saw a trend towards greater differentiated

pricing of individual companies and equity

markets than we have witnessed during the

last couple of years, where there has been a

great deal of synchronisation.

As always, irrespective of the market,

we are focusing on creating future value by

investing in companies which give us the best

return for our money. This year we have also

found that state-dominated companies with

clear social agendas are not the favourites

of investors. Experience from previous deca-

des has shown that predictable corporate

governance and good value creation pay off

over time.

Concession blow for Eletrobras

The greatest negative surprise of the quarter

came from the Brazilian state, which in Sep-

tember proposed new procedures for rene-

wing concessions in the Brazilian electricity

sector. This has hit our investment in state-

dominated Eletrobras (3.4% of the fund).

In previous concession renewals, Eletro-

bras paid the government a price which allo-

wed the company to achieve an eight to 10

percent return on invested capital. The pro-

posal which the Brazilian government has

now put forward, which applies to both the

network and power generation means that all

concessions renewed in the years until 2017

will either be withdrawn or renewed at prices

which only cover direct costs.

Eletrobras has not decided what it will

do. Should concessions be withdrawn, com-

panies will be compensated for the residual

book value of the power plants. But one can

also question whether the real book value

is in line with the government’s perception

of fair value. Concessions granted after the

power reform of 2004 will continue unchan-

ged. All measures taken are in accordance

with laws and regulations, even though there

is considerable disagreement about inter-

pretation.

Nevertheless, we assess that Eletrobras

will have to pay considerable restructuring

costs. In a meeting recently held with the

company in Stavanger, they claimed that a

return of the current concessions would result

in them having greater financial power. This

is correct in the short term, but these assets

must be reinvested in new concessions.

While several considerably higher-valued

companies within the Brazilian energy sector

suffered significant share price losses when

PERFORMANCE (EUR) JULY-SEPT* YEAR TO DATE*

SKAGEN Kon-Tiki 6.2% 10.1%

MSCI Emerging Markets Index 6.1% 12.9%


SKAGEN Kon-Tiki team

Portfolio managers Kristoffer Stensrud, Knut Harald Nilsson, Cathrine Gether and Ross Porter


LARGEST PURCHASES/SALESJULY-SEPTEMBER

SKAGEN KON-TIKI KEY FIGURES FOR THE LARGEST HOLDINGS

27



the news about concessions was published,

Eletrobras prices declined relatively moderately.

Approximately 25 of the 58 Brazilian Reals

which today constitute the book value of

each Eletrobras share are exposed to risk if

the government’s concession proposals are

approved. The Eletrobras share price was

just over 18 Reals at the end of the quarter.

Due to uncertainty about the renewal of

concessions we have considerably reduced

our expectations of Eletrobras’ future ear-

nings and our share price target as a result.

Our ordinary shares have been sold, but we

have kept the preference shares. These give

us a running return on investment of approx-

imately nine percent per annum.

From 2015 onwards, we estimate that

operating income will improve considera-

bly and therefore also the return on equity.

Based on book equity of at least 30 Reals for

every Eletrobras share, contracts entered into

should pay a return on capital of 8-10 percent.

The positive aspect of the government’s

proposed new concession rules is that Eletro-

bras’ framework conditions will be predicta-

ble in the coming years. Terms and conditions

will be decided definitively during October.

Eletrobras has time until 4 December to make

up its mind whether it will hand back current

concessions, effective from February 2013.

Except for Eletrobras, there were no other

surprises among the funds’ other major

investments. The company’s earnings in the

second quarter were in line with or somewhat

better than expectations.

Hard-pressed gas market in the USA

The second quarter figures for the US oil ser-

vice company Baker Hughes were better than

most people had been expecting. High oil

prices and investment willingness among

the oil companies continue to provide a good

backdrop for the historically cheap Baker Hug-

hes shares. The same can be said of Archer,

which would benefit greatly by putting the

operations of the company in order.

Continued strong competition and pres-

sure on prices in the US are contributing to

general scepticism about the sector among

investors. Despite this, we see considerable

upside to the global hunt for unconventional

hydrocarbons.

The major risk of even lower gas prices

in the US resulted in us selling completely

South African Sasol, which is strong within

the gas processing sector. The combination

of a slightly more liberal pricing policy for the

sale of oil and petrol in Brazil and promises of

increased future oil production resulted in a

welcome share price increase for Petrobras.

Commodities were forced down

Weak indicators from the Chinese economy

and a creeping suspicion that the world is

not in the process of running out of resources

after all, led to commodity stocks having a

tough time during the quarter. Therefore, the

Brazilian iron ore company Vale was one of

the fund’s greatest losers. We exploited the

poor growth in commodity shares to buy up

ENRC and Exxarro. The companies can point

to good cash flows, which provide a compe-

titive earnings base for the future.

Due to scepticism about the global econo-

mic climate, we are still comfortable with the

low commodity weighting in the portfolio. As

a general rule we do not speculate in commo-

dity prices, but value the companies based

on their internal dynamics, which should be

positive.

Misunderstood tractors and combine

harvesters

CNH Holding, the world’s third largest produc-

tion company for farming machines such as

tractors and combine harvesters, is a newco-

mer to the portfolio. The company is priced

in line with its book equity and issues ear-

nings forecasts eight times a year. During the

autumn, CNH Holding will merge with its main

owner Fiat Industrial, which above all produ-

ces IVECO lorries. The merger will improve the

liquidity of the shares.

Traditionally, the farming machinery sec-

tor is cyclical. Five years of constant price

rises for farming products indicate to us that

the sector is underinvested. Even without a

revaluation of the sector, the chances are

good for CNH Holding to deliver a return on

capital which should guarantee good share

price growth in the future.

We also purchased shares in the Spanish

company Abengoa, an engineering company

which constructs and builds solar power sta-

tions, water purification plants and transmis-

sion lines. In the course of the next couple of

years, the company will also have concession

activities up and running which will contribute

to stable earnings. Although only 27 percent

of revenues currently come from the domestic

market, Abengoa’s share price is subject to a

Spanish discount. A planned stock exchange

launch in the USA could contribute to the

revaluation of the company.

After a good flight, some of our holding in

AirAsia was sold. We bought into Egyptian

Orascom Industries, where a splitting up of

the company could result in the revaluation

of both the company’s fertilizer and construc-

tion sections.

Cautious moves into the solar section

Through the purchase of shares in REC and a

small increase in the holding of Yingli Green

Energy shares, we move cautiously further

into the solar energy market. The solar cell

market is still disastrous, with declining pri-

ces and major overcapacity as well as cus-

toms barriers being raised. However, as prices

of components fall, profitability for the solar

panel market will rise and the political will

Concession blow: The Brazilian state proposed new procedures for renewing concessions in the Brazilian electricity sector in September, which impacted our holding in the state-dominated Eletrobras (3.4%).

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28



to invest in renewable energy will move from

developed countries to the emerging markets.

Both REC and Yingli Green Energy look like

being candidates for survival in an extremely

difficult sector and company valuations are

gradually becoming more level-headed.

The cruise sector looks like it is sailing

towards better times. Ticket prices are rising,

whilst costs are heading in the opposite direc-

tion. Moreover, order books are historically

thin. For a relatively low price tag compared

with competitors we took a position in Royal

Caribbean Cruise Line.

After a long period of poor growth with

few bright spots on the horizon the rest of the

ordinary shares in LG Electronics were sold.

We still hold the preference shares, which

have good dividend returns and trade at a

discount to the underlying assets. As the

business model of the Chinese distributor

of electrical equipment Gome showed signs

of failing, we sold our stake in the company.

Strong contributors during the period were

Indian Mahindra & Mahindra and Chinese

Great Wall Motors. The two companies con-

tinue to impress, both in terms of their busi-

ness models and their development abilities.

Heineken captures Tiger

Our position in the Dutch Heineken brewery

was increased. The company was strong in

Emerging Markets, and has put in a bid for

the whole of Asia Pacific Breweries (APB), of

which they have long been the largest sha-

reholder. APB owns several strong brand

names, of which Tiger is the most valuable.

As the takeover offers opportunities for

increased sales for the number two in beer

in Thailand, Thai Beverages, and possible

coordination gains with soft drinks and foods

in the previous owner of APB, Fraser & Neave,

we also bought into this company.

After a fantastic journey, we completely

sold our position in the South African retail

chain Shoprite. The company is still delivering

and it has commendable ambitions, but the

pricing of the shares now leaves only a small

margin for error.

Good pharmaceuticals and banks

Within the pharmaceutical sector, our two

main holdings in Hungarian Gedeon Richter

and Korean Hanmi Pharma, contributed well

during the period. Fundamentally, both are

developing well, while investors assess the

sector to be an increasingly safe haven in

unsettled times. After having found doubtful

figures in the accounts, we decided to sell the

shares in Arzneimittel.

Within the finance sector several compa-

nies were exited: the Thai consumer finan-

cing company Tisco, our old friend Standard

Chartered Bank, Turkish Yapi Kredi Bank, and

Taiwanese China Financial Development Hol-

ding. The latter was inherited from our holding

in KGI Securities. After a positive revaluation,

the shares in Gjensidige Forsikring were also

divested.

Purchased the Chinese Samsung

The major supplier to Apple, Hon Hai Indu-

stries, delivered a better margin than expec-

ted in the second quarter. Samsung Electro-

nics sailed through up-and-down lawsuits

against Apple and remains a winner in its

superb product development.

We bought into Chinese Lenovo, which

in 2006 acquired IBM’s PC department. The

company is growing rapidly in new markets

and is developing its activities towards ser-

vers, distributed data processing (i.e. smart

phones) and software. Shares were acquired

in Chinese Skyworth Digital, which appears

to be the Chinese response to Samsung Elec-

tronics.

Our selling-off of China Mobile continued. The

company has been a good contributor in a

difficult market. The sale proceeds were used

to increase the holding in Bharti Airtel, which

has been through a couple of difficult years

of tough competition and pricing pressure.

New regulations in the sector and a major

defection by competitors has considerably

improved the earning picture for the future.

Conditions for Bharti Airtel’s African business

model also seem to be improving.

Unprecedented upside

In recent years we have been searching for

deeply value-anchored companies which are

basically growing well, and where we see that

shareholders receive a more than proportio-

nal share of dividends.

Several of the companies in this category

are state-dominated with social agendas and

are therefore priced at a considerable dis-

count. Harder times are causing these com-

panies to also focus on greater cost-effecti-

veness, and on delivering the best possible

results to shareholders. This is not unlike the

development we saw ten years ago which

resulted in major revaluations over the sub-

sequent five years.

The fact that for a long time investors

have been jumping on and off the equity

train based on rapid changes in sentiment

(risk on/off), has enabled us to increase hol-

dings in unpopular companies with good ear-

nings and considerable underlying assets at

modest prices.

Global emerging markets have only had

limited benefits from the aggressive mone-

tary policies of heavily indebted developed

countries, which in forthcoming years will

result in reduced capital costs and also return

on investment requirements. This has led

us to see an upside for the SKAGEN Kon-Tiki

portfolio which is without precedent in the

almost 20 years we have been dedicated to

equity management.


SKAGENFUNDS.COM/SKAGEN-KON-TIKI

Cautious moves in solar energy: Through the purchase of shares in Norewgian REC and a slight increase in Chinese Yingli Green Energy we continue to move cautiously into the solar energy market. The two companies appear to be candidates for survival in an extremely difficult sector.

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In September the European Central Bank

(ECB) decided to do whatever it takes to save

the Eurozone. Given fiscal conditionality the

central bank stands ready to buy an unli-

mited amount of sovereign debt to keep a

lid on interest rate spreads in the common

currency area. This is the long sought-after

big bazooka which could solve the sovereign

debt crisis.

An unruly fi scal union

It is a radical step, however, because the ECB

is pre-empting a political discussion on an

explicit fiscal union and its necessary com-

panion – a political union. But it is a logical

step, since when the Economic and Monetary

Union (EMU) was inaugurated, Europeans in

fact created an unruly fiscal union.

The Eurozone is more than just a mone-

tary union because central bank money is

sovereign debt. And the money issued in

the form of euros or central bank deposits by

the ECB, which is owned by all the treasuries

in the Eurozone, is Eurozone-guaranteed

debt. Thus, when German chancellor Ang-

ela Merkel told German parliamentarians in

June that there would be no eurobonds “for

as long as I live” she probably already had

eurobonds in her purse.

Via the ECB the euro countries’ fiscal

destinies are irrevocably linked. Add multi-

ple centres of fiscal sovereignty, and you’ve

got the recipe for a perfect sovereign debt

storm. Germany, which adopted the euro

without first securing a political union, is like

an early Mormon who took many wives and

then found himself constrained by Catholic

divorce laws.

Monetisation is not infl ationary

Absent an immediate morphing of Antonis

Samaras, prime minister of Greece, and

other Club Med leaders into libertarian Iron

Ladies, there are two ways out of the fiscal

morass: a series of sovereign defaults, or an

orderly fiscal union. The first would lead to a

new financial crisis; the latter presupposes

an eventual political union, with Eurozone

parliamentarians ruling the roost and natio-

nal parliaments fiscally shrunk to the role of

city councils. It is the latter process that the

ECB now is pre-empting.

The new policies now pursued by the

ECB might end up monetising most of the

peripheral sovereign debt. Monetarists

would abhor it. But since monetisation is a

swap of sovereign debt for ECB debt, which

leaves the consolidated Treasury and central

bank debt unaltered, it is, contrary to Bun-

desbank claims, not inflationary. High infla-

tion is due to too much public debt, not the

mixture of Treasury and central bank debt.

Also, the ECB can issue long-term debt

instead of overnight debt. In fact, if the

Eurozone is meant to last for eternity, why

not just swap most of the ECB’s overnight

debt for central bank perpetuities? Locking

in currently attainable long-term yields on

jointly and severally guaranteed Eurozone

debt would lower the probability of a fiscally

induced price level spike.

The United States of the Eurozone

Neither voters nor politicians understood

the fiscal and federal implications of the

EMU. The tough part going forward, there-

fore, is convincing the public that mutualisa-

tion of sovereign debt via the ECB is feasible

and follows logically from the idea of a com-

mon currency.

In order to survive in the long run the

monetary union needs an orderly fiscal

union and a full-scale political union. Since

most voters thought they could get away

with a common currency without a joint fis-

cal policy, the political fight is going to get

nasty. But if cool heads prevail and the costs

and benefits are spelled out, it is likely that

we will end up within an orderly fiscal union.

Instead of the burial of the euro, we would

then witness the birth of a United States of

the Eurozone.

Aiming the bazooka

FIXED INCOME

Torgeir Høien Portfolio manager SKAGEN Tellus

th skagenfunds.com

Absent an immediate morphing of Antonis Samaras, prime minister of Greece, and other Club Med leaders into libertarian Iron Ladies, there are two ways out of the pre-sent fi scal morass: a series of sovereign defaults, or an orderly fi scal union.

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30



Further up in the third quarter

The global bond fund SKAGEN Tellus had a

very strong third quarter and rose 3.8 percent

measured in euro. So far this year the fund is

up 10.7 percent; 7.3 percentage points more

than the benchmark index.

As was the case in the second quarter, we

saw yields on our emerging market bonds fall,

implying appreciating bond prices. There is

still more to be gained here. For while many

bonds issued in the developed economies

provide a negative real return, there is still a

significant real return to be gained on bonds

issued in emerging markets. And what is

paradoxical is that while many developed

countries are drowning in debt, a fair number

of emerging market countries are managing

to keep their central government finances

in order.

We also benefited from falling yields in

the three Eurozone countries in which the

fund is invested. For some time now we have

had a position in Irish sovereign debt; in the

middle of the second quarter we bought some

Portuguese sovereign debt and at the end of

July we bought a Spanish bond. Combined,

these investments – which are all in bonds

with around ten years to maturity – amount

to 13.7 percent of the fund. We do not have

any other euro-denominated bonds in the

portfolio and are therefore underweight the

euro relative to the benchmark index.

The motivation for our investments in the

Eurozone periphery is a belief that the leading

politicians and institutions there will do what

it takes to narrow interest rate spreads bet-

ween the core and the periphery. The most

concrete step taken so far is the European

Central Bank program for unlimited interven-

tion in the bond market where governments

request help from the European rescue funds

and at the same time approve fiscal policy

tightening. We believe that Spain will be inclu-

ded in this program in the autumn while Ire-

land already qualifies and Portugal is not far

off. A requirement will also be made that the

countries must be able to issue bonds in the

market, something that Portugal will probably

first be able to do in mid-2013.

SKAGEN Tellus

SKAGEN Tellus 3.80% 10.67%

Barclays Capital Index 1.23% 3.36%


SKAGEN Tellus

Portfolio manager Torgeir Høien

PERFORMANCE (EUR) JULY-SEPT* YEAR TO DATE*

2012

25,0

22,5

20,0

17,5

15,0

12,5

10,0

7,5

5,0

2,5

0,0

-2,5

20112010j f m a m j j a s o n d j f m a m j j a s o n d j f m a m j j a s

Source: Macrobond

25,0

22,5

20,0

17,5

15,0

12,5

10,0

7,5

5,0

2,5

0,0

-2,5

Pe

rce

nt P

erce

nt

Germany

Ireland

Portugal

2-YEAR INTEREST RATES IN PORTUGAL, IRELAND AND GERMANY


31


Return and risk measurements

NOTICE

Returns in euro*

as of 30-09-2012 Year to date

1 year 2 year 3 year 5 year 10 year Sincestart

SKAGEN Vekst 11,8 % 20,6 % 2,8 % 7,1 % -2,8 % 15,0 % 15,1 %

Oslo Børs Benchmark Index (OSEBX) linked OSEBX/MSCI AC Total Return Index 17,8 % 30,9 % 11,2 % 16,1 % -1,5 % 14,8 % 9,7 %

SKAGEN Global 13,3 % 26,3 % 9,5 % 12,5 % 1,1 % 14,8 % 15,6 %

MSCI World Linked Index (DM through AC Total Return) 13,9 % 25,8 % 9,6 % 11,7 % -0,4 % 5,1 % 2,1 %

SKAGEN Kon-Tiki 10,1 % 21,4 % 2,6 % 11,4 % 3,9 % 23,4 % 17,3 %

MSCI Emerging Markets Index (Daily Traded Net Total Return) 12,9 % 22,1 % 1,8 % 10,1 % 0,7 % 13,9 % 9,1 %

SKAGEN Tellus (Euro) 10,67 % 13,56 % 5,37 % 9,32 % 6,57 % 6,64 %

Barclays Capital Global Treasury Index 3 - 5 years (Euro) 3,36 % 6,73 % 6,31 % 8,18 % 8,26 % 6,36 %

RIGHT OF CANCELLATION

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

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-

able in the fund’s product sheet (simplified prospectus) and the general commercial terms. Statutory information is sent to unit holders

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.

as of 30-09-2012 SKAGEN Vekst SKAGEN Global SKAGEN Kon-Tiki SKAGEN Tellus

MEAN VARIANCE ANALYSIS LAST 5 YEARS

Standard deviation, fund 25,8 % 20,4 % 25,1 % 7,85 %

Standard deviation, benchmark index 31,4 % 16,1 % 23,9 % 9,36 %

Sharpe-ratio, fund -0,18 -0,04 0,23 0,57

Sharpe-ratio, benchmark index -0,11 -0,14 0,11 0,65

Relative volatility/tracking error 10,3 % 7,8 % 5,4 % 10,49 %

Information ratio -0,13 0,20 0,57 -0,15

Correlation 0,95 0,94 0,98 0,27

Alpha -1,7 % 1,6 % 3,1 %

Beta 0,78 1,19 1,03

R2 91 % 87 % 95 %

GAIN LOSS ANALYSIS LAST 5 YEARS

Relative gain 85 % 121 % 106 % 87 %

Relative loss 89 % 111 % 97 % 93 %

Relative gain/loss ratio 0,95 1,08 1,10 0,94

Positive index divergence 11,72 10,54 9,08 11,42

Negative index divergence 13,24 8,67 5,80 12,68

Index divergence ratio 0,89 1,22 1,56 0,90

Percentage positive index divergence 47 % 55 % 61 % 47 %

Percentage positive index divergence when market is up 23 % 70 % 60 % 18 %

Percentage positive index divergence when market is down 76 % 40 % 62 % 82 %

Percentage of number of positive index divergence 37 % 55 % 57 % 57 %

Percentage of number of positive index divergence when market is up 24 % 68 % 59 % 38 %

Percentage of number of positive index divergence when market is down 54 % 41 % 54 % 79 %

VALUE AT RISK LAST 5 YEARS; 2.5 % CONFIDENCE

Value at risk: observed, NAV -20,4 % -15,0 % -19,0 % -5,0 %

Value at risk: observed, Benchmark -26,9 % -10,0 % -16,8 % -3,7 %

Relative Value at Risk, observed -5,0 % -6,4 % -4,2 % -9,5 %

GAIN/LOSS ANALYSIS SINCE INCEPTION

Relative gain 95 % 158 % 121 % 90 %

Relative loss 78 % 104 % 100 % 83 %

Relative gain/loss ratio 1,22 1,52 1,21 1,08

Positive index divergence 14,80 20,51 12,94 11,77

Negative index divergence 10,00 8,45 5,75 11,54

Index divergence ratio 1,48 2,43 2,25 1,02

Risk and performance measurements

Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager’s skill, the fund’s risk profile and subscription and management fees. The return may become negative as a result of negative price develop-ments. Investments in foreign currencies are normally not hedged.

SKAGEN Vekst has a fixed management fee of 1% pro anno. Returns exceeding 6 % p.a. are shared 90/10 between the unitholders and the management company.

SKAGEN Global has a fixed management fee of 1% pro anno. Better value development measured in percent in the fund’s net asset value compared with the MSCI AC World Index (in NOK) is shared 90/10 between the unitholders and the management com-pany.

SKAGEN Kon-Tiki has a fixed management fee of 2% pro anno. Better value develop-ment measured in percent in the fund’s net asset value compared with the MSCI Emer-ging Markets Index (in NOK) is shared 90/10 between the unit holders and the manage-ment company. However, the total annual management fee charged may not exceed 4 % of the fund’s average annual asset value. If the fund’s net asset value shows a poorer development measured in percent than the MSCI Emerging Markets Index, 10 % of the poorer value development is deducted from the fixed management fee. However, the total annual management fee charged may not be lower than 1 % of the fund’s average annual asset value.

SKAGEN Global and SKAGEN Kon-Tiki may be charged a variable management fee even if the fund’s return has been negative, as long as the fund has outperformed the benchmark. Conversely, 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 SKAGEN Tellus. The management fee is cal-culated daily and charged quarterly.

Please refer to the product sheets and pro-spectuses for a detailed description of the cost, etc. They are available upon request from SKAGEN Funds or at www.skagenfunds.com

* All return figures beyond 12 months are annualised.

R E T U R N A N D R I S K M E A S U R E M E N T S

32


HISTORICAL PRICE DEVELOPMENT SKAGEN VEKST (EUR)

A minimum of 50 percent of the

assets of the SKAGEN Vekst equity

fund will at all times be invested in

Norway. The rest will be invested

in the global equity market.

SKAGEN Vekst is suitable for

investors who want an equity fund

with a good balance between

Norwegian and global companies.

The fund has a broad mandate

which gives it the freedom to

invest in a number of companies,

industries and regions.

S E CU R I T I E S P O R T F O L I O S K AG E N V E K S T A S O F 2 8 - 0 9 -2012

Risk

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910

20

40

80

160

320

480

10 11 12

NA

V S

KA

GE

N V

ek

st

SKAGEN VekstBenchmark Index (EUR)20 % annual return

421 3 5 6 7

Security NumberAcquistion

value NOK * Market

priceCur-rency

Market-value NOK*

Unrealisedgain/loss *

Share of fund

Stock- exchange

ENERGY

Petroleo Brasileiro Pref ADR 1 468 265 154 991 22,12 USD 186 167 31 177 2,61 % New York

Solstad Offshore ASA 1 938 650 95 344 86,50 NOK 167 693 72 349 2,35 % Oslo Børs

Ganger Rolf ASA 1 273 817 130 405 118,50 NOK 150 947 20 543 2,12 % Oslo Børs

DOF ASA 5 702 213 108 660 26,30 NOK 149 968 41 309 2,10 % Oslo Børs

Baker Hughes Inc 552 000 136 205 44,96 USD 142 259 6 054 1,99 % New York

Bonheur ASA 1 192 594 88 117 118,50 NOK 141 322 53 205 1,98 % Oslo Børs

Sevan Drilling ASA 17 599 671 140 651 5,75 NOK 101 198 -39 453 1,42 % Oslo Børs

Gazprom Oao ADR 1 754 000 111 556 10,03 USD 100 843 -10 714 1,41 % London Int.

Statoil ASA 603 335 90 997 147,90 NOK 89 233 -1 764 1,25 % Oslo Børs

Transocean Ltd 313 900 138 551 44,92 USD 80 825 -57 726 1,13 % New York

Electromagnetic Geoservices AS 5 029 207 68 319 14,05 NOK 70 660 2 341 0,99 % Oslo Børs

Siem Offshore Inc 8 036 317 68 365 8,09 NOK 65 014 -3 351 0,91 % Oslo Børs

Eidesvik Offshore ASA 1 587 641 60 595 33,50 NOK 53 186 -7 409 0,75 % Oslo Børs

Marine Accurate Well ASA 67 652 076 51 259 0,61 NOK 41 268 -9 991 0,58 % Unotert

Subsea 7 SA 229 300 26 738 132,20 NOK 30 313 3 575 0,43 % Oslo Børs

Northern Offshore Ltd 2 750 000 26 552 10,30 NOK 28 325 1 773 0,40 % Oslo Børs

Seabird Exploratio Plc 11/15 6,00% Call 5 172 592 30 716 78,00 USD 23 619 -7 097 0,33 % Unotert

Fred Olsen Production ASA 3 000 000 18 735 6,95 NOK 20 850 2 115 0,29 % Oslo Børs

Norwegian Energy Co ASA 5 127 513 78 354 3,70 NOK 18 972 -59 382 0,27 % Oslo Børs

Minor items 76 574 44 947 -31 627 0,63 %

Total Energy 1 701 682 1 707 611 5 929 23,95 %

RAW MATERIALS

Norsk Hydro ASA 6 302 679 161 138 26,84 NOK 169 164 8 026 2,37 % Oslo Børs

Akzo Nobel NV 228 734 61 345 44,21 EUR 74 538 13 193 1,05 % Amsterdam

Koza Altin Isletmeleri AS 553 919 39 761 38,60 TRY 68 163 28 402 0,96 % Istanbul

Agrinos AS 817 242 23 068 45,50 NOK 37 185 14 116 0,52 % Unotert

Norske Skogindustrier ASA 5 970 000 345 541 5,19 NOK 30 984 -314 556 0,43 % Oslo Børs

Minor items 94 004 60 426 -33 578 0,85 %

Total Raw materials 724 857 440 461 -284 397 6,18 %

INDUSTRIALS

Kongsberg Gruppen ASA 3 110 267 129 185 108,50 NOK 337 464 208 279 4,73 % Oslo Børs

Wilh. Wilhelmsen Holding ASA 1 315 811 93 970 139,00 NOK 182 898 88 928 2,56 % Oslo Børs

Norwegian Air Shuttle ASA 1 504 738 83 483 107,50 NOK 161 759 78 277 2,27 % Oslo Børs

Dockwise Ltd 1 032 808 173 152 99,00 NOK 102 248 -70 904 1,43 % Oslo Børs

Stolt-Nielsen Ltd 926 602 114 905 109,50 NOK 101 463 -13 442 1,42 % Oslo Børs

LG Corp 200 000 41 440 62 200,00 KRW 64 073 22 634 0,90 % Seoul

Glamox ASA 5 944 034 5 852 10,50 NOK 62 412 56 560 0,88 % Unotert

Aveng Ltd 2 575 700 75 193 31,14 ZAR 55 668 -19 526 0,78 % Johannesburg

TTS Group ASA 3 222 553 45 757 13,40 NOK 43 182 -2 575 0,61 % Oslo Børs

Golar LNG Ltd 182 956 40 258 38,63 USD 40 512 255 0,57 % NASDAQ

Odfjell SE-A 1 664 725 74 526 21,90 NOK 36 457 -38 069 0,51 % Oslo Børs

NKT Holding A/S 159 823 31 627 201,90 DKK 31 907 280 0,45 % København

I.M. Skaugen SE 1 323 619 16 595 24,00 NOK 31 767 15 172 0,45 % Oslo Børs

Goodtech ASA 2 116 842 48 135 12,75 NOK 26 990 -21 145 0,38 % Oslo Børs

Norwegian Car Carriers ASA 12 360 250 37 823 2,10 NOK 25 957 -11 867 0,36 % Oslo Børs

LG Corp Pref 224 482 25 796 21 500,00 KRW 24 859 -938 0,35 % Seoul

Minor items 154 158 45 200 -108 959 0,63 %

Total Industrials 1 191 856 1 374 816 182 960 19,28 %

CONSUMER DISCRETIONARY

Royal Caribbean Cruises Ltd 1 803 021 269 973 30,13 USD 311 396 41 424 4,37 % New York

Continental AG 269 000 128 675 76,19 EUR 151 070 22 395 2,12 % Xetra

Hurtigruten ASA 22 671 503 81 526 3,29 NOK 74 589 -6 937 1,05 % Oslo Børs

Mahindra & Mahindra Ltd GDR 591 300 10 523 16,05 USD 54 400 43 877 0,76 % London Int.

NHST Media Group ASA 60 000 31 447 550,00 NOK 33 000 1 553 0,46 % Unotert

LG Electronics Inc Pref 230 478 55 694 19 000,00 KRW 22 555 -33 139 0,32 % Seoul

Minor items 38 243 23 930 -14 314 0,34 %

Total Consumer Discretionary 616 081 670 941 54 859 9,41 %

33


IT 9,5%

Energy24,0%

Industrials 19,3%

Finance 13,8%

RawMaterials6,2%

Health 4,5%

ConsumerDiscretionary 9,4%

Telecom 3,1%

Cash 2,1%

ConsumerStaples 5,2%

Utilities 3,0%

SECTOR DISTRIBUTION

GEOGRAPHICAL DISTRIBUTION

10 L ARGEST HOLDINGS

* Children and young women picking flowers

in a field north of Skagen, 1887. Detail.

By Michael Ancher, one of the Skagen painters.

The picture is owned by the Skagens Museum.

S E CU R I T I E S P O R T F O L I O S K AG E N V E K S T A S O F 2 8 - 0 9 -2012

South America 4,7%Cash 2,1%Asia ex Japan 9,5%

Japan 0,1%

EMEA 5,7%

Eurozone 10,2%

NorthAmerica 10,0% Norway 52,3%

Peripheral EU 5,2%

Oceania 0,2%

* Figures in 1000 NOK The market value as of 28.09.2012 is the last quoted price from the stock exchange. The average cost method is used for the calculation of sales gain.


value NOK * Market

priceCur-rency

Market-value NOK*


Share of fund

Stock- exchange

CONSUMER STAPLES

Cermaq ASA 1 084 045 45 733 75,00 NOK 81 303 35 570 1,14 % Oslo Børs

Morpol ASA 8 407 150 175 896 8,63 NOK 72 554 -103 342 1,02 % Oslo Børs

Kesko Oyj B 370 000 93 965 22,06 EUR 60 164 -33 801 0,84 % Helsinki

Royal Unibrew A/S 116 365 33 185 445,00 DKK 51 202 18 017 0,72 % København

Austevoll Seafood ASA 1 972 716 62 173 25,80 NOK 50 896 -11 277 0,71 % Oslo Børs

Yazicilar Holding AS 750 000 25 622 14,00 TRY 33 474 7 851 0,47 % Istanbul

Minor items 80 045 18 508 -61 537 0,26 %

Total Consumer Staples 516 620 368 101 -148 518 5,16 %

HEALTH CARE

Teva Pharmaceutical-Sp ADR 719 787 217 973 41,49 USD 171 183 -46 790 2,40 % NASDAQ

Clavis Pharma ASA 853 268 28 167 63,50 NOK 54 183 26 015 0,76 % Oslo Børs

Photocure ASA 1 109 401 44 688 37,00 NOK 41 048 -3 640 0,58 % Oslo Børs

Medi-Stim ASA 1 513 625 18 913 18,00 NOK 27 245 8 332 0,38 % Oslo Børs

Minor items 82 632 27 741 -54 890 0,39 %

Total Health Care 392 373 321 400 -70 973 4,51 %

FINANCIALS

Olav Thon Eiendomsselskap ASA 180 025 33 834 862,00 NOK 155 182 121 347 2,18 % Oslo Børs

Hannover Rueckversicherung AG 367 500 74 061 49,73 EUR 134 712 60 651 1,89 % Frankfurt

RSA Insurance Group Plc 11 714 361 114 633 1,11 GBP 119 944 5 311 1,68 % London

Gjensidige Forsikring ASA 1 369 099 80 698 79,45 NOK 108 775 28 077 1,53 % Oslo Børs

Danske Bank A/S 741 784 83 171 104,90 DKK 76 942 -6 229 1,08 % København

Northern Logistic Property ASA 2 728 689 82 502 28,00 NOK 76 403 -6 099 1,07 % Oslo Børs

Korean Reinsurance Co 1 096 291 30 487 11 850,00 KRW 66 912 36 425 0,94 % Seoul

Norwegian Finans Holding ASA 12 047 000 23 621 4,15 NOK 49 995 26 374 0,70 % Unotert

Hitecvision AS 762 746 5 183 65,00 NOK 49 578 44 395 0,70 % Unotert

Sparebanken Øst 1 413 500 25 053 30,00 NOK 42 405 17 352 0,59 % Oslo Børs

Haci Omer Sabanci Holding AS 1 501 444 23 339 7,88 TRY 37 718 14 379 0,53 % Istanbul

Sparebanken Vest 995 506 45 056 28,30 NOK 28 173 -16 883 0,40 % Oslo Børs

Minor items 60 212 38 590 -21 622 0,54 %

Total Financials 681 851 985 328 303 478 13,82 %

INFORMATION TECHNOLOGY

Samsung Electronics Co Ltd Pref GDR 199 321 257 657 352,00 USD 402 170 144 513 5,64 % London Int.

SAP AG 342 400 131 117 55,47 EUR 139 998 8 881 1,96 % Xetra

Q-Free ASA 3 182 604 44 688 18,50 NOK 58 878 14 191 0,83 % Oslo Børs

Proact IT Group AB 458 101 15 214 91,00 SEK 36 459 21 245 0,51 % Stockholm

Minor items 66 951 38 936 -28 015 0,55 %

Total Information Technology 515 627 676 440 160 814 9,49 %

TELECOM

France Telecom SA 1 111 904 142 131 9,48 EUR 77 738 -64 392 1,09 % Paris

Sistema Jsfc GDR 573 709 19 190 20,36 USD 66 955 47 765 0,94 % London Int.

Mobile Telesystems ADR 453 489 28 862 17,65 USD 45 880 17 018 0,64 % New York

Indosat Tbk PT ADR 154 730 25 735 28,09 USD 24 914 -821 0,35 % New York

Minor items 7 842 2 341 -5 501 0,03 %

Total Telecom 223 760 217 828 -5 932 3,05 %

UTILITIES

Centrais Eletricas Brasileiras SA Pref 2 610 818 126 051 18,60 BRL 137 113 11 061 1,92 % Sao Paulo

Fortum Oyj 755 000 84 612 14,35 EUR 79 860 -4 752 1,12 % Helsinki

Total Utilities 210 663 216 972 6 309 3,04 %

Total equity portfolio* 6 775 369 6 979 898 204 529 97,88 %

Disposable liquidity 150 875 2,12 %

Total share capital 7 130 773 100,00 %

Basiskurs per 28.09.2012 1 246,8126

34


1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20121999

10

20

40

80

160

240 SKAGEN GlobalWorld Index20 % annual return

NA

V S

KA

GE

N G

lob

al

HISTORICAL PRICE DEVELOPMENT SKAGEN GLOBAL (EUR)

The SKAGEN Global equity fund

invests in stocks worldwide.

The fund seeks to maintain a

balanced industry exposure.

SKAGEN Global is suitable for

investors who want an equity

fund which invests over the

whole world and is therefore

diversified both geographically

and by industry. The fund is

also suitable for those who

already have exposure towards

the Norwegian equity market,

but who wish to strengthen

their portfolio and reduce risk.

S E CU R I T I E S P O R T F O L I O S K AG E N G L O B A L A S O F 2 8 - 0 9 -2012

Risk

421 3 5 6 7


value NOK * Market

priceCur-rency

Market-value NOK*


Share of fund

Stock- exchange

ENERGY

Gazprom Oao ADR 13 955 912 1 016 074 10,03 USD 801 772 -214 302 2,43 % London Int.

Baker Hughes Inc 2 269 804 591 589 44,93 USD 584 139 -7 449 1,77 % New York

Weatherford Intl Ltd 6 926 377 580 074 12,58 USD 499 089 -80 984 1,51 % New York

Ensco Plc Class A 1 411 142 404 289 54,59 USD 441 241 36 952 1,34 % New York

Petroleo Brasileiro Pref ADR 3 396 473 606 992 22,06 USD 429 166 -177 826 1,30 % New York

OMV AG 2 064 000 445 062 27,24 EUR 414 313 -30 750 1,25 % Wien

Kazmunaigas Exploration GDR 3 216 018 405 395 18,45 USD 339 865 -65 530 1,03 % London Int.

Nabors Industries Ltd 3 722 233 497 730 14,06 USD 299 765 -197 966 0,91 % New York

Afren Plc 21 792 001 223 689 1,39 GBP 281 177 57 488 0,85 % London

BP Plc 3 948 350 200 454 4,39 GBP 160 229 -40 225 0,49 % London

Electromagnetic Geoservices AS 9 988 712 155 711 14,05 NOK 140 341 -15 370 0,43 % Oslo Børs

Petroleo Brasileiro SA 2 065 412 146 770 22,40 BRL 130 584 -16 186 0,40 % Sao Paulo

BP Plc ADR 511 549 155 878 42,54 USD 124 633 -31 245 0,38 % New York

Minor items 137 595 132 479 -5 116 0,40 %

Total Energy 5 567 303 4 778 793 -788 510 14,47 %

RAW MATERIALS

Akzo Nobel NV 1 870 494 564 595 44,17 EUR 608 898 44 303 1,84 % Amsterdam

Heidelbergcement AG 1 170 781 367 883 40,80 EUR 352 004 -15 879 1,07 % Xetra

Ternium SA ADR 3 008 882 468 540 19,59 USD 337 622 -130 918 1,02 % New York

Norsk Hydro ASA 9 261 378 273 662 26,84 NOK 248 575 -25 087 0,75 % Oslo Børs

Lundin Mining Corp SDR 8 323 200 208 160 33,65 SEK 244 533 36 373 0,74 % Stockholm

Mayr-Melnhof Karton AG 450 627 203 444 73,11 EUR 242 776 39 332 0,74 % Wien

Cliffs Natural Resources Inc 1 086 723 305 363 38,85 USD 241 825 -63 538 0,73 % New York

UPM-Kymmene Oyj 1 467 477 97 177 8,79 EUR 95 054 -2 123 0,29 % Helsinki

Minor items 61 877 70 121 8 244 0,21 %

Total Raw materials 2 550 700 2 441 408 -109 292 7,39 %

INDUSTRIALS

Tyco International Ltd 5 900 910 1 219 632 56,18 USD 1 898 861 679 229 5,75 % New York

LG Corp 1 883 017 485 731 62 200,00 KRW 602 326 116 595 1,82 % Seoul

Bunge Ltd 1 558 747 510 189 66,70 USD 595 516 85 326 1,80 % New York

Siemens AG 833 819 488 622 78,15 EUR 480 189 -8 433 1,45 % Frankfurt

TE Connectivity Ltd 1 895 712 303 021 34,02 USD 369 401 66 380 1,12 % New York

Stolt-Nielsen Ltd 2 157 534 364 453 109,50 NOK 236 250 -128 203 0,72 % Oslo Børs

Randstad Holding NV 1 095 530 271 231 25,96 EUR 209 616 -61 615 0,63 % Amsterdam

BayWa AG 744 577 222 363 30,66 EUR 168 253 -54 109 0,51 % Frankfurt

TRW Automotive Holdings Corp 490 740 122 417 43,36 USD 121 881 -535 0,37 % New York

Minor items 346 753 150 582 -196 171 0,46 %

Total Industrials 4 334 413 4 832 876 498 462 14,64 %


Comcast Corp 2 973 262 292 629 34,74 USD 591 636 299 007 1,79 % NASDAQ

Toyota Industries Corp 2 946 921 490 495 2 185,00 JPY 474 022 -16 474 1,44 % Tokyo

Renault SA 1 586 952 401 190 36,71 EUR 429 357 28 168 1,30 % Paris

Hyundai Motor Pref (2pb) 562 937 157 824 77 600,00 KRW 224 651 66 827 0,68 % Seoul

General Motors Co 1 478 540 202 725 22,79 USD 192 997 -9 728 0,58 % New York

Dixons Retail Plc 78 684 888 109 156 0,20 GBP 144 974 35 818 0,44 % London

LG Electronics Inc Pref 1 036 948 270 944 19 000,00 KRW 101 321 -169 624 0,31 % Seoul

Yamaha Motor Co Ltd 1 953 411 159 122 682,00 JPY 98 075 -61 048 0,30 % Tokyo

Minor items 280 701 371 240 90 538 1,12 %

Total Consumer Discretionary 2 364 787 2 628 271 263 484 7,96 %

35


IT 15,1%

Energy14,5%

Industrials 14,6%

Finance 18,5%

Raw Materials7,4%

Health 4,2%

ConsumerDiscretionary 8,0%

Telecom 5,7%


Utilities2,5%

Cash4,3%

SECTOR DISTRIBUTION

South America 6,6%

Cash 4,3%

Asia exJapan 15,2%

Japan 3,9%

EMEA 7,7%

Eurozone 13,4%

North America 33,6%

Norway 3,7%

Peripheral EU 9,7%

Frontier Markets 1,8%



* From the moor north of Skagen, 1885. Detail.

By P.S. Krøyer, one of the Skagen painters.


S E CU R I T I E S P O R T F O L I O S K AG E N G L O B A L A S O F 2 8 - 0 9 -2012

* Figures in 1000 NOKThe market value as of 28.09.2012 is the last quoted price from the stock exchange. The average cost method is used for the calculation of sales gain.


value NOK * Market

priceCur-rency

Market-value NOK*


Share of fund

Stock- exchange

CONSUMER STAPLES

Svenska Cellulosa AB-B 7 129 659 564 340 122,50 SEK 762 547 198 207 2,31 % Stockholm

Unilever NV-Cva 1 106 562 192 348 27,67 EUR 225 671 33 322 0,68 % Amsterdam

Tesco Plc 6 717 110 241 918 3,33 GBP 207 043 -34 874 0,63 % London

Yazicilar Holding AS 4 021 961 97 412 14,00 TRY 179 488 82 076 0,54 % Istanbul

United Intl Enterprises 154 171 22 774 974,00 DKK 148 443 125 669 0,45 % København


Minor items 143 094 93 159 -49 935 0,28 %

Total Consumer Staples 1 323 697 1 727 744 404 047 5,23 %

HEALTH CARE

Roche Holding AG-Genusschein 461 983 402 234 176,20 CHF 496 247 94 013 1,50 % Zürich

Teva Pharmaceutical-Sp ADR 2 067 215 446 692 41,58 USD 492 335 45 643 1,49 % NASDAQ

Pfi zer Inc 1 813 495 212 079 24,81 USD 257 712 45 633 0,78 % New York

Rhoen-Klinikum AG 1 108 726 121 721 15,34 EUR 125 332 3 611 0,38 % Xetra

Minor items 29 944 740 -29 204 0,00 %

Total Health Care 1 212 670 1 372 366 159 696 4,16 %

FINANCIALS

Citigroup Inc 8 141 582 1 833 543 32,70 USD 1 525 138 -308 404 4,62 % New York

American International Group 2 732 371 512 660 32,65 USD 510 946 -1 715 1,55 % New York

Hannover Rueckversicherung AG 1 298 960 274 401 49,77 EUR 476 451 202 050 1,44 % Frankfurt

Gjensidige Forsikring ASA 5 719 946 338 240 79,45 NOK 454 450 116 210 1,38 % Oslo Børs

Banco Do Estado Rio Grande Do Sul Pref 8 211 327 171 463 16,80 BRL 389 365 217 902 1,18 % Sao Paulo

Haci Omer Sabanci Holding AS 13 394 775 259 522 7,88 TRY 336 458 76 936 1,02 % Istanbul

Goldman Sachs Group Inc 487 483 353 594 113,87 USD 317 951 -35 643 0,96 % New York

Cheung Kong Holdings Ltd 3 780 674 283 780 113,70 HKD 317 540 33 760 0,96 % Hong Kong

Kinnevik Investment AB-B 2 039 277 100 415 136,40 SEK 242 858 142 443 0,74 % Stockholm

TAG Immobilien AG 2 386 629 125 729 8,35 EUR 146 853 21 124 0,44 % Frankfurt

RSA Insurance Group Plc 14 080 558 135 408 1,11 GBP 144 561 9 154 0,44 % London

Albaraka Turk Katilim Bankasi AS 31 824 600 213 096 1,36 TRY 137 966 -75 130 0,42 % Istanbul

Sparebank 1 SR-Bank ASA 3 611 486 101 986 36,90 NOK 133 264 31 278 0,40 % Oslo Børs

Asya Katilim Bankasi AS 20 782 168 204 999 1,98 TRY 131 167 -73 832 0,40 % Istanbul

Industrial Bank of Korea 1 973 755 144 101 12 250,00 KRW 124 342 -19 760 0,38 % Seoul

EFG-Hermes Holding SAE 10 956 636 206 143 12,04 EGP 123 910 -82 233 0,38 % Cairo

Capitamalls Asia Ltd 15 585 550 98 722 1,65 SGD 120 103 21 381 0,36 % Singapore

GSW Immobilien AG 559 925 94 706 29,04 EUR 119 843 25 137 0,36 % Xetra

Japan Securities Finance Co 4 069 475 234 986 358,00 JPY 107 251 -127 736 0,32 % Tokyo

Minor items 270 140 235 406 -34 733 0,71 %

Total Financials 5 957 634 6 095 823 138 189 18,46 %


Samsung Electronics Co Ltd Pref 560 968 1 292 728 789 000,00 KRW 2 276 156 983 429 6,89 % Seoul

Oracle Corp 6 472 904 1 043 048 31,34 USD 1 161 956 118 908 3,52 % NASDAQ

Kyocera Corp 1 200 268 631 870 6 760,00 JPY 597 314 -34 555 1,81 % Tokyo

Microsoft Corp 2 199 798 325 540 29,89 USD 376 617 51 077 1,14 % NASDAQ

Samsung Electronics Co Ltd Pref GDR 135 491 136 883 352,00 USD 273 177 136 294 0,83 % London Int.

Google Inc 58 615 199 849 754,90 USD 253 449 53 599 0,77 % NASDAQ

Minor items 42 374 33 802 -8 572 0,10 %

Total Information Technology 3 672 293 4 972 472 1 300 180 15,06 %

TELECOM

Vimpelcom Ltd-Spon ADR 11 765 585 908 277 11,61 USD 782 415 -125 862 2,37 % New York

China Mobile Ltd ADR 770 393 211 135 55,09 USD 243 095 31 961 0,74 % New York

China Unicom Hong Kong Ltd 21 748 250 202 629 12,72 HKD 204 352 1 723 0,62 % Hong Kong

Indosat Tbk PT ADR 921 819 137 600 28,09 USD 148 316 10 716 0,45 % New York

Vivendi SA 1 299 149 145 393 15,40 EUR 147 432 2 039 0,45 % Paris

China Unicom Hong Kong Ltd ADR 1 180 403 109 298 16,30 USD 110 207 909 0,33 % New York

Sistema Jsfc GDR 878 692 87 335 20,36 USD 102 472 15 137 0,31 % London Int.

Minor items 111 421 157 650 46 228 0,48 %

Total Telecom 1 913 089 1 895 940 -17 149 5,74 %

UTILITIES

Centrais Eletricas Brasileiras SA Pref 11 295 481 698 456 18,55 BRL 591 402 -107 054 1,79 % Sao Paulo

Centrais Eletricas Brasileiras SA 7 122 805 594 014 12,13 BRL 243 863 -350 152 0,74 % Sao Paulo

Total Utilities 1 292 471 835 265 -457 206 2,53 %

Total equity portfolio* 30 189 056 31 580 958 1 391 902 95,66 %

Disposable liquidity 1 433 696 4,34 %


Basiskurs per 28.09.2012 816,4921

36


2004 2005 2006 2007 2008 2009 2010 2011 20122003

20

10

40

80

120SKAGEN Kon-TikiEmerging Markets Index20 % annual return

NA

V S

KA

GE

N K

on

-Tik

i

HISTORICAL PRICE DEVELOPMENT SKAGEN KON-TIKI (EUR)

The SKAGEN Kon-Tiki equity fund will invest at least 50 percent of its assets in emerging markets. These are markets that are not included in the MSCI World Index. Neverthe-less, following on from our require-ment to have a reasonable industry balance, 50 percent of the fund’s assets may be invested in markets that are included in the MSCI World Index. SKAGEN Kon-Tiki is suitable for an investor who wants to benefit from the value creation taking place in the world’s emerging markets. The fund offers the opportunity of extraordinary returns, but at a higher risk than with a global/Norwegian equity fund.

S E CU R I T I E S P O R T F O L I O S K AG E N KO N -T I K I A S O F 2 8 - 0 9 -2012

Risk

421 3 5 6 7


value NOK * Market

priceCur-rency

Market-value NOK*


Share of fund

Stock- exchange

ENERGY

Baker Hughes Inc 6 612 835 1 850 498 44,93 USD 1 701 828 -148 670 3,95 % New York

Gazprom Oao ADR 22 585 821 1 553 333 10,03 USD 1 297 563 -255 770 3,01 % London Int.

Petroleo Brasileiro Pref ADR 5 655 678 965 220 22,06 USD 714 631 -250 589 1,66 % New York

Seadrill Ltd 2 307 335 213 835 223,70 NOK 516 151 302 316 1,20 % Oslo Børs

Tullow Oil Plc 3 804 688 332 305 13,71 GBP 482 465 150 159 1,12 % London

Afren Plc 25 977 562 322 079 1,39 GBP 335 183 13 103 0,78 % London

Pacifi c Drilling SA 4 465 777 267 970 9,99 USD 255 537 -12 433 0,59 % New York

Petroleo Brasileiro SA 2 000 000 153 673 22,40 BRL 126 448 -27 225 0,29 % Sao Paulo

Archer Ltd 13 430 829 321 949 8,66 NOK 116 311 -205 638 0,27 % Oslo Børs

Deep Sea Supply Plc 12 229 431 125 766 9,50 NOK 116 180 -9 586 0,27 % Oslo Børs

Minor items 236 058 142 221 -93 837 0,33 %

Total Energy 6 342 686 5 804 517 -538 169 13,48 %

RAW MATERIALS

Vale Sa Spons ADR 9 472 805 1 013 789 17,41 USD 944 646 -69 143 2,19 % New York

Exxaro Resources Ltd 5 669 011 724 160 160,94 ZAR 631 360 -92 799 1,47 % Johannesburg

Eurasian Natural Resources 10 691 761 595 655 3,11 GBP 307 453 -288 201 0,71 % London

Drdgold Ltd ADR 3 724 701 206 450 6,46 USD 137 821 -68 629 0,32 % NASDAQ

Park Elektrik Uretim Madenci 6 389 816 114 735 6,70 TRY 136 469 21 733 0,32 % Istanbul

Ipek Dogal Enerji Kaynaklari Ve Uretim AS 9 525 668 87 534 4,10 TRY 124 494 36 960 0,29 % Istanbul

Vale SA-Pref A 1 231 900 210 807 35,43 BRL 123 191 -87 616 0,29 % Sao Paulo

Asia Cement China Holdings 50 706 000 186 391 3,27 HKD 122 483 -63 908 0,28 % Hong Kong

Total Raw materials 3 139 521 2 527 917 -611 604 5,87 %

INDUSTRIALS

ABB Ltd 8 957 636 928 140 123,80 SEK 968 224 40 084 2,25 % Stockholm

A P Moller - Maersk B 12 701 496 037 41 520,00 DKK 521 307 25 270 1,21 % København

Empresas ICA S.A.B 42 542 700 621 197 25,00 MXN 473 979 -147 218 1,10 % Mexico

Aveng Ltd 21 017 094 617 358 31,29 ZAR 455 076 -162 282 1,06 % Johannesburg

Bidvest Group Ltd 2 878 881 335 297 206,00 ZAR 410 390 75 093 0,95 % Johannesburg

CNH Global N.V. 1 644 161 384 698 39,20 USD 369 166 -15 532 0,86 % New York

Harbin Electric Company Ltd 68 000 000 614 366 5,96 HKD 299 380 -314 986 0,70 % Hong Kong

Golar LNG Ltd 1 274 141 279 985 38,51 USD 281 049 1 065 0,65 % NASDAQ

Orascom Construction Industries GDR 977 842 218 053 46,55 USD 260 723 42 670 0,61 % Cairo

AirAsia Bhd 38 805 500 90 691 3,02 MYR 219 244 128 553 0,51 % Kuala Lumpur

Tekfen Holding AS 8 933 907 139 944 6,52 TRY 185 677 45 733 0,43 % Istanbul

Norwegian Air Shuttle ASA 1 628 768 119 886 107,50 NOK 175 093 55 206 0,41 % Oslo Børs

Frontline 2012 Ltd 6 912 000 128 435 25,00 NOK 172 800 44 365 0,40 % Unotert

Dryships Inc 12 000 219 215 197 2,36 USD 162 216 -52 981 0,38 % NASDAQ

Orascom Construction Industries 552 118 135 933 287,16 EGP 148 922 12 989 0,35 % Cairo

Enka Insaat Ve Sanayi AS 9 426 663 105 720 4,50 TRY 135 220 29 499 0,31 % Istanbul

Abengoa SA 1 117 057 105 076 13,78 EUR 113 473 8 397 0,26 % Madrid

Minor items 354 192 245 413 -108 779 0,57 %

Total Industrials 5 890 207 5 597 354 -292 853 13,00 %


Hyundai Motor Pref (2pb) 3 574 100 570 644 77 600,00 KRW 1 426 315 855 670 3,31 % Seoul

Great Wall Motor Co Ltd 93 094 500 168 869 20,45 HKD 1 406 324 1 237 455 3,27 % Hong Kong

Hyundai Motor Pref (1p) 3 259 810 521 108 72 000,00 KRW 1 207 012 685 904 2,80 % Seoul

Mahindra & Mahindra Ltd GDR 7 859 799 156 887 16,05 USD 722 567 565 680 1,68 % London Int.

Royal Caribbean Cruises Ltd 2 171 283 384 223 30,10 USD 374 347 -9 876 0,87 % New York

LG Electronics Inc Pref 3 150 000 850 969 19 000,00 KRW 307 788 -543 182 0,71 % Seoul

Hengdeli Holdings Ltd 155 068 000 270 643 2,25 HKD 257 735 -12 908 0,60 % Hong Kong

DRB-Hicom Bhd 54 368 600 205 041 2,33 MYR 236 991 31 950 0,55 % Kuala Lumpur

Mahindra & Mahindra Ltd 1 812 804 140 553 864,70 INR 169 834 29 280 0,39 % Nat. India

Minor items 76 259 43 875 -32 384 0,10 %

Total Consumer Discretionary 3 345 197 6 152 787 2 807 590 14,29 %

37



IT 13,0%

Energy13,5%

Industrials 13,0%

Finance 15,2%

RawMaterials5,9%

Health 4,4%

ConsumerDiscretionary14,3%

Telecom 7,4%


Utilities3,5%

Cash1,7%

SECTOR DISTRIBUTION

Cash 1,7%

Asia ex Japan 39,6%

EMEA 21,9%

South America 13,3%

Eurozone 2,1%

North America

6,7%

Norway 3,7%

Peripheral EU 7,3%

Frontier Markets 3,7%



* Skagen reef’s lightship, 1892. Detail.

By Carl Locher, one of the Skagen painters.


S E CU R I T I E S P O R T F O L I O S K AG E N KO N -T I K I A S O F 2 8 - 0 9 -2012

* Figures in 1000 NOK

The market value as of 28.09.2012 is the last quoted price from the stock exchange. The average cost method is used for the calculation of sales gain.


value NOK * Market

priceCur-rency

Market-value NOK*


Share of fund

Stock- exchange

CONSUMER STAPLES

Cosan Ltd 10 319 782 577 467 15,68 USD 926 847 349 381 2,15 % New York

Heineken NV 2 044 217 610 709 46,36 EUR 698 364 87 655 1,62 % Amsterdam

Kulim Malaysia BHD 55 651 600 175 679 4,93 MYR 513 277 337 598 1,19 % Kuala Lumpur

Yazicilar Holding AS 9 654 470 239 354 14,00 TRY 430 850 191 496 1,00 % Istanbul

Tata Global Beverages Ltd 14 126 721 188 252 142,85 INR 218 640 30 388 0,51 % London


PZ Cussons Plc 7 625 746 127 931 3,00 GBP 211 881 83 950 0,49 % Nat. India

Minor items 324 199 286 324 -37 874 0,66 %

Total Consumer Staples 2 325 798 3 501 630 1 175 832 8,13 %

HEALTH CARE

Richter Gedeon Nyrt 968 258 1 070 376 38 800,00 HUF 969 829 -100 548 2,25 % Budapest

Hanmi Pharm Co Ltd 760 725 315 456 93 700,00 KRW 366 568 51 112 0,85 % Seoul

China Shineway Pharmaceutical 25 409 000 186 531 11,16 HKD 209 469 22 938 0,49 % Hong Kong

Eis Eczacibasi Ilac Ve Sanayi 21 418 365 146 800 1,86 TRY 126 990 -19 810 0,29 % Istanbul

Supermax Corp BHD 29 573 600 114 137 2,06 MYR 113 972 -165 0,26 % Kuala Lumpur

Minor items 184 050 105 683 -78 367 0,25 %

Total Health Care 2 017 350 1 892 510 -124 839 4,40 %

FINANCIALS

Haci Omer Sabanci Holding AS 50 107 500 989 063 7,88 TRY 1 258 630 269 567 2,92 % Istanbul

Banco Do Estado Rio Grande Do Sul Pref 19 543 329 452 544 16,80 BRL 926 706 474 161 2,15 % Sao Paulo

VTB Bank Ojsc GDR 43 947 983 1 325 224 3,33 USD 838 252 -486 972 1,95 % London Int.

Aberdeen Asset Management Plc 20 695 195 334 715 3,11 GBP 594 730 260 014 1,38 % London

State Bank of India 2 305 149 662 042 2 240,60 INR 559 591 -102 450 1,30 % Nat. India

Kiwoom Securities Co Ltd 1 043 205 190 648 65 400,00 KRW 350 860 160 213 0,81 % Seoul

Bangkok Bank Public Co-Nvdr 9 410 500 240 648 194,00 THB 339 203 98 555 0,79 % Bangkok

JSE Ltd 6 464 519 249 899 68,90 ZAR 308 221 58 321 0,72 % Johannesburg

Korean Reinsurance Co 4 765 065 181 997 11 850,00 KRW 290 385 108 388 0,67 % Seoul

EFG-Hermes Holding SAE 14 949 381 353 507 12,04 EGP 169 065 -184 441 0,39 % Cairo

Turkiye Sinai Kalkinma Bank 26 126 005 154 747 2,00 TRY 166 561 11 813 0,39 % Istanbul

Kiatnakin Bank Pcl-Nvdr 19 238 700 142 186 46,25 THB 165 323 23 137 0,38 % Bangkok

Kiatnakin Bank Pcl 16 543 300 108 175 46,25 THB 142 161 33 985 0,33 % Bangkok

Nordnet AB 7 007 907 97 310 18,70 SEK 114 417 17 107 0,27 % Stockholm

Minor items 423 822 330 995 -92 826 0,77 %

Total Financials 5 906 528 6 555 101 648 573 15,22 %


Samsung Electronics Co Ltd Pref 550 547 1 360 170 789 000,00 KRW 2 233 872 873 703 5,19 % Seoul

Hon Hai Precision Industry 93 500 000 1 791 461 92,00 TWD 1 680 401 -111 060 3,90 % Taipei

Samsung Electronics Co Ltd Pref GDR 505 370 496 402 352,00 USD 1 018 929 522 527 2,37 % London Int.

Naspers Ltd 1 202 865 309 434 514,97 ZAR 428 652 119 218 1,00 % Johannesburg

Lenovo Group Ltd 22 990 000 108 985 6,42 HKD 109 029 44 0,25 % Hong Kong

Minor items 278 564 133 948 -144 616 0,31 %

Total Information Technology 4 345 015 5 604 831 1 259 817 13,02 %

TELECOM

Sistema Jsfc GDR 11 303 681 901 767 20,36 USD 1 318 224 416 457 3,06 % London Int.

Bharti Airtel Ltd 22 993 483 992 479 265,45 INR 661 295 -331 184 1,54 % Nat. India

China Mobile Ltd ADR 1 769 952 526 686 55,09 USD 558 503 31 818 1,30 % New York

Indosat Tbk PT 103 964 000 323 274 5 400,00 IDR 336 001 12 727 0,78 % Indonesia

Indosat Tbk PT ADR 2 054 395 350 195 28,09 USD 330 543 -19 653 0,77 % New York

Total Telecom 3 094 401 3 204 566 110 165 7,44 %

UTILITIES

Centrais Eletricas Brasileiras SA Pref 28 105 663 2 077 528 18,55 BRL 1 471 539 -605 989 3,42 % Sao Paulo

Minor items 51 596 25 491 -26 104 0,06 %

Total Utilities 2 129 124 1 497 030 -632 094 3,48 %

Total equity portfolio* 38 535 825 42 338 243 3 802 417 98,32 %

Disposable liquidity 721 935 1,68 %


Basiskurs per 28.09.2012 514,8049

38


SKAGEN Tellus is an actively

managed global bond fund

investing in bonds issued by

governments, regional autho-

rities and financial institutions

all over the world. SKAGEN

Tellus is a good option for

investors who wish to invest

in global bonds and who have

an investment horizon of at

least 12 months. Investors

must be tolerant of exchange

rate fluctuations.

* Interior. Brøndum’s annex, ca. 1920. Detail.

By Anna Ancher, one of the Skagen painters.


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GOVERNMENT BONDS

Australian Government 15.11.2012 4,75 4 000 24 223 596,67 418 23 867 24 285 -357 5,13 %

Brazilian Government 10.01.2028 10,25 6 000 21 788 368,41 376 22 105 22 481 317 4,75 %

Canadian Government 01.08.2013 2,00 5 000 28 695 587,63 92 29 382 29 473 687 6,22 %

Chilean Government 05.08.2020 5,50 800 000 10 006 1,28 78 10 273 10 351 266 2,19 %

Colombian Government 14.04.2021 7,75 5 000 000 17 419 0,39 564 19 692 20 256 2 273 4,28 %

European Bank Recon & Dev 17.06.2015 0,50 20 000 18 273 87,71 26 17 542 17 568 -730 3,71 %

European Bank Recon & Dev 06.06.2014 5,25 130 000 14 998 10,75 231 13 970 14 201 -1 027 3,00 %

Irish Government 18.10.2020 5,00 2 000 13 419 735,36 697 14 707 15 404 1 288 3,25 %

Lithuanian Government 11.02.2020 7,37 2 000 13 770 730,16 110 14 603 14 714 833 3,11 %

Mexican Government 20.11.2036 10,00 40 000 21 226 64,14 485 25 656 26 141 4 429 5,52 %

New Zealand Government 15.04.2015 6,00 2 000 10 596 516,45 259 10 329 10 588 -267 2,24 %

Peruan Government 12.08.2037 6,90 6 000 15 574 265,93 117 15 956 16 072 382 3,39 %

Polish Government 25.10.2021 5,46 15 000 26 434 192,98 1 360 28 947 30 307 2 513 6,40 %

Portugese Government 15.04.2021 3,85 5 000 22 919 523,42 645 26 171 26 816 3 253 5,66 %

Russian Government 10.03.2018 7,85 50 000 9 956 19,69 36 9 844 9 880 -112 2,09 %

Slovak Government 21.05.2022 4,37 3 000 17 305 605,21 265 18 156 18 422 851 3,89 %

South African Government 31.03.2036 6,25 35 000 20 800 55,35 752 19 373 20 124 -1 427 4,25 %

Spanish Government 31.01.2022 5,85 3 000 21 217 733,29 852 21 999 22 850 782 4,83 %

UK Government 07.03.2013 4,50 3 000 28 422 942,40 72 28 272 28 345 -150 5,99 %

US Government 31.08.2013 0,12 7 000 40 672 572,99 4 40 109 40 113 -563 8,47 %

US Government 15.12.2012 1,12 6 000 36 182 574,42 111 34 465 34 576 -1 717 7,30 %

Total Bond Portfolio 433 894 7 551 445 418 452 969 11 524 95,67 %

Disposable liquidity 20 545 0 20 508 20 508 -37 4,33 %

TOTAL 454 439 7 551 465 926 473 476 11 487 100,00 %

Portfolio Key Figures

Effective underlying return 3,80 %

Effective yield to clients* 3,00 %

Duration** 4,51

* Effective underlying return adjusted for managment fee.

** Duration is a simplifi ed 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 29.06.2012.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 28.09.2012 110,2017

Risk

421 3 5 6 7

S E CU R I T I E S P O R T F O L I O S K AG E N T E L L U S A S O F 2 8 - 0 9 -2012

39


Financial statementAS OF 30.09 .2012

Income Statement(all figures in NOK 1000)

SKAGEN VekstQ1 - Q3 2012

SKAGEN GlobalQ1 - Q3 2012

SKAGEN Kon-TikiQ1 - Q3 2012

SKAGEN Balanse 60/40***

Q1 - Q3 2012

SKAGEN Avkastning

Q1 - Q3 2012

SKAGEN HøyrenteQ1 - Q3 2012

SKAGEN Høyrente Institusjon

Q1 - Q3 2012

SKAGEN TellusQ1 - Q3 2012

SKAGEN Krona**Q1 - Q3 2012

PORTFOLIO REVENUE AND COSTS

Interest income and costs -1 780 -4 148 2 308 433 28 106 103 893 36 982 13 258 13 878

Dividends 177 643 707 722 889 103 - - - - - -

Realised capital gain/loss -80 553 691 673 713 142 -28 6 101 1 518 -907 8 841 -

Change unrealised capital gain/loss 456 499 1 210 212 735 195 -28 16 167 13 591 4 536 4 841 1 877

Broker's fee -5 188 -17 063 -33 004 - -8 -97 -63 -15 -76

Currency gain/loss -5 814 -37 789 -65 343 - 9 679 - - -901 -

PORTFOLIO RESULT 540 807 2 550 607 2 241 401 376 60 043 118 904 40 548 26 024 15 679

MANAGEMENT REVENUE AND COSTS

Management fee - fixed -57 233 -245 897 -663 305 - -3 852 -7 533 -1 686 -2 930 -730

Management fee - variable* -14 117 - 135 624 - - - - - -

ASSET MANAGEMENT RESULT -71 350 -245 897 -527 681 - -3 852 -7 533 -1 686 -2 930 -730

RESULT BEFORE TAX 469 456 2 304 711 1 713 720 376 56 191 111 371 38 862 23 094 14 948

Tax cost -10 272 -71 560 -92 199 -163 - - - - -

NET INCOME FOR THE PERIOD 459 184 2 233 150 1 621 521 213 56 191 111 371 38 862 23 094 14 948

Balance Sheet SKAGEN Vekst30.09.2012

SKAGEN Global30.09.2012

SKAGEN Kon–Tiki30.09.2012

SKAGEN Balanse 60/40***

30.09.2012

SKAGEN Avkastning30.09.2012

SKAGEN Høyrente30.09.2012

SKAGEN Høyrente Institusjon

30.09.2012

SKAGEN Tellus30.09.2012

SKAGEN Krona30.09.2012

ASSETS

Norwegian securities at cost price 3 619 474 935 595 1 142 074 72 879 744 245 3 101 505 910 551 - -

Foreign securities at cost price 3 155 895 29 253 461 37 393 751 - 117 617 - - 433 894 586 530

Unrealised capital gains 203 421 1 390 808 3 802 417 -28 8 084 8 470 3 504 11 524 1 703

Accrued interest securities 1 136 1 106 - 610 4 695 14 907 7 402 6 899 3 505

TOTAL SECURITIES PORTFOLIO 6 979 926 31 580 970 42 338 243 73 461 874 642 3 124 882 921 457 452 317 591 738

Dividend receivable 9 133 57 981 49 529 - - - - - -

Accrued interest bank - - - - - - - - -

TOTAL ACCRUED INCOME 9 133 57 981 49 529 - - - - - -

Accounts receivable - brokers 55 187 43 125 147 240 - - - - - -

Accounts receivable - management company 1 3 7 - - - - 1 -

Tax receivable on dividends 5 715 34 446 3 249 - - - - 853 -

Other receivables - - 2 441 - 286 2 125 - 362 -

TOTAL OTHER RECEIVABLES 60 904 77 574 152 937 - 286 2 125 - 1 216 -

Bank deposits 143 246 1 480 379 834 404 693 193 750 887 746 534 485 21 610 28 796

TOTAL ASSETS 7 193 209 33 196 904 43 375 112 74 154 1 068 679 4 014 753 1 455 943 475 144 620 534

EQUITY CAPITAL

Unit capital at par value 571 940 4 050 168 8 367 398 73 798 765 751 3 871 243 1 421 867 430 078 584 490

Premium -1 445 135 16 908 675 21 617 270 -19 269 173 34 557 -4 418 44 995 6 782

TOTAL PAID-IN EQUITY CAPITAL -873 195 20 958 843 29 984 669 73 779 1 034 924 3 905 800 1 417 449 475 073 591 272

Retained earnings 8 003 999 12 042 756 13 000 165 213 32 448 106 417 37 929 -889 15 983

TOTAL EQUITY CAPITAL 7 130 804 33 001 599 42 984 833 73 992 1 067 372 4 012 217 1 455 378 474 184 607 255

DEBT

Accounts payable - brokers 27 237 60 707 174 701 - - - - - 12 908

Accounts payable - management company 32 650 81 462 81 649 - 1 307 2 535 565 960 281

Other debt 2 518 53 136 133 930 162 - - - - 89

TOTAL OTHER DEBT 62 405 195 306 390 279 162 1 307 2 535 565 960 13 279

TOTAL DEBT AND EQUITY CAPITAL 7 193 209 33 196 904 43 375 112 74 154 1 068 679 4 014 753 1 455 943 475 144 620 535

Nubmber of units issued 5 719 404,74 40 501 682,83 83 673 983,01 737 983,24 7 657 510,42 38 712 432,11 14 218 668,57 4 300 781,41 5 844 901,73

Base price per unit 28.09.2012 1246,8126 816,4921 514,8049 100,2617 139,3729 103,6281 102,3460 110,2017 103,8848

Note: Divergence in price relative to the portfolios is due to accruals divergence as of 30.09.2012.

* Calculated variable management fee as of 30.09.12: pursuant to the regulations, the definitive statement shall take place as of 31.12.2012 based on value developments during the rest of the year.

** Figures in SEK 1000

***Fund established on 29 February 2012

F I N A N C I A L S TAT E M E N T

P H O N E : + 47 51 21 3 8 5 8 * E M A I L : CO N TAC T@S K AG E N F U N DS .CO M

Countries highlighted in dark blue are a home market.Countries highlighted in light blue are those in which SKAGEN has an office.

Countries highlighted in green are those in which SKAGEN has marketing permission.

SKAGEN’s International department has over the past few years grown to meet increasing interest and demand

from outside the home market in the Nordic region.

The department now handles inquiries and clients from countries as diverse as the Netherlands, Luxembourg,

Finland, Iceland, the UK and Switzerland. SKAGEN’s international department has grown alongside the

international expansion and is based between Stavanger, Norway, London, UK and Amsterdam, the Netherlands.

SKAGEN continues to expand in Europe Offi ces:

Head office

SKAGEN Funds

Postbox 1604001 Stavanger, Norway

or

Skagen 3, TorgterrassenStavanger, Norway

Tel.: +47 51 21 38 58Fax: +47 51 86 37 00

Email: [email protected]

London

Albemarle House

1 Albemarle Street

London W1S 4HA

UK

Amsterdam

Museumplein 5 D

1071 DJ Amsterdam

The Netherlands

Contact Customer Services

Customer Services is open from Monday to Friday from 9 a.m. to 5 p.m. (CET)

Either visit us at our office, send an email or call us and we will do our utmost to assist you.

Graphical production:

Printting Produksjon as

Documents

Skagen funds Market report October 2012