The Power of Zero Nils Hast, Senior Portfolio Manager, ODIN Fund Management

Helsinki, February 9, 2016

Agenda 1. Macro Picture Update

2. The Power of Zero – The Hunt for Yield

Three themes occupying investors’ minds

And plenty of uncertainty associated with these themes

Data continues to disappoint in the US, whilst data in the rest of the world also surprises on the downside, but to a lesser degree. European data now disappoints, from surprising on the upside until January

Developed Markets, Citi, G10 Economic Surprise Index

Inde

x

- 125

- 100

- 75

- 50

- 25

0

25

50

75

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

Source:

Financial markets are back in «panic» mode

Source: Credit Suisse

A tough start to 2016

Source: Credit Suisse, per 4 Feb 2016. Per 9 feb pre US open.

YTD price change

-9.3% -15.7%

-29.9%

-14.7%

-21.9%

-11.8%

+12.7%

Recession pricing in US credit markets

US Corporate bonds (BBB rating) at recession levels

Source: Morgan Stanley

Recession in the US?

Source: Credit Suisse

The Chicago Fed’s National Activity Index

A tough start to 2016. But we’ve seen it before…

Source: Morgan Stanley

Agenda 1. Macro Picture Update

2. The Power of Zero – The Hunt for Yield

From School maths

The third index law, is know as the Power of Zero

𝑎𝑎0 = 1 for 𝑎𝑎 ≠ 0

The Power of Zero (or rather «the Power of Minus»)

Zero rates and QE

Drive down yields

(short and long)

Push investors to take more

risk

• Credit risk • Duration risk • Riskier asset

classes

Record low interest rates - drives the hunt for yield

Source: Swedbank, Bloomberg

0,216 %

The search for yield continues…

30%

57%

70%

43%

Major DM issuers Neg policy rate issuers

Share of government bonds trading at negative yield

Negative Positive

First bond with a positive yield: Germany in Feb 2024 and Switzerland in April 2033

Source: Credit Suisse

Climbing the pyramid of yield (and risk)

Source: RBS

Risks: Beware of tourists in the asset class

The hunt for αlpha

• Increased allocation to riskier asset classes • Low yields are a powerful driver «The Power

of Zero» Allocation

• Invest in lower credit quality paper • BBB instead of A Credit risk

• Go further out on the curve • 10 years instead of 5 years Duration risk

(D)?

C C

How to navigate European credit in 2016?

Stock-picking

Credit risk

Be satisfied Go subordinated

Go South (if you get paid)

Recently we have seen divergens in the high yield markets

80

85

90

95

100

105

110

okt jan apr jul okt jan

Norsk HY (DNB HY TR H) Europeisk HY (BBG EU HY) US HY (BBG US HY)

Source: Bloomberg. Norske markedet ved DNB Norwegian High Yield Hedged Index. Europeiske markedet ved Bloomberg EUR High Yield Index, amerikanske markedet ved Bloomberg USD High Yield Index.

20

A portfolio of investment grade and financials has outperformed pure High Yield

80

85

90

95

100

105

110

okt jan apr jul okt jan

Norsk HY (DNB HY TR H) Europeisk HY (BBG EU HY)US HY (BBG US HY) ODIN Kreditt

Source: Bloomberg. Norske markedet ved DNB Norwegian High Yield Hedged Index. Europeiske markedet ved Bloomberg EUR High Yield Index, amerikanske markedet ved Bloomberg USD High Yield Index.

21

Story for 2015 and 2016: Divergence

More stimulus Looser monetary policy Withdrawing stimulus

Tightening monetary policy

Big disconnect between markets and central banks guidence

Source: Credit Suisse

Road map: Divergence

• Low interest rates – for long

• Sluggish growth

• Pressure on public spending

• Central banks continue in lead roles

Recipe: Diversification

Diversification is prudent

In particular at times of uncertainty