Exposure to Brazilian utilities giant Eletrobras had a major negative impact on the performance of both of Skagen’s main equity funds in 2012, the firm’s CEO has revealed.
Speaking at the Skagen New Year’s Conference in London on Tuesday, Harald Espedal, who is also investment director at the Norwegian boutique, said holding Eletrobras had led to a ‘painful year’ for its two core strategies.
The stock featured in both the Skagen Global and Skagen Kon-Tiki funds and Espedal said it had cost the global equity fund 2.6% of performance and it had cost 3.7% on the emerging markets fund over the course of 2012.
Espedal said, despite the Skagen Global fund managing to outperform its benchmark, the MSCI World AC, by 2.1 percentage points, it had been constrained by its exposure to Eletrobras.
Meanwhile, the Skagen Kon-Tiki fund returned 8.3% in the calendar year, while its benchmark, the MSCI Emerging Markets, rose 13.1%.
Espedal said problems arose from government intervention in the company in the autumn following reforms of the utilities and power generation sectors in Brazil.
This was compounded by the agreement to a partial nationalisation of the stock at, what Espedal termed, ‘very unfavourable terms’ for shareholders.
‘The Brazilian government came in with a low ball offer both in terms of financial compensation for taking over and also the compensation the companies would get for running the utilities on behalf of the government,’ he said.
‘We protested against them taking that offer. However, the fact that there is some Brazilian government control of the company means it was able to make the board vote in favour of the deal at the general meeting of Eletrobras. As a result, there was a big permanent loss of value in 2012.’
However, the company still retains some minor holdings in Eletrobras due to its historically strong performance.
‘We have sold out of some of the positions and reduced our exposure across the funds,’ Espedal added. ‘Historically it has achieved well and been a good contributor for our funds.’
According to the latest available data, the Skagen Kon-Tiki fund has a 0.75% position comprised of preferred shares in Eletrobras and 0.03% in straight equity.
In comparison, at the end of December 2011, Eletrobras had made up 6.21% of the portfolio exposure.
Meanwhile, Eletrobras preferred stock comprises 0.81% in the Skagen Global fund, while there is a 0.21% position in Eletrobras straight shares in this fund.