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A higher cash flow for the cautious investor aiming for capital preservation

The Danish mortgage bond market

One summer evening in 1795 a fire broke out at Holmen, a naval area in Copenhagen. The fire spread rapidly through the city, and within 24 hours, a quarter of Copenhagen’s inhabitants were homeless. Massive reconstruction required financing, and in 1797, Kreditkassen for Husejere i Kjøbenhavn (The Credit Association of Copenhagen homeowners) was founded. It was an association of borrowers and the first example of what later developed into a mortgage credit institution.

The basic idea was - and still is - that investors’ interests are better safeguarded if investments are based on a pool of mortgages rather than on a single mortgage. The legislative basis was therefore created for the formation of mortgage credit associations.

To this day the Danish mortgage bond market has never had any defaults, despite world wars, major market disruptions and political changes. With more than 180 billion Euro currently managed in this market, and daily trading volumes exceeding 1 –billion Euro, it provides the cautious investor with an opportunity to achieve an above average return with capital preservation. The Danish mortgage bond market is the third largest in the world. Moody’s has rated 95% of this market with ratings between Aa2 and Aaa. From the investor’s point of view, Danish mortgage bonds represent a safe option according to Moody’s Investor Service and it describes Danish mortgage bonds as being a strong low-risk financial instrument.
Today, it represents a rare opportunity for the cautious investor to considerably increase his cash flow (income) with a high degree of security.

A constant positive cash flow over a period of time will generate a positive performance, even though it is difficult to assure performance on a short term basis as markets move in either direction. The Managers have many years of expertise in this market and provide the Fund with continuous advice to achieve its objectives.

The Danish mortgage market
- an example of a typical investment

Description Investment Instrument Return pa Return E pa Note
Initial Investment 1.000.000E mortgage bond 2035 5% 50.000E pa The investment by investor
Bank leverage 3.000.000E mortgage bond 2035 7/35% (3x2.5%) 75.000E pa Financed by the bank with a 2.5% spread
Cash flow from a 1.000.000E investment 12.5% pa 125.000E pa Estimated total annual income

Nordic Cash Flow Fund in detail

Advantages
  • High security as 95% of the Danish mortgage bonds are rated between Aa2 and Aaa.
  • High rate of return with interests/coupons paid quarterly.
  • Low volatility.
  • Long/short duration.
  • Never a default since the introduction more than 200 years ago.
  • The third largest mortgage market in the world, after America and Germany.
  • Currency risk perceived to be extremely low as Denmark is a part of the ERM-II agreement with a narrow band of +/- 2.25% (since the introduction of the Euro, EUR/DKK has fluctuated less than +/- 0.40%).
Drawbacks
  • The borrower may redeem a percentage of the bonds at any time at par (100%).
  • An increase in short-term interest rates can reduce the cash flow.
Objective

The investment objective of the fund is to achieve long-term capital preservation investing in Danish mortgage bonds in particular, with long-term performance generated by constant positive cash flow. Leverage may be used to enhance potential returns.
Strategy

The investment strategy of the fund is to invest in Danish mortgage bonds offering a high rate of return with coupons paid quarterly. The fund may make use of leverage and ideally borrow up to three times the net assets to enhance potential returns.

The borrowing is used to invest in bonds paying a higher return than the borrowing cost with the aim of achieving a higher long-term performance. Any OECD currency may be used for borrowing but will typically be EUR, DKK or CHF. Derivative instruments may be used to achieve the investment objective.
Performance and backtesting

The historical performance is not a guarantee for future performance but the fund expects a long-term return on investment of 10-15% pa.

As the fund was established in 2004, a back test was run from July 1997 to October 2004 with only a 2 times leverage, borrowing 50% CHF and 50% DKK, and produced an average return of 17.68% per annum or a total over that period of 128.21%.

The back test is based on:
- Nordea Mortgage Bond index (source: - Nordea Analytics)
- 3 Months CHF LIBOR
- 3 Months DKK CIBOR
Fund Highlights
  • Seven years backtracking record with positive performance of 17.68% per annum.
  • Capital appreciation achieved through a positive cash flow.
  • An above average return investing in Danish mortgage bonds.
  • Simple investment strategy.
  • Moderately leveraged portfolio.
  • Moody's rates 95% of the Danish mortgage bonds between Aa2 - Aaa.
  • Never a default in the Danish mortgage bond market since 1797.

Contact information:

Hedge Fund Services BVI
James Frett Building,
PO Box 761, Whickhams Cay 1
Road Town, Tortola,
British Virgin Islands.
Tel. +1 284 494 6046
Fax +1 284 494 6898

Nordic Cash Flow Fund, Ltd
Nemours Chambers, PO Box 3170
Road Town, Tortola, British Virgin Islands
Tel: +1 284 494-6046
Fax: +1 284 494-6898
Web: www.ncf-fund.com
E-mail: info@ncf-fund.com