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Novo Annual Review 2016
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credit
s novo?s credit portfolio
is diversified across several types of underlying risk sources. these assets can be broadly classified into the following categories: ? emerging market debt ? senior secured loans issued by corporations ? commercial real estate debt ? high-yielding debt issued by corporations ? subordinated debt issued by financial institutions the management of our emerging market debt assets is carried out by an external manager, who pursues a bottom- up approach in global credit markets. the firm is exclusively engaged in this activity and has extensive experience in dealing directly with sovereign and corporate entities in non-g7 countries. the emerging markets strategy accounts for about 30% of novo?s credits. the majority of our senior loan assets are managed by two managers ? one specialises in european, the other in us senior loan assets. we also have a few senior loans in our internally managed credit portfolio. our senior loan assets are typically 1st lien floating rate notes, issued by large international companies with an appreciable degree of debt on their balance sheets. our senior loans accounts for about 30% of the credit portfolio. our real estate debt assets are overseen by an external manager, who focuses on commercial mortgage-backed securities. the vast majority of the underlying real estate assets are located in the us. the credit portfolio also includes a european high yield bond strategy, which is conducted by an external manager. our internally managed credits primarily consist of subordinated debt issued by danish financial institutions. we also have a number of investments in debt issued by corporations in various industries. these bonds
or loans typically carry a yield that reflects that the security is either subordinated or that the market perceives the issuer to be risky. our high proportion of floating rate loans means that our credit portfolio is less sensitive to changes in interest rates as compared to fixed rate high yield bonds. the absolute return of novo?s credits from year to year is highly dependent on the global capital flows either into, or away from risky assets. the relative performance relies on the ability to invest in securities that carry a significant yield while avoiding losses. all of our credit investments, internally and externally managed, are based on a business-oriented investment approach, in-depth fundamental analysis, and a long-term perspective. in 2016, our credit portfolio returned 11.3%. this should be viewed relative to the benchmark (a blend of merrill lynch global high yield index and j.p. morgan emerging market bond index) that returned 12.6%. the relative underperformance is largely due to our underweight in low- rated and energy-related corporate credits. over the past five years, the credit portfolio has returned 9.5% p.a. versus a benchmark return of 6.9% p.a. bonds novo?s bonds are managed in-house. a large bulk of our bonds are covered bonds issued by danish mortgage institutions. our fixed-rate covered bonds typically have a few years to maturity, which makes them less sensitive to changes in interest rates. the bond portfolio also consists of investments in the safest tranches of securitised pools of international corporate loans. finally, we have a few minor positions in bonds issued by corporations with high credit ratings. in short, the bond portfolio has a high liquidity, low credit risk and low interest rate risk. by the end of 2016, the bonds amounted to dkk 6.4 billion. bonds that have a high liquidity and low default risk, such as the bonds in novo?s portfolio, offer yields that are only slightly above yields of risk-free government bonds. therefore, the absolute return of novo?s bonds is primarily determined by the danish interest rate environment, which is currently trading at historically low yields. in 2016, our bond portfolio returned 1.4%. this should be viewed relative to our benchmark (effas 1-3 index) that returned only 0.2%. over the past five years, the bond portfolio has returned 1.7% p.a. versus a benchmark return of 0.4% p.a. continued from p. 50 52 novo a/s 2016
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