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Novo Annual Review 2016
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investment
approach novo?s financial investment portfolio
consists of equities, credits, bonds and illiquid investments. some of these investments are managed by external firms and some are managed in-house. regardless of asset class or management structure, all of our financial investment adhere to a number of investment principles: ? buying businesses not ticker symbols: focus on the underlying business fundamentals and values. invest in high-return businesses managed by shareholder- orientated people. ? long-term investment horizon: attempt to buy businesses that are out of favour for reasons that we consider temporary. ? avoid permanent loss of capital: don?t pay too much for the asset in the first place and understand the fundamental risk of each asset. ? cyclicality in valuations, earnings and credit spreads: opportunities arise due to ?human herd? behaviour that creates cyclicality in financial markets. ? conservative: only pay for the expected outcome and keep a margin of safety. do not buy into optimistic management cases and leave room for upside potential. equities novo?s equity portfolio is liquid and diversified. around 15% of the equity portfolio is currently allocated to highly liquid index products. the remaining 85% is invested in about 250 different listed companies that have been carefully selected by our active managers
(the 20 largest externally managed holdings account for a third of the equities). by the end of 2016, our actively managed equities were split between 13 external managers in a mix of global, regional and country-specific mandates. common to these managers is that they: ? invest in durable cash-generative business; ? invest for the long-term; ? have a strong focus on management and shareholder orientation; ? invest only in companies that they understand; ? base their investments on in-depth fundamental analysis; and ? are only willing to pay a reasonable price, even for an excellent business. in order for us to become an active partner rather than a passive client for our external managers, it is important that our team understands the theses for the majority of the securities that the external managers invest in. to ensure this, a significant amount of team resources are devoted to following the companies in question and discussing investment theses with our current managers. we are constantly screening the capital management universe for new talent that match our investment philosophy and values. we only consider managers who have a coherent and well-defined investment strategy, invest with passion and integrity, are sceptical of conventional wisdom, and whose interest are strongly aligned with ours. in 2016, we introduced a new manager to the portfolio, who is regarded as one of the best long- term value investors in asia. a part of the equity portfolio is managed internally. the internally managed liquid equity investments are primarily comprised of our investment in the danish engineering and machinery company flsmidth, but the portfolio also includes a few smaller stakes in other listed companies. in the beginning of 2016, we increased our stake in flsmidth where we became a major shareholder in 2015. on january 21th, we announced that our holdings corresponded to 15.02% of the share capital. flsmidth supplies equipment and services to the mining and cement industries. these industries were not in favour on the stock market at the time of our investment, and we were able to acquire the shares at an attractive valuation in 2016, our liquid portfolio returned 8.1%. this should be viewed relative to the benchmark (msci world index), which returned 9.3%. over the past five years, the equity portfolio has returned 11.3% p.a. versus a benchmark return of 9.8% p.a. continued from p. 49 continues on on p. 52 50 novo a/s 2016
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