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Asset Allocation and Fixed Income Anders Wagner

Senior Analyst

Date 8. February 2011

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Outlook for Fixed Income -first half 2011

• Government/Mortgage: We prefer low duration as we expect interest to go higher.

• Credit: Still interesting even though spreads has come in.

• High Yield: Recommended as default rates are falling and recovery rates are getting better.

• Index linked bonds: Interesting for long term investors as the bonds provide some protection against inflation.

• FI Hedge Fund: Provides stability to the portfolio in a scenario with raising inflation and higher interest levels

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Fixed Income in the Model Portfolios: (New money)

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Duration Conservative

Moderate

Aggresive

Gov./Mortg. <=2,5 year

40% 30% 20%

Gov./Mortg. <=5 years

20% 10% 5%

Gov./Mortg. >5 years

Credit 20% 20% 25%

High Yield 10% 20% 25%

Inflation linked

5% 10% 10%

FI Hedge Fund

5% 10% 15%

Total 100% 100% 100%

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Appendix: Fixed Income Charts:

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It also means that corporate defaults should continue to be very low.

Thus if our macro scenario is right (the Green phase)...

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Global high yield default model

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Percen

t

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5

8

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15

Percen

t

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Forecast

Actual default rate

Model

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Rating tells about the counter part risk

Moody's Definition

Aaa Bedste bonitet, ekstremt stærk betalingsevne

Aa Meget høj bonitet, meget stærk betalingsevne

A Bonitet over middel, stærk betalingsevne

Baa God bonitet, tilfredsstillende betalingsevne

Ba Spekulative elementer, betydelige usikkerhedselementer

B Beskeden sikkerhed for betaling. Betalingsevne besiddes p.t., men stor risiko for problemer

Caa Betalingsevne truet, meget sårbar for betalingsproblemer (hos Moody's evt. også misligeholdt)

C Udtalte problemer med betalingsevne (hos Moody's ofte misligeholdt)

Investment Grade

Speculative Grade (High Yield)

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The problem for us is to determine where we are in the cycle! More

later...

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A stylised business cycle

Recession

Expansion

Out of recession-phase2Recession -phase 1

Broadening recovery -phase 3Policy normalization/mid cycle slowdown/into recession -phase 4

Trend growthLate spring

Autumn2010