Keeping faith with the past
Fennell Betson talks to the man charged with ensuring that the Nobel Foundation still
has the cash to fulfil the terms of its founder's bequest
Next month in Stockholm and Oslo this year's winners of Nobel prizes will be presented with their awards. For each laureate this is an accolade confirming that they are at a pinnacle of achievement in their fields. No other award carries the same seal of approbation and such universal glory.
Once again the living will of Alfred Nobel will have been fulfilled and the Nobel Foundation will have discharged its obligations to its founder. He will have obtained his objective of not just rewarding achievement with recognition, but also with hard cash as the winners walk from the ceremony richer by prizes worth Skr7.5m ($1m) each.That has been the hard part for the Stockholm-based foundation - to ensure the prizes have the same real value as in Nobel's time, something it has not always been able to do.
The foundation's deputy executive director Åke Altéus explains: When Alfred Nobel died in 1896, he wanted the money to be invested in a fund of safe papers, meaning government bonds and the like. As there was no inflation then, it seemed to be a good idea."Inevitably, the capital was eroded and the value of the prizes reduced. "This continued until 1953, when we were allowed to invest in equities. Slowly the trend was changed," he says.Altéus attributes the turnaround to two factors. The first was the equity market boom of the 1980s. "Investors either did well or very well then." The other was the sale of the Bevaringen company, which owned a number of Swedish commercial properties, in stages during the decade, with the last 25% being disposed of in spring 1990, just before the property crash in Sweden later that year, to one of the local insurance companies "at a reasonably good price". It's a deal that is still commented on for its fortunate timing, Altéus adds. "This was a once-in-a-lifetime deal, the whole transaction meant we doubled our capital and enabled us to increase the prizes by 100% from Skr3m in 1989 to Skr4m in 1990 and Skr6m in 1991. That meant we were back in real terms to the first prize awarded in 1901 amounting to Skr151,000. It's a bit shaky, but it is as close as you can get." The original capital Nobel left was Skr31.5m and the foundation's assets have a market value of Skr3bn today.
When Altéus joined in 1989, about 15% of the portfolio was invested abroad, the proportion today is 54%. "The overseas portion was like a spice in the mix of a largely Swedish portfolio of bonds, equities and real estate." As the foreign proportion increased, external managers were used. "But we did manage the Swedish equities internally until 1995." Though it meant parting with a hands-on activity he really enjoyed, Altéus says that with just a total staff of 10 in Stockholm, the decision was taken to concentrate internally on the asset allocation, manager selection and a follow-up system of portfolio evaluation..
The system puts every manager or fund used through a 60-month track record of performance, against a battery of measures. In addition to the percentage returns against the chosen benchmark, they include the Beta, r-squared, and a range of ratios. "This is a very interesting way of looking at risk and return," says Altéus."Our approach is to decide our position, say 20% in the US. The starting point would be to consider buying the S&P or another index, as this would be the least expensive way of gaining exposure to the market." In fact, the foundation has never taken the passive route. "We have been fortunate enough to find managers over time who are active and deliver more than the index on both a risk-adjusted basis and after fees."
Currently, the fund is 64% in equities, with 13% of the total portfolio inSwedish stocks, part-managed by Handelsbanken on a discretionary basis and part in a mutual fund Trevise Tillvaxtfond. The US equities, amounting to 20%, are with Alliance Capital and in the Brandywine Fund; Europe, excluding Sweden (16%) is with Pictet in a segregated account; Japan (6%) in the Carlson fund. Carnegie in Denmark handles a gobal equity portfolio on a discretionary basis and 9% of the portfolio is invested in the Templeton Emerging Markets Fund.
Altéus acknowledges that this is quite a number of managers, but points out that the fund used to have more and decided to concentrate, within the overall rule that no manager should ever have more than 10% of the assets and the minimum amount be Skr100m per mandate.
"We get many big and small investment houses coming to us offering their services." Frequently, they will find themselves in the august surroundings of the foundation's boardroom under the penetrating gaze from the portraits of Nobel and his mother, and participate in what Altéus calls his "Asian way of doing business". "I like to sit down with potential managers, as I do with our existing managers, and look one another in the eye and drink tea together. I like to do this for quite some time, as we do not change managers easily."
What he seeks is "a structure". "We do not like black boxes or magic fingers, what we are looking for is transparency. We need to get the feeling that the manager knows what he is doing and that we can understand what he is doing." Managers will have to provide the past data for the past 60 months to be analysed in the foundation's reporting system.
"There should be a philosophy, a way of doing business, a team filled with an idea that come rain or come shine, they will just keep on doing this. For me the only indicator is to find a structure like this, to know it has been in place for a number of years and still is in tact. Even then, I know there are no guarantees that they can repeat their past performance." He adds: "Once we have got to know a manager and give them a mandate, we also know we must give them two of three years before we can make any judgement." Sometimes, they will use consultants Frank Russell or local advisory firm Intervalor to help select managers.
On the ongoing relationship with managers, the discussion about the benchmark and agreement on it are very important. In addition, regular meetings are held, normally twice a year, to keep things under control. "When we are dissatisfied with a manager, you will examine things under a number of stances. Are you happy if the index goes down 35% and the manager is down 25% - obviously you are not, though you may have to abide by it. Peer group analysis can also be interesting, are they always in in the upper quartile? The third way is to look at absolute performance." The fund has a 50/50 split between using segregated accounts and investment funds in the equity portfolios, but this is not planned, he says. He finds attractive the fact that funds provide all the supporting services and in the US particularly the rules are strict. "If you are in a segregated account it is your responsibility to see the manager is carrying out his functions."Usually on the fees side, he is looking for equivalence between the two approaches. "It is one of my joys in life to negotiate fees."
The next major task ahead will be the rebalancing of the portfolio, as the foundation is in the process of selling practically all its property in Sweden, which amounts to 12% of the portfolio. One problem with property is that the foundation is taxed on any income from directly-held properties, whereas other investment income is tax-free. "We also find real estate hard to put into a model and see how it helps in reducing risk, as the statistics are too few to be significant." The new funds will not become available until next year. "We have not decided what to do with these. But we are looking for higher yields. The present returns from in the form of interest, income and dividends are too low compared with expenditure on the prizes, determining who gets them and administration," he says. "We are not currently able to use realised capital gains for these purposes, though this is something we are looking to change in the years to come.""