Asset managers rather than asset gatherers
Carnegie Asset Management (CAM), a Swedish-owned asset management firm that operates mainly from Denmark, has staked its reputation on the performance of a single product - its global equities fund.
CAM currently has €13.2bn of assets under management which includes local equity assets in Norway, Sweden, Finland and Denmark, and global equity assets. Some 60% of AUM is managed out of Denmark, where the focus on is on the global equity strategy, with €6.3bn under management.
The global equity strategy has outperformed consistently. Since its launch in 1995, the Luxembourg-domiciled Carnegie Worldwide fund has returned 328.2% against a benchmark return of 94.7% (see table). At the client level, CAM has also shone. Last year, the global equities portfolio that CAM manages for Sweden’s AP2 pension buffer fund returned 21.2%, outperforming its benchmark by 17.8%
The performance of the global equities fund has contributed significantly to the profitability of the parent Carnegie Group, a banking house which can trace its ancestry back to a Scot who fought at the battle of Culloden in 1745.
In 2007, asset management generated 37% of operating profits for the Carnegie Group. Most of this derived from the global equities operation in Copenhagen.
CAM’s global equities expertise dates back to 1986, when Mikael Randel, CAM’s current managing director, co-founded a business managing Europe, Australia and Far East (EAFE) portfolios with the simple aim of picking a small number of global stocks that would perform over the long term, come hell or high water.
CAM added US equity to EAFE equity in 1990 to create a worldwide equity fund that has become its flagship.
The business Randel created operates independently of the Carnegie parent’s activities and is structured as a boutique with its own performance-driven culture.
Bo Knudsen, (pictured right) a member of the portfolio management team running the Carnegie Worldwide Fund, says this structure shapes CAM’s aims: “We are an asset manager rather than an asset gatherer. We don’t want to be the biggest asset manager in the world, but we do have the clear goal of becoming one of the best.
“Our first priority is world class performance and profitability. Our second is asset growth. These need to hang together. If asset growth doesn’t fit with our performance and profitability priorities, something must change.” Focus is crucial, he says. “We take extreme care in deciding which products and client segments to work with. We only operate in areas where we are, or have the potential to become, world leaders.”
Global equities was a necessary choice for a Nordic investment operation, he suggests. “We think that if you want to be successful in local products you have to have a global perspective. We come from a small country and if we want to prosper we need to understand what’s going on outside our home country.”
Focus is at the heart of CAM’s investment philosophy, which is founded on the belief that investing in a strictly limited number of companies, which managers know and understand, is more likely to reduce risk than diversifying across a wide range of securities. The worldwide fund therefore sets a maximum of 30 stocks for its portfolio.
“The 30 maximum is the one thing that is set in stone and that cannot change,” says Knudsen. “But beyond that we are not bound to invest in any particular style, such as value or growth.
“We typically invest in large cap global companies with a market capitalisation of at least $10bn (€6.45bn). Our aim is to be able to invest and disinvest in these positions within a reasonable period of time without affecting overall portfolio returns.”
The CAM Worldwide Fund investment portfolio is structured like a triangle, he says. “Typically, the base of the triangle, the foundation of the portfolio, will consist of stable growth companies, typically in the food and tobacco industries and electric utilities areas. These are companies where the demand for products is constant rather than fluctuating, and which tend to generate a large amount of free cash flow.
“If you are reasonably clever in picking these stocks, which typically fall in the large cap area, you have a good foundation in the portfolio for holding down volatility.”
Over the cycle, this ‘base load’ of stable growth securities will typically account for half of the portfolio, Knudsen says. “The other sides of the triangle are the more aggressive parts of the portfolio. And the more aggressive part of the portfolio typically focuses on one specific theme.
“Every decade has had its major theme, sometimes emerging into a real bubble. We had the energy stocks in the 1970s, Japan in the 1980s and technology in the 1990s.
“This time it’s China and India, and the emerging markets in a broader perspective. That is the theme of the decade and that’s where we are focusing. The other linked theme is commodities. We see oil commodities, in particular, being driven by the historic rise of emerging markets.”
Carnegie’s investment process has remained the same since its launch in 1986. New products, such as the launch of a global long-short hedge fund in 2003, have tended to be variants of this process. The Carnegie Worldwide Long/Short fund is a concentrated portfolio of a limited number of high conviction long/short stock picks. It was conceived as a hedge for the worldwide fund, says Knudsen. “We thought that if we were to go into five or 10 years of very weak markets, it would be nice to have a product where we would actually be able to make money.”
Knudsen emphasises that the CAM hedge fund is not like other hedge funds and that CAM are stock pickers rather than traders. “We believe that the longer term, patient investor achieves the greatest investment returns. The average holding period for the long/short investments in the portfolio is often several months rather than days.”
Investment is focused on liquid, larger capitalisation global stocks, with a bias towards going long in higher quality companies and shorting lower quality companies.
“This is very disciplined process with a low number of stocks,” he says. “The hedge fund is maxed 30 stocks long, maxed 10 pair trades, and then there is also a maximum of short positions, eventually max 30 shorts. But we wouldn’t have both 30 longs and 30 shorts - it’s too many positions.
“We give ourselves a bit more flexibility in the hedge fund, but it is still based upon the same principles - long-term stock picking, with the long side very much structured like the triangle. We adjust the risk in the portfolio, adjusting the net exposure, typically using futures on the market, but also having some terminal short positions.”
The CAM hedge fund has attracted €500m to date, and will close at €1bn. “Obviously when the hedge fund is doing well - and it has done well over the years - it’s a substantial generator of revenue for us,” says Knudsen.
For the past four years CAM has been building an institutional presence in the UK, with some success. In the past 12 months, it has attracted £500m (€635m).
Since the beginning of 2008, CAM has also looked for business in Germany. “We see a trend where European pension funds are moving away from the index oriented mandates and towards a core satellite approach,” he says. “We fit very well into that.”
For a boutique asset manager like CAM, capacity is an issue. CAM anticipates that asset growth from the Scandinavian, UK and German institutional markets will enable it to reach capacity limits, in terms of both of assets under management and clients, that are roughly double the current levels.
Bo Knudsen has been involved in the management of global equities since 1989. He spent five years as a portfolio manager with Danske Capital, becoming head of international equity investments. From 1994 to 1998 he worked as a portfolio manager with CAM. After three years as executive director and head of equities with Nordea Investment Management, he returned to CAM, where he is portfolio manager in the global equities team. Knudsen is chairman of the Danish Society of Financial Analysts and the Danish Society of Investment Professionals.