Coming out of the woods
It is cold in Stockholm but asset managers are happy. The market recovery has translated into new mandates for some Swedish houses, with the rest contenting themselves with the fact that the worst is probably over.
At a safe distance from the downturn, managers say it had its benefits. The bear market made institutions take a greater interest in how their money was being run and pushed them into asset classes they had been deliberating over for years.
It also poured cold water on foreign managers’ ambitions, with local players using their proximity as a selling point to institutions wanting to keep a closer eye on their portfolios.
But the market falls have also sounded a wake-up call to some of the big Swedish players who have faced sharp criticism from their increasingly fussy clients.
From Nordea’s high-atriumed offices near the city centre, Nordea Investment Management’s assets under management have risen 15% so far this year according to managing director Johan Sidenmark. The company has won equity mandates from other houses and fixed income deals mainly from larger institutions outsourcing bond management.
Just around the corner SEB Asset Management, currently Sweden’s second largest institutional manager, has also seen increased business. “We are bringing in new clients at a rate that we haven’t seen for many years,” says Pontus Bergekrans, head of institutional clients.
But Carlson Investment Management and Handelsbanken Asset Management, contenders for third largest provider, say mandates have yet to pick up.
“Things are still pretty slow,” says Hans Hellenborg, head of marketing at Handelsbanken Asset Management.
Sweden’s pensions system comprises about 10 large funds, such as the state AP funds, with a steep drop to the second tier whose schemes are only around 20% the size of the big institutions. It is the second tier that has seen the most change, says Sidenmark.
The big funds are run along ‘Anglo Saxon’ lines, with specialist managers, largely selected through international consulting firms.
Their lack of short-term accounting constraints means they have faced less pressure to change. “The big funds have done an ALM a couple of years ago and they have stuck to their portfolios and to their objectives,” says Sidenmark.
It is quite a different story for the second tier, whose smaller life insurance companies and corporate funds have faced short-term solvency requirements or an obligation to underwrite risk.
The downturn saw a shift into bonds, with guaranteed products, particularly stock index bonds proving popular. But with the market rebound “we have seen a slow down in these kind of products,” says PO Ost, head of marketing at Carlson Investment Management.
There has also been “huge” interest in higher risk bonds, including high yield, emerging market and corporate securities, says Sidenmark.
And funds have made a big move away from domestic securities. A survey of 100 schemes for Nordea shows that over the past two years funds have increased their international equity allocations from a third to two thirds.
Second tier funds’ closer scrutiny of their portfolios has resulted in a shift from balanced mandates to a core/satellite approach and funds have been instructing managers to change the focus to absolute returns and/or take a more active approach.
“There’s been a restructuring, from 50 equities, 50 bonds, or whatever, to removing the 50:50 benchmark and saying: ‘give us CPI plus two percentage points’,” says Ost.
Unless the markets go skyward, this thinking is here to stay, he says. “Clients have realised that what really matters is to get assets at least as high as liabilities.”
As part of this trend institutions have put more money into hedge funds. “Clients had been discussing going into hedge funds for about five years, but few had done much. People were gradually moving into them and this was accelerated by the downturn,” says Ost.
Funds have also followed the example of the big institutions in using stop-loss mechanisms to protect against risk. And fund managers themselves have been scrutinised with a more critical eye.
“The managers that have had problems are the ones that have stated that they are active and in reality they are index,” says Sidenmark.
SEB, by its own admission, has come in for just such criticism.
“In the past we were very active. We were one of the pioneering institutional asset management business that took off in the mid-1990s,” says Bergekrans.
“But as we got a little too big during a short period, we had to focus a lot on streamlining, and that made the value proposition not as tailor-made as many clients would have liked.”
This was one of the reasons for Bergekrans’ own appointment two years ago, he says. Rather than launching new products, SEB resuscitated styles that had fallen into passivity. “We worked through our processes, brought in new people, including heads of teams. We were very clear about what we expected. It was a tough job.
“We have also become more flexible to what clients need, whether it be portfolio construction or working with more absolute return-oriented goals.”
The approach has paid off, says Bergekrans. An annual client satisfaction survey released in September ranks SEB number one for managers’ approval among their own clients, he says. Its rating among non-clients also has also shown sharp improvement, he adds.
SEB is beginning to turn its focus back towards growth after a period of cost-cutting.
It responded more quickly than most to the downturn, abandoning in 2001 its objective of being the “top-ranked institutional asset manager in Europe” in favour of focussing on profits, client satisfaction and core services.
It closed its London office and outsourced Asia and Japan portfolios, losing at least 100 staff.
But in recent months it has begun hiring people again on the client and investment management side.
Carlson also shed staff during the downturn and Ost is relieved that no further cuts will have to be made.
Nordea Investment Management cut around 40 posts when it concentrated its core equity products in Copenhagen last year, although Sidenmark said the move was not influenced by the downturn, but by the need to end duplication.
The downturn slowed the march of some foreign players into Sweden, with the likes of Danske Bank, Julius Baer and HSBC closing offices and reducing staff in Stockholm.
“It doesn’t look good to come and open an office and say: ‘we promise we will have a local service’ and then close it, especially when you have already done this once before,” says Hellenborg, refusing to name names.
Foreign managers are “always trying to take care of the customer from London, Paris or Frankfurt“, but at Handelsbanken “even our large customers belong to a branch office”, he says.
Bergekrans agrees. “Many international managers began coming into Sweden in the late 1990s, with strong brand names and a lot of caché. But the clients who have worked with them know that it’s difficult to get the same kind of service and closeness. And the performance hasn’t been as good as you could have expected.”
Swedish managers, of course, would say this.
But it seems that when, rather than if, international managers restart their invasion local managers will be better prepared to compete with them.