The Danish asset management industry remains relatively sheltered by taxation and investment restrictions that leave many international players wary of a market that is a small prize in relative terms.
Domestic asset managers and consultants, however, believe that this will change as increasingly sophisticated Danish pension funds diversify internationally.
Hasse Nilsson, head of Alcifor Advisory Associates, believes that Nordic countries lag others in Europe in terms of sophistication, but that change is inevitable in part spread by increasing ideas of best practice, while asset managers are increasingly facing competition from international players. The consensus is that, of the foreign players, Schroders - rated by Nilsson and by pension managers - has had the most significant market impact, though others such as State Street and Dresdner RCM Global Investors have offices in Denmark.
With the increasing number of overseas mandates, Niels Fink of the general workers' pension fund PensionSelskaberne notes: Several of the large international players based in London are managing mandates from Danish institutions but domestic players still play a major role."
Nilsson, assessing these domestic players says that Danske Capital Management, part of Den Danske Bank is the largest with Dkr 170bn ($26bn), but that Dkr120bn of those assets comes from Danica Life the bank's insurance subsidiary. Unibank, with no insurance money, manages Dkr60bn.
"It is fair to say that Unibank is the most aggressive, offering active outside management in bonds and equities." He describes Den Danske as "more modest" with a focus on the indexed equity mandates. "Because of their large involvement with institutions they tend to get their share of the cake." The latter has, however, separated its asset management activity whilst Unibank's asset management function remains integrated within the bank.
The two asset management groups of note, he says, are ABN AMRO-owned Alfred Berg "who have built up a competence especially in Nordic coverage" and Carnegie Asset Management. "Carnegie is a little more fractional, with a mixed organisation controlled by Singer & Friedlander. They are doing well in some areas but are not coherent in terms of matching Alfred Berg."
A fifth company, Dansk Portfolio, has good relations with the unions and co-operatives which has seen it win business aided by a co-operation agreement for managing international bonds and equities with Mercury Asset Management, now part of Merrill Lynch. The final player is the smaller merchant bank Gudme Raaschou which has Dkr5bn mostly from small domestic players.
The major insurers are PFA, Tryg-Baltica, Codan and Danica who will run money for companies' retirement provision outside of the industry wide schemes. However with the associations for cross industry pension schemes and for life insurers recently amalgamating, distinctions may be blurring. Insurers undertake some money management - mostly passive tracking - while some asset managers are hopeful of picking up increased business from them in future.
That said, all the asset managers identified the greatest growth potential as coming from the labour market schemes.
While domestic players dominate the market, it is the international players, according to Nilsson, that are taking advantage of trends in the industry. "If you look at the figures, 10 years ago international diversification was 1%, three years ago in 1994 it was 6% and now it is 12%. The bulk has gone to international asset managers."
For domestic players, the market is still growing, as funds continue to accumulate assets.
Steen Villemoes, investment director at DIP, the Danish pension fund for engineers, has a policy of externalising all international investments. These currently stand at 23% and cover all regions using managers such as Danske Capital Management, Schroders and Bank Invest. Its global investments are either mutual funds or joint arrangements with other Danish pension funds apart from a segregated European mandate managed by Carnegie Asset Management and a small cap European portfolio managed by Singer & Friedlander.
Villemoes looking at the historical context says: "Looking back 10 or 12 years, Danish managers were trying to become players and they weren't qualified. But in the last couple of years the quality has improved." Fee levels for both domestic and international players have also come down.
Domestic managers may receive a smaller percentage share, but the total is increasing in size.
The outgoing chief executive of Danske Capital Management, Karsten Knudsen, says that the two banks Den Danske and Unibank account for 60% of the market in Denmark with the rest divided between the various specialists and the international players. He adds however that this depends on definition because the insurance companies will have their own indexing managers.
"The institutional market in size and in nature is the dominant market and it will stay so. They are going to diversify. Investors are placing an increasing proportion of their assets internationally," says Knudsen.
Ole Jacobsen, who heads Unibank Investment Management, noting that the bank is the largest manager of segregated money (because of Danske's management of Danica assets) says that the extension of the market to blue collar workers means that almost everyone in the labour market is covered and this has hugely boosted market growth.
Mikael Randel, managing director of Carnegie Asset Management, says that the banks have, in the past, had a stranglehold on the open pot of money but that this is changing.
"It used to be bond country, and there lots of extremely good bond people but there are a lack of asset management people in equities. Equity has always been a small part of the equation," he adds.
He points out that outsourcing is relatively new as is the buying of foreign equities although the decline in bonds is increasing. A small part of the bond portfolio is outsourced, restricted by the complicated tax rules while the local equity portfolio is managed in-house.
"If you are not indexed, it is difficult for these pension institutions to hold on to asset managers and it is difficult for them to manage these kind of people. It is a hazard if you have employee turnover," he adds.
Most of the managers regard the Nordic countries as their home market but there are some inevitable differences in emphasis.
Knudsen says Danish managers have developed an international expertise combined with knowledge of investment restrictions that gives them an advantage when dealing with domestic clients. Jacobsen agrees. He also says that emerging Central and Eastern Europe is increasing in importance with Danish companies well placed for reasons of geography and trading links.
Christian Høm, the CEO of Alfred Berg Asset Management in Copenhagen, part of a Scandinavian grouping, believes that the group as a whole is ahead of the game in terms of developing a Nordic concept and that the others are only now catching up.
"From the Alfred Berg point of view, our strength is the Nordic concept. We were the first asset manager that took the Nordic viewpoint, and I think that is what the other investment managers are doing now, building up a Nordic home base." He adds that they were also among the first to separate out the asset management function, "to see asset management as a business centre", having done so in the 1990.
Unibank, as with Alfred Berg, strongly emphasises the Nordic approach: "In Unibank our vision is to create a truly Nordic investment organisation with a global product range. We have just bought an investment manager in Stockholm. We are very close to being truly a Nordic player," says Jacobsen. But this, he says, does not limit their ability to manage elsewhere.
"At Unibank Investment Management we have had a very good performance compared with the global players and have outperformed the Morgan Stanley index in our global portfolio in 1995, 1996 and 1997, while some of the big players in London have had difficulties. We have not been so underweight in the US and overweight in Asia and Japan as the UK houses," he adds.
"The effect of the euro," says Carnegie's Randel, "will be that Europe will be the equity home market. By definition any asset manager worth his salt will be a European manager but that said there will always be local controls and portfolios with local stocks."
The pension funds themselves are also becoming increasingly sophisticated which is helping to drive change.
"Competition is heating up," says Randel. "Investors are demanding more performance. Companies are having to improve their performance to keep their market share when performance in the past has not been the main issue." He adds that the example of underfunded institutions in Japan has sounded a warning to Danish investors.
"Most institutions are aware of whatthey can ask for and what they can get in terms of service and performance. Their requirements in terms of performance is consistency with the MSCI," says Nilsson.
He sees a trend towards indexation in efficient markets and the adoption of different asset classes such as regional active mandates (where market efficiency is low), private equity and European mid-caps. But he is worried that funds may not have the relevant systems in place. "Some funds miss a formalised procedure for following up and controlling external managers. They don't recognise the need for distribution of power between money managers, brokers and custodians."
"They are lagging in terms of efficiency of costs in running assets both internally and externally."
Knudsen continues: "There is a move on international bonds as well but there is a recognition that where they want more specialised mandates, say a European mid cap mandate, they will tend to outsource."
"On the equity investment side we see a high level of sophistication. Some of them go for indexation of most of their equity investments and use a smaller proportion, say 25%, for tactical allocation in specialised mandates." He adds however that in most cases there is little by way of emerging market investment.
Demand for services such as currency management is dampened by tax regulations which preclude hedging without financial penalty. He also notes that liability matching obligations tend to push funds towards equity investment rather than fixed interest.
Jacobsen adds: "More and more of our clients are looking for a strategic partner. The overall asset allocation is more important in the long term than their performance in the individual asset class."
In terms of competition between international and domestic players, the managers believe that competition must increase but domestic players are still cynical about how much influence international players will have.
Høm emphasises Alfred Berg's domestic credentials, despite ownership by ABN AMRO, adding that there will be little foreign competition for Danish portfolios, while international competition will concentrate on the large investors. "We do see increasing competition out of London on the international side."
"They are not taking market share with one of the main reasons being language. We will see more players in the future because everybody seems to be concentrating on asset management. Foreigners find it very difficult to set up shop which is positive for the existing players. But I think that the Nordic players will probably set up asset management shops here in Denmark," says Randel.
Unibank's Jacobsen believes that the euro's introduction will inevitably increase the moves to outside investment but is uncertain about its effect upon competition. "Since the market was liberalised several institutions especially from London, have entered the market but it is our experience that the market is very tough and it is difficult to compete with Danish institutions. One problem is the Danish tax system, the real interest rate tax which is difficult for foreigners," he says.
However international companies such as Dresdner RCM Global Investors which set up in April last year has made progress having already won several mandates.
Discussing his company's progress, Thomas Pederson, a director with Dresdner RCM in Copenhagen, says: "The best way to actually service the Danish market is to have an office in Copenhagen. There is no doubt about that. We need a local presence and I am absolutely convinced that with global asset management resources we stand quite strongly in terms of making an impact on the industry. This may be contrary to what you have heard from the local managers. If we put our resources to use in a dedicated market like Denmark we will over the years reap the benefit."
Pension manager Niels Fink adds that the introduction of the euro combined with the existing regulations, will clearly increase the opportunities to invest in non-Danish European equity markets. "The increasing allocations to non-domestic markets may bring a higher degree of out-sourcing although funds themselves might also increase their internal research capabilities."
He says that being so close to an important currency will mean that it will be "the first and most natural place to diversify".