Steady hand in a storm
These are interesting times at Copenhagen’s BankInvest. Its 20-strong global equities team was recently reduced to 17 as its head, David Dalgas, resigned, followed by chief portfolio managers Klaus Ingemann Nielsen and Kenneth Graversen. The team still boasts an average of 10 years’ experience, and it maintains that the resignations would not lead directly to changes in its (low turnover, fundamentals-based) global equity portfolios.
BankInvest has form dealing with organisational change. Late 2008 was an even more tumultuous time of upheaval. That was true of nearly every finance company, of course - but for most, the soul-searching followed dreadful performance. By contrast, BankInvest’s flagship Global Equities strategy finished the year down 14.1%, beating its benchmark, the MSCI AC World Index, by almost six percentage points - the tenth straight year it had done so.
The troubles were rather those of the firm’s owners - small and mid-sized Danish regional banks struggling with bad loans. A much greater tragedy struck in October 2008, when chairman of the board Knud Christensen, an executive director with Amagerbanken, died suddenly. These shocks were the catalyst for a series of resignations at board level, accompanied by similar changes at management level - chiefly, the replacement of Niels Thuesen as CEO by Sydbank’s Torben Nielsen and the promotion of Andrea Panzieri to CIO.
“After the reshuffle we focused on returning to our core strengths, and the new board gave us the mandate,” explains Panzieri.
The first casualty was pension fund administration, which had expanded out of an existing third-party fund administration offering. “As so often, the devil was in the detail,” says Panzieri. “If you start branching out into pension funds under different regulatory regimes the re-tooling of your systems starts to take longer and impair your core businesses, and you don’t compensate with enough extra marginal business. So we designed exit strategies by mutual agreement with some of our clients.”
Next up was private equity and venture capital. BankInvest retains some - notably its Vietnam-based frontier-markets venture business - but did not renew fundraising for its IT and biotech products. This was partly due to the depressed state of the asset class, but Panzieri also concedes that the firm’s great track record in identifying investment opportunities was never matched by “a solid track record in exits”.
So back to the core business meant listed securities, pursued with a rigorously bottom-up focus on high quality companies with high free cashflows, implemented via pretty diverse portfolios - the global equities product generally runs with 80-100 positions.
“When investors don’t buy into our investment process it tends to be because they expect more concentrated portfolios,” notes Panzieri. “People start to think about concepts like enhanced index.”
It is true that beta tends to remain stable around 1.0. But the 10-year run of outperformance shows that this is a long way from enhanced-index. That finally came to an end in 2009, when it lagged the MSCI index by 0.9%. Which should come as no surprise, given the extent to which beta risk drove that rally: “It would have been quite difficult to explain if we’d ended the year way ahead of the benchmark”, Panzieri notes. More notable, in a way, is that the strategy stayed ahead of the benchmark until mid-year and had only given up those 90 basis points by year-end. That is a similar achievement to the outperformance during 2003-2007 (excess returns of 10.4%, 4.1%, 4.3%, 6.4% and 3.1%, information ratios of 1.80-2.00). Hitting those numbers with such a bottom-up, quality-focused style was remarkable given the momentum in markets and the leveraging of balance sheets in certain sectors. The fact that the crisis did not derail things is reassurance that big style tilts were not brought in to do it.
“David Dalgas and his team tightened the rules up on sector and regional neutrality early in the decade. Up to then, there had been greater leeway in regional allocations which had a top-down flavour,” Panzieri recalls. “Trying to steer between these conflicting optimisation goals - whether they be deep value or growth, or high beta or low beta - sits well with some investors but not others. A lot of our UK mandates come from managers whose investment philosophies were very style-biased and started to implode. Our approach appeals to pension funds looking for steady long-term performance, who want to take control over the top-down, asset allocation calls themselves.”
The discipline of the approach is further emphasised when one considers the extent of BankInvest’s strength and experience in emerging markets, where it has been a serious player for 25 years. In an environment where many investors talk about concepts like GDP-weighted benchmarks, it is always tempting to tilt strategy into this top-down trend and away from bottom-up fundamentals.
“Our strengths are in the bottom-up part of the philosophy and our emerging markets angle is applied at the stock-specific level, rather than over or under-weighting regionally,” says Panzieri. “Our large emerging market equity team also runs regional portfolios, and that’s where we try to maximise on those capabilities: we do not want to offer a different version of our global product because we can offer our emerging markets expertise as a standalone. We are cautious about trying to mix the styles.”
This ideal of keeping products ‘clean’, so that investors have the freedom to make the key asset allocation decisions, also informs BankInvest’s emerging market bond strategies - running for 10 years and accounting for more than 10% of its fixed income AUM. It offers a 100% local-currency sovereigns strategy for investors that want to focus on the FX appreciation story, and a strategy benchmarked 50/50 sovereigns and corporates for those focused on the credit-spread story. Even that takes too much asset allocation responsibility away for some institutional clients, Panzieri notes, although he sees the product coming into its own as emerging market corporate exposure becomes more mainstream: “It’s now a very large and liquid asset class, with maturities extending and institutional investors starting to look quite seriously.”
Still, global equities will always be BankInvest’s flagship. Here the firm has gone from zero to 19 UK institutional mandates over the past three years. A new head of UK clients has just been hired, the culmination of a major project which involved improving operational standards, building consultant relationships and integrating client relationships and portfolio management. Has that been a source of tension that led to the recent resignations? It seems unlikely, as the process has been more about improving the knowledge of the sales force than roping the portfolio managers into endless rounds of client meetings.
“We have a product specialist as a non-voting member of the investment board,” explains Panzieri. “He’s not a portfolio manager, but he attends board meetings and analysts’ meetings, knows why we took certain decisions, why we calibrated risk in this way or that, what the problems have been. When you go out to clients they expect to see the head guy for the strategy they are buying. But of course if the head guy is there, he’s clearly not at his desk working on the portfolio. Eventually clients have to see a member of the investment board, but we think our product specialist helps cut down the amount of time they spend on the road.”
Time on the road is going to be important now, as consultants will inevitably be concerned about the personnel changes. Our How We Run Our Money interviewee this month, Unipension, has already terminated a mandate as a consequence of the departure. Pension funds that have bought into BankInvest’s strategies over recent years have not been disappointed, and on balance their approach probably isn’t subject to huge ‘key man’ risk - as the smooth progress through the last upheavals demonstrate. Nevertheless, the firm now faces probably the first big test of its ability to hold onto the international institutional mandates that it has attracted so successfully.