DENMARK - Henrik Parkhøi, managing director at the DKK67bn (€9bn) Copenhagen-based asset manager LD Invest, remains bullish about his firm's prospects even though more than 55% of its assets under management are under threat following a call for tenders by LD Pension, its biggest client and majority shareholder.
And while he accepts that changing asset management arrangements would reduce LD Pension's costs over the longer-term, he has questioned whether this would be the case in the first few years of the contracts.
In total, LD Pension accounts for more than 70% of LD Invest's AuM, which generated just under 40% of its revenues last year. The mandates now officially out to tender represented 16% of LD Invest's 2009 revenues.
LD Pension published the tender for management of 12 four-year segregated account mandates covering nine asset classes yesterday:
The deadline for tenders is May 10, and LD Pension CFO Lars Wallberg told IPE that he has already seen interest from dozens of global asset managers since the pre-notification was published earlier this year. (See earlier IPE story: LD to tender €6bn in bonds and equities)
"We expect that more than 100 companies may apply for pre-qualification, and it is crucial that all applicants are given equal status and that the evaluation is fair and rigorous", said CEO Carsten Koch.
"We expect the pre-qualified companies to look at it as an advantage that they get the opportunity to submit a tender for several of the mandates. At the same time, there are ‘places on the bench' for the best companies who are not awarded mandates during the first round. Replacements may take place in case the awarded companies do not provide satisfactory performance during the coming years," he added.
The mandates cover most of LD Pension's "LD Discretionary" pool, a broadly diversified default portfolio that accounts for 91% of members' savings, as well four separate pools that members can select, currently managed by LD Invest. The current pools' asset class exposures correspond to the mandates out to tender, although an "Environment and Health" pool has now changed to an environment and climate mandate.
Excluded from the tender are four pools already managed externally - by BankInvest, Danske Invest, Jyske Invest and Nordea Invest; a pool called "LD Contra", consisting of very short- and very long-dated bonds, gold and gold mining equities and other defensive equities, designed to perform through periods of extreme inflation or deflation; and a private equity portfolio, most of which is managed by LD Invest.
The private equity element explains why a 55% share of LD Invest's assets accounts for just 16% of its revenues. But Parkhøi and his colleagues have managed to attract third-party clients since it was spun-out from LD Pension in 2005 (LD Pension is the majority shareholder, alongside Danish banks and LD Invest employees). Among more than 50 asset management clients LD Invest counts "most of the major Danish pension funds", Parkhøi told IPE.
"In some of the most difficult years we've ever seen, we've gone from one client and revenues of DKK50m to more than 50 clients and revenues of DKK190m," he said. "We knew from the start that this was a five-year contract that would come up for public tender, and that's why we've been concentrating on building our client base into one that most asset managers would be very pleased to have."
Those clients only come for an impressive track record, Parkhøi argued, pointing out the 4.5-star average rating from Morningstar for its seven mutual fund products. LD Pension is consistently among the top-performing pension funds in Denmark, and a return of 12.6% was achieved in 2009.
LD Invest's tilt towards Danish pension funds which tend not to use consultants means that it has never been analysed by PPC Metrics and PA Consulting - the two firms mandated for advice by LD Pension - but Parkhøi maintained that it was "very well-prepared for the process".
One major change that will come from LD Pension's new asset management arrangements is to the fees it pays on the tendered mandates. Since the spin-out five years ago, it has paid LD Invest a costs-based fixed fee. However, the fund is not taking in new contributions and is expected to wind-down within 10-12 years, and to have shrunk by perhaps 25% within five years, according to CEO Carsten Koch. As the asset base shrinks, a move to variable fees will make more economic sense for members.
However, moving from costs-based to commercial fees and from a single mandate to 12 could well increase costs in the short-term fpr LD Pension, Parkhøi commented.
"If you take inflation into account, you could argue that fixed fees have been disadvantageous for us. We obviously won't win every mandate; we won't even be bidding for all of it; in fact we can't because three categories are split into two mandates. But if we do win any, it's possible that the pricing will be better for us."
Should LD Invest not win any of the new mandates, its relationship with its largest client will be reduced to its private equity allocation - which the maturing fund will have to be reduced in the coming years, according to Wallberg, as it already has its real estate - and possibly "LD Contra".
"We don't consider ‘Contra' a mandate for which managers would compete," said Koch. "We may buy it as a packaged fund from LD Invest: because they run it as a mutual fund strategy, a procurement process is not necessary."
Parkhøi acknowledged that the "LD Contra" pool was not included in yesterday's tender, and said he was unaware of LD Pension's plans for the mandate, which accounts for a very small proportion of members' savings.
"I think that ‘Contra' is one of the most interesting portfolios in the asset management business - no-one else runs anything like it," he told IPE. "It would be great if they did keep it with us, because it's a very interesting and exciting product."
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