Locals profit from quiet revolution
The Danish fund management community is undergoing a quiet revolution. The established oligopolistic players – Bankinvest, Unibank Inverstment Management, Danske Capital Management, Carnegie Asset Management and BG Bank – are facing the prospect of intense international competition for the first time.
The new competition is the direct result of the introduction of the Taxation of Pension Investment Returns Act on 1 January 2000. This legislation leveled the playing field with international fund managers by replacing the Real Interest Tax Act. That tax was so complex to administer that only the large domestic fund mangers mentioned above were able to provide a full service to pension funds. Its cumbersome mathematical price revaluation principle has now been replaced by a more traditionally understood inventory principle. Foreign fund mangers are now rushing to send bright young marketers to a what they see as a new and under-developed market.
We have already seen an advance guard, including SE Banken, ABN Amro and Schroders Investment Management, establish token offices in Copenhagen. They have already discovered, as the latecomers will also, that the fund management community in Denmark is already very sophisticated. The early adoption of modern portfolio techniques has helped keep foreign managers at bay. According to William Mercer, the five biggest foreign managers of pension fund assets had only $1.1bn of assets as at 30 June 1998. Interestingly, the top five – Gartmore, Mercury, Phillips & Drew, Schroders and Morgan Grenfell – are all, like their Danish competitors, active managers.
Demographic developments in Denmark will result in an explosion in private savings in mutual funds and a refocus from bonds to equities in pension funds. The reason that private pension savings are now taking off is that the Danish state is very generous. Everyone is entitled to a flat-rate state pension worth 38% of average earnings. All Danish employees are also required to belong to the ATP, a fully funded public scheme to which both employers and employees contribute at a flat rate. The ATP has assets in excess of Dkr127bn (e17bn).
The beneficiaries from the trend towards private savings will include those companies with established products, strong track records and existing distribution, namely DanskeInvest, Uni-invest, BankInvest and Jyske Invest.
Outside of the private savings market, the attraction of the Danish market lies in the insurance and pensions industry’s premium income, which accounts for about 7% of GDP. This segment of the market is dominated by Danske Bank and Unibank which control a market share of about 39% of total premiums. Concentration is further evident when one considers that the 10 largest groups/pension funds account for 75% of earned premiums. The remainder has a staggering 53 independent suppliers of life and pension insurance chasing the balance. Many of these have alliances or joint venture with asset managers.
The most rapidly growing segment of the market is the industry-wide pension schemes which now cover around 600,000 white and blue-collar workers, as well as professional groups like doctors and engineers. Contributions are set to rise from 4% of gross wages or salaries to 9% over the next 10–15 years. This segment of the market will be characterised by outsourcing of international mandates. The Danish beneficiaries will be the three firms that offer global fund management capabilities – Unibank Investment Management, Danske Capital and BI Asset Management, the institutional division of BankInvest.
Multi-employer pension funds and life and pension insurance companies have a total equity capital of Dkr88bn and manage assets of Dkr725bn. That said, the other big opportunity is in occupational pension schemes. At the moment few private-sector employers provide occupational pension schemes for their staff. There are just 70 occupational schemes and only six have sizeable portfolios. The three biggest, Unilever, Carlsberg and IBM, use both domestic and international asset managers.
All in all, the future looks promising and it is the Danish asset managers, rather than the international ones, that look set to reap the promised windfall.
Daniel Broby is chief investment officer at BankInvest in Copenhagen