The message from the asset management community in Denmark is broadly: ‘It’s still tough out there but it has been a lot tougher.’ In part the difficulties are a result of changes as pension fund and other institutional investors reassess their positions after the 2000-2002 market collapse. But it is also proving hard to assess the choices institutional investors will make as they rebuild their portfolios.
“Pension funds in Denmark, like elsewhere in Europe, are under increasing pressure to perform,” says Mat Wiegand, portfolio manager at Carnegie AM. “The returns of various pension funds are reviewed, analysed and compared in the newspapers and on TV, and that places enormous pressure on them. And while there are some very big pension funds there is also a huge number of small and medium sized players which may not have the resources to take care of all their various duties but whose members are beginning to look at their performance more closely.”
“The pension crisis was first the result of the collapse in the equity market and then, and even worse, the fall in interest rates,” says Rune Sanbeck, head of institutions and senior vice-president at Danske Capital. “The equity crash stripped a lot of assets out of the equity part of pension fund portfolios, reducing the weighting from around 40-45% all the way down to an average of 10-15%. But that huge shift was not only due to equities falling but to the interest rate reduction that drove many pension funds into the red light sector of the Danish traffic light system which in turn led the regulator to force them to sell equities.
“In response they bought all sorts of swaps and interest rate options. So while in the 1980s funds were managed under the immunisation approach, where investors matched their passive payments with their asset payments via fixed income products, and in the 1990s the thinking was to try to match passives with assets diversion in the hope of matching liabilities, the new decade showed that that didn’t hold water. What they’re thinking about now is to control the passive side with interest rate swaps and all sorts of derivatives and managing the asset side while still thinking about the passive side but more in isolation. That’s a new paradigm.”
Peter Preisler of T Rowe Price agrees: “Having spent a long time on the liabilities side, a lot of pension investors are now looking closely into their asset side again. They are either restructuring or thinking about restructuring their portfolios. There has been some changing of managers and most have announced that they are looking closely both at their asset allocation and at whether they have the right structure of the mandates.”
For Klaus Hector Kjær, CEO of Gudme Raaschou in Denmark, this offers opportunities to smaller players. “If a client is looking for management of our core products, Danish fixed income and Danish equity, there’s a major advantage in turning to a smaller player,” he says. “We’re an active player and we believe that we can add value by active management, especially in our local market because being a small player we have the ability to get around in the market, to buy and sell, without affecting the price. This is becoming difficult for the larger players on the Danish market.”
Sanbeck of Danske Capital, one of the two biggest players, disagrees. “That depends on your trading strategy,” he says. “If you have a trading strategy you of course have a problem, but if you have a buy-and-hold strategy an you buy the right stuff then you don’t.”
Equities are the products that asset managers make most of their earnings from, Sanbeck notes. And while equities have bounced back to about 20-25% of institutional investors’ portfolios, and 10-15% for the traditionally more conservative life and pension funds “investors have been diversifying on the asset side and buying specialised mandates like emerging market debt,” he notes.
However, Nordea IM, Denmark’s largest player in the pension funds arena, is sticking with equities. Its competitors claim Nordea has paid a heavy price for holding to a growth approach over the last four years and, while it is growing its assets abroad, has lost ground in Denmark. Klaus Godiksen, head of global sales at Nordea IM, concedes it has taken a beating. “A few mandates have left due to the growth tilt in our investment style but the decision to change managers are often for diversification reasons,” he says. And he denies a change in style may be required. “No, we need to stick with what we know and our investors believe that we are good at. We might create additional strategies with new product, but that would have to be with a separate management teams. We know what we’re good at and we still believe that we’re really good at what we’re good at. And there’s nothing that will change our mind on that.”
Nevertheless, Sanbeck notes that “high-yield bonds have been a blockbuster in the Danish market. Most will have around 5%, which is a lot, but today there are pension funds with
up to 15% of their total assets in
high-yield bonds. They are looking for yield and they get that from emerging market debt and all sorts of other vehicles.”
This growing interest in emerging market instruments has allowed Sydinvest to exploit one of its major assets. “We have an excellent manager, Anders Damgaard, who has a reputation as a star performer and who was identified by major newspaper Jyllandsposten as the best manager in Denmark,” says chief investment officer Niels Skovvart. “He heads up our Latin America equity fund and our latest fund on the emerging market side, a ‘BRIC’ – Brazil, Russia, India and China – fund. I believe we are one of the first in the world or Europe, but certainly in Europe, to have launched a fund solely investing in the BRIC countries.”
Another major trend is outsourcing. “What we are trying to do is add satellite mandates by outsourcing mandates to foreign players,” says Kjær of Gudme Raaschou. “If a client is looking for active management in high yield we don’t do the investment management ourselves but we try to find the best of breed to bring to the customer.”
Outsourcing is also a strategy pursued by at the other end of the size spectrum. “We have outsourced the areas where we don’t believe that we have alpha competence, where we don’t believe that we can be the best,” says Sanbeck. “We have outsourced high yield and emerging market debt to ING, emerging market equities to Aberdeen, global value to Alliance Bernstein and Japan equities to Schroders.”
For Schroders this represents a substantial opportunity. “Sub-advisory mandates to the mutual funds industry are a new trend,” says Ketil Petersen, Schroders’ assistant general manager for the Nordic region. “We advise Danske Capital on all its Japanese and Greater China equity investments. We would like to do more of this, it opens a new channel, but it is still early days.”
Schroders’ success illustrates a key development identified by Carnegie’s Wiegand. “The increasing role of international managers is linked to increased demands for pension funds to generate return for their members,” he says. “Denmark is very under-penetrated, with most Danish institutions having had a pretty cosy environment at home without too much international competition from US or British fund managers, but this is changing.”
For Gudme Raaschou’s Kjær both the appearance of foreign asset managers and a move to hedge funds are linked to regulatory and legal changes. “In the past it was virtually impossible to establish hedge funds in Denmark mainly for tax reasons,” he says.
“Investors running a traditional directional long-short strategy in equities were not able to write off the loss on short positions against the gains made on long positions. But this has changed lately so now both investors going long and short for themselves and investment funds can employ hedge fund strategies without being penalised by tax issues.”