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In 2000 the Taxation of Pension Investment Returns Act was introduced in Denmark. Like a good new year’s resolution it promised a simpler taxation regime for all, and a gateway for foreign asset managers wishing to break into the domestic Danish market.
Five years of freedom have seen major growth in mandates for non-Danes. According to consultant Jesper Kirstein, author of the Kirstein Finans annual report, about half of all pension fund relationships with external providers of asset management are now with foreign players.
That spells a great change from 1998, when Danish pension funds outsourced just around 1.1bn to foreigners.
Of course the best way to be visible is not merely to fly in every month but establish an office in the country. This is the method used by T Rowe Price, which hired Flemming Madsen and Tom Pedersen, both Danes six years ago to head its European business. Madsen in Copenhagen made the Danish capital a centre for the Baltimore manager, a rarity for US corporates which almost always use London as a bridgehead for sales and investments for all of Europe.
But for T Rowe Price, the Nordic region is now second only to the US for institutional business, and within the Nordic region Denmark is currently the most important country.
With approximately €130bn in long-term savings, Denmark might not be the largest market in Europe but it is surprising that so few other foreigners have emulated the T Rowe Price model. Schroders perhaps comes closest with a dedicated sales office – it has had a local presence for investment funds distribution for many years.

As the latest Kirstein Finans report proves, there is certainly openness to foreign specialists. Danske Capital uses external managers, including Aberdeen, ING, Schroders and Wellington in its product range. Other commercial local players are currently investigating more outsourcing, so the market is progressing towards a model of manufacturers and distributors, in which the former have little need for brand awareness beyond a few key decision-makers among the distribution community.
Danske is content with its position in the new order. The local giant for asset management actually believes a two-handed approach works best. On the one hand are what it calls ‘tier one’ clients – the large pension mutual insurers. On the other are ‘tier two and tier three’ clients – corporates, local authorities, foundations, family offices and private clients. Rune Sanbeck, head of Danske Capital’s institutional business in Denmark, reckons it has a 15-20% share of the ‘tier one’ market and 50% of ‘tiers two and three’.
For tier two and three clients, Danske offers one-stop shop solutions. If it feels others are better-placed to manage the money, it outsources. But it has the distribution network and will also handle tactical and sometimes strategic asset allocation for these clients.
For tier one clients, Sanbeck says that the range on offer is limited to those areas and products where Danske is sure it can add alpha. That currently includes Danish and Nordic equities and eastern European equities. It is building up European equities, with an 18-month track record. On fixed income, it feels strong on both local and Nordic governments and mortgages; European investment grade debt; and European and global government debt.
When the Taxation of Pension Investment Returns Act was introduced, international equities was the hottest offering foreigners could present, on the back of astounding five-year track records. To this day, it is a major product from the likes of T Rowe Price. But the road has not been smooth, due to the regulatory decision to impose stronger funding measures in 2001 and the contemporaneous bear market.

Peter Leane, head of the Nordic region at Merrill Lynch Investment Managers recalls that after the retrenchment of 2001, Danish funds moved money from global equities into local equities and the likes of Mortgage Backed Securities. The next steps were high yield and then emerging market debt.
He expects more developments into international equities with Latin American and Emerging Markets equities as well as a transfer from ordinary indexing to enhanced indexing. “We have spoken with people about indexing in the past. Now there is real appetite, with people wanting to meet the managers.”
The manager that TRowe Price, Merrill Lynch and the others have to beat is Carnegie, whose World Wide global equities fund has outperformed MSCI World by about 180% since launch in 1990, not that Mikael Randel, head of Carnegie Asset Management and the fund’s original portfolio manager is worrying too much about the index.
The fund generates its returns from a portfolio of only about 25-30 stocks. These can be viewed on the company website; as can both the longs and shorts of Carnegie’s newer WorldWide Long/Short hedge fund.
“We give the customers what they want,” says Randel. “Thanks to Morningstar and other rating agencies, Danish investors now know what truly active investing means and they don’t want to pay active fees for closet-indexing.”
Lots of the Carnegie WorldWide picks are solid cash-generators such as Nestlé, E.on, oil producers, cigarette manufacturers and banks. “If we want growth we buy in Emerging Markets,” says Randel.

The fund has returned to its original model based on free cash flow. That was toned down during the bull market when it was evident that the financial world was not that worried about generating income. Although the fund sold technology stocks at the right time, it guessed wrongly that pension funds and insurers would use their bounty accumulated during the tech years to buy growth stocks. Enron and 9/11 put paid to this theme; the tougher regulations on pension solvency in Denmark probably didn’t help.
Back to strength performance-wise, Randel asserts that Carnegie delivers because it is a small team where communication is easy. “If you look at the success stories managing global equities, it is always small teams.”
He sees no inconsistency between this belief and the greatness of the likes of Peter Lynch, former manager of Fidelity’s Magellan Fund, at one time the world’s largest mutual fund. “Lynch got to take the decisions,” remarks Randel.
Without a distribution network, Carnegie is reliant solely on its performance to keep with bigger competitors. The Carnegie Long/Short fund has performed handsomely, too, since its launch two years ago but Randel suggests that interest has not come so much from Danish institutional investors.
While Kirstein maintains that hedge funds are on the horizon, it is well-known that larger Danish pension funds are concentrating on private equity and unusual alternatives such as forestry and infrastructure funds. It seems that having developed their own derivative programmes to better match liabilities – before any other country in Europe – funds such as ATP and PKA are not overwhelmed by the hedge fund story and it will not be one of the growth stories in this country in 2006 – at least not in ‘tier one’.

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