Nordic markets look for more
The market for asset management in Sweden is notoriously overcrowded, and for years a feature of Stockholm’s financial scene has been the large number of asset managers looking for a limited amount of institutional business.
“There are few markets that have the same level of competition and the same number of players as Sweden,” says PO Öst, head of sales and marketing at Carlson IM, now part of the DnB NOR Group. “If you divide the amount of potential assets to be outsourced with the number of players, one thing is clear – we are over-banked.”
Yet this has done little to discourage international asset management firms from seeking to enter the market. Baltimore-based T Rowe Price is currently setting up a sales office in Stockholm, while Fidelity Investments has appointed a head of Nordic institutional business to be based in Stockholm.
Although the market is no less competitive, there are now clearer lines of demarcation as domestic and international players have re-focused their activities. Notably, most large domestic players have abandoned attempts to compete globally.
Two years ago SEB AM decided to concentrate on markets where its parent bank had a clear presence, such as in Germany, Denmark, Finland and Sweden, and to withdraw from areas where it did not – the UK and US.
SEB has also focused its efforts on what it sees as its core markets, European equities and fixed income. “We are now developing our processes and competencies around this core. In fixed income, we are developing our competencies and products in the credits area, while in equities we are developing our competencies in the newcomers from the east into the EU,” says Pontus Bergekrans, head of institutional clients at SEB.
Credits, both domestic and European, will be limited to investment grade, he says. “There has been limited demand in Sweden for the more risk-oriented fixed income products. That is due to the tradition in Sweden among institutional investors that when you want to increase your risk you tend to look for equities as a start.”
However, some Nordic asset managers have retained a global presence. Carlson IM continues to run eight offices in seven countries on three continents.
“One of the reasons for that is to be more competitive on the home market,” says Öst. “The Nordic countries, and Sweden in particular, are quite advanced in asset management, risk management, and administration. But rust never sleeps. You always have to fight to improve yourself and your knowledge. That has been one of the reasons we have marketed ourselves abroad – to be out there, meeting the competition on their own turf.”
Foreign entrants to the market tend to focus on providing non-core products for the Tier 1 clients - e10bn plus institutional investors, such as the state-owned AP buffer funds and multinational-owned corporate pension funds - and a full range of products for Tier 2 clients, typically pension funds with assets of between e0.5-5bn.
“As most of our clients are very large institutional investors they will manage European equities themselves,” says Johan Hamilton, managing director of Schroder Investment Management in Stockholm. “Our European range would be much more focused on the mid sized pension fund that actually outsources everything.”
Newer foreign entrants are also choosing to target the less crowded sectors of the market, in particular the Tier 2 institutions, such as pension funds, trusts and foundations. Asgeir Thordarson, the new head of Nordic institutional business at Fidelity Investments, says: “The dynamics of the two tiers of Swedish asset management business are quite different. The first tier is highly competitive because everyone’s there. It’s also quite visible. Mandates are often won through public tendering and everyone who is in the market has a pretty good feel for what is going on.
“But in the second tier of mid-sized players that is not the case. There it is much more a question of being around, knocking on doors and then having the type of product to back that up.”
Fidelity now plans to target the second tier, Thordarson says. “Historically we’ve been focusing on the top tier. But we feel we’re better equipped now to also address the mid tier. We have just launched a family of institutional funds that have been registered for distribution in Sweden and across the Nordic region. This gives us a much broader range of artillery.”
T Rowe Price Global Investment Services (TRPGIS), the European subsidiary of Baltimore-based T Rowe Price, which is opening a fourth European office in Stockholm this year, also plans to target the second tier.
Johan Elmquist, head of TRPGI Nordic sales and client relations in Stockholm, says: “Obviously we spend a lot of time with the top 15 institutions in the Swedish market, but we have also drawn up a list of 150 other institutions including municipalities, small and mid-sized trusts, foundations and corporate pensions funds which we think represent an opportunity.”
In the past, international asset managers have built business typically by offering specialist skills. Schroders, for example, is heavily overweight in Japan and Asia, regarded as non-core areas of investment by the large Swedish institutional investors. However, this pattern may be changing. Some domestic asset managers sense a shift back by institutions from a specialist to balanced management of their assets.
Hans Hellenborg, head of institutional advice at Handelsbanken AM, says: “A year ago people were saying they needed the best specialist in the world for each market As a result they ended up with a large number of different manager . But you need to keep in contact with the manager to check if he or she is on track, and with 25 mandates it’s almost impossible to do that.”
Many clients are not concentrating their efforts on asset allocation and the big picture, he says. Many are also returning to the domestic asset managers they abandoned three or four years ago. “Some large institutions changed to another bank to get a better return. But that has not been the case. In many cases investors are saying that now the Swedish banks are as good, or as bad, as the other larger players.” says Hellenborg.
As the future has become uncertain, steady relationships between asset manager and client have perhaps become more important, says Bergekrans: “When the environment is less optimistic in terms of yields and performance, many clients tend to lengthen in their investment horizons. When you do that it becomes more important to have a relationship with an organisation.”
This is reflected in clients’ wish lists. Swedish institutions have traditionally looked for returns in high risk assets like equities. They now looking for low risk assets, says Öst.
“Client demand is concentrated in one distinct area – Swedish plain vanilla fixed income. And that has to do with a number of issues, including international accounting rules, longer life expectancy and the bear markets.”
The other area of interest, though much further down the scale, is hedge funds, he says. “There is definitely a trend toward absolute-return investing, hedge funds being a part of that, and it’s picking up steam among the bulk of the clients. It’s become a very crowded market in Sweden, with new hedge funds popping up every day. And it’s a good quality market, not only in terms of talent but the infrastructure around it.”
Caroline Bradley, responsible for Nordic institutional business development at Goldman Sachs AM (GSAM), sees a growing interest in private equity. GSAM currently has several Nordic institutional clients invested in their private equity fund of funds.
“Private equity investment has become quite well-established because there have been a number of high profile Nordic or Swedish private equity funds that are considered very good. And now institutional investors are starting to move more into the global private equity sphere. They have built up capabilities in the Nordic region and Europe and
now they’re going to the US and even to Asia.”
However, there is some scepticism about the perceived and actual levels of interest in alternative investments. Hellenborg says: “What investors are discussing and what they are actually doing are two different issues. A lot of people are talking about alternative investments , and say they are interested, but what they are doing is market timing.”
This is because the Swedish stock markets have outperformed global equity markets this year. “It has been rather a good year for the Swedish pension funds. We have had falling interest rates and pension funds are long bonds. We have had rising equity markets and pension funds are long equities. So they don’t need to invest in alternatives.”
With an overcrowded asset management market, most asset managers expect the industry to consolidate. However some asset managers also expect a consolidation of client objectives.
Hellenborg suggests that investors will focus on a few rather than a number of issues in future. “We don’t need to be too sophisticated. We just need to get a few things right like asset allocation.”
They will also spend their time more rationally, he suggests. “You don’t have to spend a lot of time with something that ends up as only 10% of your portfolio. That’s the problem with private equity. It takes a very long time to do a very small deal.”
Simplification would certainly reduce the number of players in the Swedish asset management market. Whether it would be in the market’s interest is another matter.