Norway's place for money
The institutional market in Norway is a notoriously difficult market for asset managers to enter. There are three broad reasons for this. The first is that the is market controlled by a handful of large players. The second is that the pension fund business is too fragmented to be lucrative to asset managers. And the third is that second pillar pension assets are unlikely to increase dramatically while there is a state petroleum fund to pay out pensions.
Of the four Nordic countries, Norway offers the least short term potential says Tom Pedersen, managing director of T Rowe Price Global Investment Services (TRPGIS) – the European arm of US based T Rowe Price. “From a pension fund point of view there are relatively few pension funds. They number 350, but if you break this down to assets under management there are only maybe 10 that an asset manager would consider worth looking at.”
Pedersen says that there have been promises of a consolidation among corporate pensions funds in the past which have come to nothing: “Five years ago there were stories in the press about how these funds should merge to achieve economies of scale. As far as I can see, nothing has happened at all. There was big resistance from people in places like Narvik and Trondheim to merge their schemes.”
The pensions legislation, introduced in 2001 to put defined contribution (DC) plans on a fiscal par with defined benefit plans in the field of occupational pension, is unlikely to increase the pool of pension fund assets available to managers, since the average size of the new corporate DC scheme is 20 to 25 people.
On top of this, the downturn has frightened investors out of equities. Norway is traditionally a bond rather than an equity market, as Caspar Holter, partner at the pensions consultancy Pensjons & Finans, points out. “Pension funds have always been low equity investors. Up to 1992 we invested 8% in equity and then increased to 12%. In 1998 it increased to 35%. But the average pension fund, even when the market was at the top, never unvested more than 20%.”
Investors are currently reducing their equity holdings to around 10%. Erik Garaas, managing director of GN Asset Management, the asset management arm of the insure Gjensidige NOR GN has NOK80bn (E11bn) under management and manages a global bond portfolio for the State Petroleum Fund. “Many of our customers have reduced their exposure to equities and increased their bond exposure. However, compared with other asset managers in Norway, we have a very good standing in the area of bond management, so I think other managers have been more affected than we have.”
The downturn in the markets has put pressure not only on the investors but also on the fund managers, as profits of their management activities are squeezed. Some consolidation is inevitable. There are 21 active fund managers in the market currently. Of these, 13 has less than 1% of the market.
Garaas says that the highly concentrated structure of the asset management industry in Norway means that some asset managers will have to pull out of certain activities: “I think you will see that a lot of the small providers will close their activities. The problem is you have a very high degree of fixed costs so you will see managers reducing some activities and specialising in others.”
GN AM’s strategy is to specialise, he says. “We were already in the process of specialising our activities and the downturn in the market has increased the pressure on this process.”
GN was the first Norwegian asset manager to set up an offshore fund for Norwegian instutional investors. It has established a wholly owned entity in Dublin and uses this entity to produce products which it is not allowed to produce under Norwegian regulations. “We are allowed to sell it in Norway and we are allowed to manage it in Norway but we are not allowed to build it in Norway,” says Garaas.
The problem confronting Norwegian asset managers who want to provide funds for Norwegian institutions is that the legislation regulating funds is skewed towards retail, rather than instutional investors. “If you want to establish a fund in Norway, all funds are regulated by a system which is used a for a small retail customer. That’s all right for the retail group customer, but if you want to establish a fund for a pension fund or professional investors it’s not possible to do it in that way.”
There are a number of advantages of creating a fund offshore, he says. “We can use a lot more derivatives, the same derivatives that we use for the Petroleum Fund. We are also allowed to charge different fees for different investors. In Norwegian law, you have to have the same fee for all investors.”
Corporate bonds offer some escape for instutional investors. Garaas notes an increasing interest in investment grade bonds, although most people are staying clear of junk bonds.
Åsmund Paulsen, head of global equities at DnB Asset Management, suggests that the Norwegian market has ridden the equities storm better than other European markets because of its historical attachment to bonds. “We are less affected by the market than the UK. We also have some fairly stiff regulations that require reserves. Typically we have some 30% in equities – half or less the percentage in other countries.”
Two factors have accounted for the fall in the equity share of portfolio, he says: “Markets and price movements have been dramatic. In addition to that we have seen forced selling, or at least something that has all the characteristics of forced selling.” He estimates that many of the large institutional portfolios now hold less than 10% in equities.
“Rebalancing isn’t very advanced in most portfolios. Typically, you would have few portfolios that would automatically rebalance. Generally though we’ve had a lot lower allocation to equities.”
The movement in the market has put any move into alternatives on hold, he suggests. “Hedge funds were beginning to pop up on the radar screens of institutional portfolios and some made initial allocations but you could hardly say they made a significant impact.
“The demand for alternative investments is a long term trend. Initially, when the prices moved down, it became more tempting to have alternative hedge funds. You also had the example that even these hedge funds can lose money.”
There is still a role for derivatives, however, and DnB is one of the leading suppliers of derived products. Derivatives earned a bad press initially, he says: “Pension funds wanted to invest in derivatives for the best reasons in the world. But they ended up making huge losses.”
More recently, there has been a demand for products which are a package of bond and equity exposures, guaranteed through derivatives. “In practice, this means investing only in discounted interest rates plus any currency differences there might be. Up to now these have not had a huge impact on pensions funds but since the market turned, pension funds have been among the client group buying these.”
One of the reasons that institutional investors were hit by the equity down turn was that they entered the market too late, Paulsen suggests. “The reason for the downturn in the the institutional market is that many new investor groups arrived late. Increased equity allocation came in quite late, including the government’s regulation allowing an increase allocation from 20% to 35%.”
One group that was particularly hard hit were the newly emancipated municipalities, who had suddenly been given the freedom to invest in equities on a significant scale. “Some of these came in quite late and had one or two years of their market before they could see any price movement.”
Paulsen is optimistic that the markets will recover. “Obviously we do need the companies to produce some convincing earnings figures. There has been a dramatic cut in capacity. We also need to see the top line growth come back. Once that happens we are optimistic, but not necessarily to run and buy. So, for the time being we are focusing on company earnings since we think, long term, that is going to be reflected in stock prices.”
Meanwhile, he recalls advice he once received that “money needs a place to be”. Asset managers can only hope it is with them.