Not altogether when it comes to funds
It is a region within a region; the little sister of the European Union, regarded with fondness by all but often neglected in favour of the more mature and muscular mutual fund markets. Comprising Sweden, Norway, Denmark, Finland and Iceland the Nordic region is internally as culturally diverse as the other countries that form Europe, but the long history of peaceful co-existence and elements of language commonality make the grouping as a regional industry meaningful.
Together the Nordic bloc represents some of the newest and fastest growing markets. Together they now boast $157.6bn in mutual funds (Lipper, June 2000, including assets based in Luxembourg and Dublin that have a Nordic provenance), ranking the region seventh in market size behind France, Germany, Italy, UK, Switzerland and Spain. They account, in total, for just over 5% of European retail fund assets. Within the Nordic region Sweden has by far the largest mutual fund industry accounting for 60% of the Nordic total.
Sweden is also the most mature of the Nordic markets with its first funds being launched in the late 1950s. The Danish industry, originating much earlier, took its modern open-ended form in 1962. Mutual funds in Norway were first seen in 1966 but it was not until the late 1980s that investment in the schemes really began to take off. Their growth coincided with the stock market boom and the implementation of the Ucits Directive, the latter being the instrument that launched mutual fund activity in both Finland and Iceland. From a zero to small start, these industries have necessarily delivered spectacular asset growth. Coming from nowhere the compound annual growth of Finnish mutual funds has been the highest in Europe at 72% but all the other Nordic markets have posted growth rates between 22% and 30%, comparing well with the European average of 19%.
Their history is very recent but their fund managers are not novices. De-regulation in the banking industry coupled with the Europe-wide merger and acquisition activity has led to consolidation and ownership by well-established and powerful banking interests. Across the Nordic region, the leading 10 players account for 71% of mutual fund assets and most have a domestic presence in more than one of the Nordic markets. Internationally, the best known names are ABN Amro, ranked seventh and the largest foreign presence, and Skandia, a home-grown group ranked ninth and one the best known unit-link players in Europe. In March this year the first true pan-Nordic group was formed with the merger of the Finnish/Swedish MeritaNordbanken with Danish Unibank. This merged group will become the largest financial institution in the region and the second largest mutual fund player with 16% of fund assets.
With the exception of Iceland and Denmark, equity investment dominates with some 69% of fund assets in the equity arena and a higher percentage if balanced funds are taken into account. Investment strength is in the domestic arena. Denmark’s largest two funds by a significant margin are Danish bond funds (Dansk Invest Dannebrog and Uni-Invest Direct), Sweden’s largest fund, again by a significant margin, is a Swedish equity fund (Roburs Aktiefond Kapitalinvest). A similar pattern can be seen in the other Nordic markets, Finland standing out as an unusual exception with its top two funds being global and European equity portfolios. However, with the exception of Iceland, the weighting in favour of domestic securities is not as high as one might imagine. In both Denmark and Finland domestic investment accounts for just under half of total mutual fund investment and in Norway and Sweden domestic securities account for 69% and 59% respectively.
The investment management skills exist but for a foreign institutional investor, they are virtually invisible. “There is a big information barrier,” comments Tero Viherto, director and partner of Finland’s largest stockbroker and third largest fund management group, Evli Rahasto. “There is no common fund categorisation platform so direct comparison of funds even within the Nordic market is difficult. More important, there is no fund rating service operating in the region.” Performance data exists. The Finnish stock exchange offers very good data over its web site (www.hex.fl) and in the Swedish market, data is available from Svensk Fondstatistik. Recently they have been joined by US giant Morningstar which has also opened a Finnish operation and is soon to open in Norway.
Tax is another issue. In Sweden investment gains are distributed to avoid capital gains tax, a feature that may not suit institutional investors. On the other hand Finland offers an environment that is free of stamp duty. According to Viherto this has led to pan-Nordic management groups choosing Finland as their domicile of choice. With consolidation in the Nordic markets well advanced, groups can very effectively access proprietary distribution channels from a single fund family. Norway offers the same tax advantages as Finland but its decision to remain outside the EU is a potential problem for investors. The Norwegian authorities were very quick to implement Ucits equivalent regulations but technically they fall outside the Ucits passport scheme.
Denmark, although an EU member, stands in a rather isolated position amongst the Nordic markets, with a tax environment that acts as a positive deterrent to foreign groups wishing to access the Danish markets. The result is that only a handful of funds from Luxembourg and the UK are registered to sell there. The structure of the industry is also unusual. Fund management groups are established as co-operative type “associations”. There are three varieties: accumulation treated as corporate entities for tax purposes, and distribution and account keeping funds, which are fiscally transparent. Technically management fees are not permitted and the cost of the association is charged to its profit and loss account. With such a wide choice of funds throughout Europe, all established in well-understood structures, the Danish-style associations are an eccentric variation that institutions are unlikely to favour.
For the most part Danish and other Nordic fund managers have found it easier to appeal to foreign institutions by establishing funds in Luxembourg and Dublin. Here, their funds are visible and their expertise matched on a fully comparable basis with other international players.