Learning to walk again
Asset managers in Denmark no longer believe they can walk on water – they are just glad they can walk at all. Now through the past few years, they are hoping they are in fair shape for the demands that investors are going to make. But it is no longer a world in which investors will buy what is put before them, nor will they necessarily fly with local carriers.
This realisation has had a chastening effect. No longer is it possible to be all things to all investors – even for the major providers. “We see ourselves as one of the market’s three full-scale providers,” says Niels Lorentz Nielsen of SEB Asset Management in Copenhagen – the other two being Danske Capital and Nordea. “This means that any client from the biggest pension fund to the smallest can be sure that we can provide all the services. Whether we produce them in house or outside is another question.”
The other asset managers in the market are mainly made up of those specialising in a number of areas, such as Bank Invest, Carnegie, Alfred Berg, Gudme Raaschou and Sydinvest. Then there are the increasing number of non-Nordic players, with Schroders and T Rowe Price having established local offices – Schroders has been entrenched for well over a decade – but many more flying in from Europe and the US.
In fact SEB in Denmark started its asset manager life in Copenhagen four years ago as a specialist European small cap operation based on a team that came from Nordea Asset Management. Following the acquisition of Codan Bank by SEB in Denmark, the Codan insurance assets went to SEB’s team. “The mandate gave us the investment capacity and technology platform to become one of the biggest managers in Denmark,” says Henrik Nordby Christensen, also of SEB.
Now, with E11bn under management and expanding, the Codan business – at Dkr80bn (e10.7bn) – is a reducing proportion as other business expands, he says. “We are very much an institutional provider, as we do not have any retail distribution.”
This, of course, is where the other two majors have firepower, with Dkr98bn of Danske’s assets being in mutual funds through Danske Invest, and Nordea Invest, the group’s domestic funds arm managing Dkr90bn for both retail and institutional clients. Danske’s assets total Dkr 357bn, but a further Dkr100bn is attributable to the life and pension operation of Danske Bank. “Both the life and funds business are regarded as external clients,” says Søren Skov at Danske Capital.
But their size gives no immunity from competition, as Skov of Danske recognises. “The domestic players held sway in Denmark largely because of the difficult tax requirements, but four years ago this was changed, which meant that on the institutional side, foreign managers could compete.”
T Rowe Price is the foreign group that seems to have made the breakthrough, having garnered some $2bn in assets from Danish institutions in a matter of years. “We have done well, we had the right products at the right time and helped educate the market about these,” says Flemming Madsen of TRP in Copenhagen.
Danske has rethought its strategy as to how wide its offering should be in the post-crash market. “We have decided to focus on a number of key areas.” In addition to Nordic markets, the rest of Europe, and the new CEE markets, the group wants to focus on global products. “The message that we are focusing on certain areas and not trying to do everything has been well received by our clients,” says Skov. “Our three alpha areas are Danish, European and global, which is where we will concentrate our expertise.”
But it has outsourced high-yield bonds and emerging market debt to a joint venture with ING. This is not an insignificant step, since these areas are now of high interest for Danish investors.
A similar strategy has been put in place at SEB with a number of classes now outsourced, some to different parts of the group, and others like high yield to specialist houses such as Muzinich. “We have now defined the core we do, domestic equities and bonds, European equities and bonds,” says Lorentz Nielsen.
For the major groups with retail investment funds this focus on core competencies makes sense, as they are building around what they can sell through their own mutual funds managed in-house, particularly domestic equities and bonds and European equities and bonds. The danger, says one observer, is that they will all be offering much the same thing.
One major issue for the managers is reading what investors want. “It is hard to see a clear trend as to what investors are looking for on the equity side, except that they definitely want to move outside Denmark,” says Skov. “Some are taking the indexed routes and some are being driven towards more active mandates. A number are taking a regional approach to portfolios, while others are going global. And they are certainly interested in emerging markets.”
At SEB, Christensen says: “After three turbulent years, Danish funds are now in a financial position to re-evaluate their strategies and managers. Things are starting to heat up. Investors want to obtain the best return from their assets and that means choosing the right managers who can outperform.”
But first the institutions have to decide on their asset selection. Insurance company holdings of equities are typically reckoned to be in the 7–8%, range, while pension funds are in the 15–20% range. As both groups of investors slashed back their holdings, partly as a result of supervisory requirements, it seems their foreign equity holdings fell more than domestic, explained by the fact that these equities were hit harder than domestic stock prices, but also by the fact that when reducing portfolios it was easier to dispose of the more liquid US and European than Danish equities. This means that portfolios are likely to be overweight domestic issues, but this was no bad position to be in with the local market up some 35% this year. The reckoning is that while there may not be rebalancing by selling domestic equities, new equity-directed money will be towards non- domestic opportunities.
“We have seen a sharp rise in demand for US equities,” says Peter Preisler of T Rowe Price, confirming the move back to equities and non- domestic and a widening range of managers. “When building non-domestic equity portfolios, the trend among Danish investors is to move away from global portfolios and take a more regional view.”
But he thinks that pension funds will move from their below 20% positions to upwards of 30% over time. “But the market has become much more focused on specialist alpha-generating products – no longer can anything be sold without proper tracking error and substance, as opposed to the days before the market collapse.” In addition to the non-domestic players, this will suit the local specialists that have such products, such as Bank Invest and Carnegie.
But Danish investors are bond investors par excellence, in addition to the government sector, there has been the long involvement in the local mortgage bond market. But yields have reduced here as mortgage holders exercised their rights to redeem and refinance at lower rates. “This is almost a national sport,” quips one observer.
But instead of moving to investment grade, investors seem to have jumped along the risk spectrum and gone for high-yield and emerging market debt. “This is one area where we see our growth coming from,” says SEB’s Lorentz Nielsen.
“Our high-yield product has gone very well in Denmark but is currently closed,” says TRP’s Madsen, but the group has obtained business from many institutions wanting to participate in the asset class, with allocations typically between 5% and 10%. But some investors are beginning to look at investment-grade bonds on a global scale. And there is the growing interest in emerging market debt, which Danske Capital is also finding.
“Now that many institutions have outsourced all or part of their portfolios, the asset allocation decision seems to be the main area of focus for them. In that process, the institutions like to obtain the input of their asset managers in this area,” says Madsen. “There is resistance in the Nordic markets to using consultants for this type of work.” Danske Capital has launched a tactical asset allocation product into the market on both an advisory and overlay management basis, and it is finding real institutional investor interest in.
With the recent moves as a result of the Bremer commission’s recommendations to offer wider choice to pension fund members in terms of unitised products with other managers, the domestic mutual fund providers are those most likely to benefit, certainly initially. Brand name awareness is likely to predominate, but there could be opportunities through white labelling and sub-advisory arrangements.
On the alternative side, private equity has been understandably quiet in the past two to three years, says Steen Villemoes of Helix Associates in Copenhagen. “People are looking at increasing their allocations, but are definitely holding back at the moment.”
And talk about hedge funds of funds is all it seems to be, according to some pundits. With the poorer returns experienced from funds of hedge funds in the past couple of years, the question is that they may miss the Danish boat completely. But on an individual fund basis Carnegie has made a determined assault on the market by launching a long/short strategy fund for Danish investors last year, the first by a domestic group.
This has attracted some E14m in assets and produced some very good performance, says Morten Therkildsen of Carnegie. Both SEB and Danske have plans to launch hedge fund products when the time is ripe. “In the future we will introduce hedge fund products based on our alpha areas,” says Skov.
Socially responsible investing seems to be making little advance among the Danes, other than in some public sector mandates.
Nordea Invest, the group’s mutual fund operation, is finding growing interest in institutions setting up special funds, dedicated to one investor. “This is becoming popular here in Denmark, with investors choosing their own strategy and investment managers, just using our services for administration and net asset value calculation,” says senior portfolio manager Lars Eriksen. The minimum investment is Dkr10m and Nordea has 10–15 of these arrangements in place.