Open door policy
Commercial asset managers all over the world will welcome the words of Anders Bertramsen, portfolio manager for Laerernes Pension, the DKK25bn (€3.4bn) Danish teachers’ retirement fund.
“We like every manager and every style,” he says. Bertramsen is the kind of mandate issuer who is happy to put his contact details on every Request for Proposals (RFP). He believes it is better for prospective suppliers to communicate with him beforehand than hopefully fill in their details with a misplaced pitch. “One US quant equity manager responded to an RFP for high-yield bonds,” he recalls. “They reckoned they could port the alpha but I told them that was not what we were looking for.”
Having such conversations saves both sides a lot of time, which is why Bertramsen believes openness is the best policy when looking for new managers. As a former consultant at Denmark’s most famous institutional adviser, Kirstein Finans, he genuinely enjoys assessing what commercial investors have to offer.
Bertramsen says that he will even phone up houses he would like to respond if they have not contacted him.
But Laerernes Pension will not be a guinea pig for new products. “We won’t be the first into anything. We want to see a strategy that has worked for a minimum of three years,” says Bertramsen. He sees little value as a buyer in backtesting. If a strategy works, Laerernes Pension expects it to have attracted money already.
The plan itself has a policy of using external providers for as many functions as possible, bar strategic management.
“Our strategy from the start was to outsource whatever had economics of scale and was not a part of the core business,” says Paul Brüniche-Olsen, chief executive officer. Along with administration, investment management was handed over to PFA in 1993 when Laerernes Pension was established. Brüniche-Olsen himself joined two years later and acknowledges that the common investment strategy at that time for Danish pensions was to put 90% of the assets in domestic fixed income and real estate with the final 10% in domestic equities as the risky top layer.
This did not suit Brüniche-Olsen. Although day-to-day portfolio management lay with PFA, the in-house strategic team decided to work its way up the efficient frontier. Laerernes Pension was a new fund so Brüniche-Olsen began by diversifying the fixed income portfolio. “We were one of the first [Danish plans] into international fixed income,” he claims. The journey began with foreign governments then high yield and eventually emerging market debt.”
In August this year it awarded its second emerging market debt mandate, worth $120m, to Wellington Management.
On equities, Laerernes Pension has a combination of regional and global mandates, reflecting perhaps Bertramsen’s openness to best ideas. There is one passive global mandate and two actives. Regional briefs include a US mid-cap quant mandate for PanAgora. Although he expresses a preference for boutiques with a high degree of ownership by the staff, his motto on manager selection is: “If they can prove that the strategy is right and it works, that’s fine.”
part from this range of bond and equity mandates, Laerernes Pension is well on its way towards a strategic allocation of 5% of assets to forestry.
The manager is International Woodland Company, based in nearby Frederiksberg, and run by the charismatic Otto Reventlow.
Brüniche-Olsen recalls first meeting him in the start of the 90s. Having been impressed by Reventlow’s arguments in favour of timberland, Brüniche-Olsen hired IWC some years later. Timberland has negligible correlation with most other asset classes and stable returns. Brüniche-Olsen thereby sees it as part of the same journey to diversification as buying more overseas bonds. He points out that within the IWC portfolio are territories in the US north-west and south-east, in Chile, Brazil, Australia and New Zealand. All this means Laerernes Pension spreads risk from any particular wood region or its markets. “Brazil supplies wood chips to the US and Europe: Australia and New Zealand supply factories in China and Korea; the US itself has a major domestic market [along with Canada it produces and consumes one-third of the world’s wood production].”
Diversification is essential in the eyes of Brüniche-Olsen because it’s the best form of risk management to ensure the plan can meet its guaranteed rate of return.
anish retirement provision is generally on a defined contribution basis, whether in the non-for-profit occupational sector or commercial sector. Although defined contribution means that participants rely on accumulated investment market returns to determine the size of their pension, in Denmark providers do typically provide a minimum guaranteed return. In other words, providers carry investment risk.
For some, such as some of the commercial pension funds, the guaranteed return is quite high at 4.5%. Other plans, such as the one for architects and the one for vets and psychology graduates, have abolished the minimum. Teachers find themselves somewhere in the middle. The rates Laerernes Pension have to reach are 1.8% and 2.5% net of taxes. The prime tax, which does not please Brüniche-Olsen or any other fund executive, costs 15% on capital gains and income. All told, the nominal return target for his plan is 4.5-5%. From next year new members will have a capital guarantee, easing the problem. But the 1.8% and 2.5% rates will continue for existing members’ benefits. So how does the plan ensure it reaches its targets?
Brüniche-Olsen returns to the importance of asset diversification. Unlike ATP and the healthworkers’ industrywide fund, PKA, Laerernes Pension does not have any interest rate derivatives or structured products in its portfolio to ensure certain rates of return. After the traffic-light system was introduced in 2001, it chose not to take this risk mitigation approach. Denmark is now famous as the birthplace of liability-driven investing. ATP now has a liability portfolio consisting mainly of derivatives that hedge liability risk. Its return-seeking assets such as private and public equity are in a separate portfolio. But ATP is not representative of the 30 or so Danish occupational plans. They are much smaller and unlike the state supplementary plan, generally have flexibility on their guarantee level.
The teachers’ fund has assets worth DKK25bn (€3.4bn). More importantly, it is also only fifteen years old and growing fast, with annual net inflows of roughly DKK3bn. Given this immature profile, why spend much of the risk budget immunising or at least dampening interest rate risk? Of course, Brüniche-Olsen would like to keep his options open. He mentions Japanese rates as an example of why caution on rates is necessary. Looking forward, he expects rate falls and deflation in parts of the world, possibly Europe, but not everywhere. This is why the fund’s fixed income portfolio is so diversified and takes in emerging markets where deflation is not a likely scenario. Asked if the strategic management would ever consider swaps, he musters as much ambivalence as possible: “You never know,” before breaking into laughter. He would be too shrewd to announce to the world such a move. It could cost the fund in market movements.
In spite of the poker tactics, it seems unlikely that Laerernes will be emulating ATP in the near future. The fund is looking more and more to higher-return mandates, although as yet there are no plans for hedge funds. Bertramsen is concentrating on asset diversification for the time being rather than strategies. He acknowledges that for hedge funds, assessing their risk-return characteristics in general is most difficult, especially as hedge funds are not an asset per se.
Given its youthfulness and lower guaranteed rates, how did the plan react when the financial authority introduced the traffic light system six years ago? Brüniche-Olsen says that in hindsight, occupational funds see the system as a good thing. At the time, however, he certainly complained. The industry-wide regulations did not seem appropriate given the immaturity and flexible guarantee of Laerernes Pension. Today Brüniche-Olsen’s big recommendation is that the system introduce some smoothing mechanism. “If interest rates or equities dropped suddenly for a shorter period and we went into a red light situation, we would be forced to sell at any price.” He would like to see the key triggers be measured in average over longer periods such as a year, to save pension funds costs incurred by immediate reaction.
Bertramsen meanwhile concludes on manager selection by putting the quantitative search process in perspective. “At the end of the day it comes down to whether you believe in the person sitting across the table from you.”
Commercial providers with an appointment in to visit Copenhagen should polish up their presentation skills.