Michael Pederson, CIO of PKA, the Danish health and social services workers’ fund, tells Brendan Maton about the positive side to principled investment
The caricature of the successful modern money manager depicts a male in his 40s with sleek hair, cigar in mouth, garish braces and a ruthless, abrasive desire to make himself richer and richer. Michael Nellemann Pedersen, chief investment officer of PKA, the Danish health and social services workers’ fund, fits the physical description. He has the odd brightly-coloured tie, if not the garish braces. And he manages enough money to satisfy the ambitious: DKK116bn (€15.5bn) - a lot of money in a country with just 5m inhabitants. But any similarity with the Gordon Geckos of this world end there.
Denmark is a modest country, where income tax is high and conspicuous displays of wealth are low. The ethos of the social market is that every citizen be comfortably off, not to champion high earners. Pedersen plays a major role fulfilling this ethos as his team at PKA oversees the pensions capital for 220,000 people in the health and social services sector, from nutritionists to midwives.
Altogether, they form the largest occupational fund in Denmark. But as might be expected of caring professions, they do not tolerate excessive spending by their pension agents (nor do they permit investments in tobacco, so no cigars at Pedersen’s Hellerup office to celebrate successful investment deals). The work of the investment team is scrutinised by the boards of the eight contributing funds and reflects their members’ wishes. Various new initiatives of PKA, from joint administrative ventures with other retirement plans to direct investments in local companies and know-how exchanges with businesses in emerging markets, are proof of the fund’s twin desires to be efficient and responsible. PKA adheres to the UN’s Principles for Responsible Investment, of which the key perhaps is the obligation to be active owners and incorporate environmental, social and governance issues into ownership policies and practices.
If anything, Pedersen is under more pressure from this strong desire by Danish public sector workers to be responsible capitalists than his peers in investment banks and commercial asset management houses. Theirs is a straightforward pursuit of greater returns; his requires a conscience too. No issue has revealed this burden more than the sequence of responses from big Danish retirement funds’ to the political demonstrations in Burma at the end of 2007. Initially, the big funds, led by ATP, the state supplementary scheme, showed little willingness to alter their stakes in foreign companies active in the country in spite of the violent measures used by its government against political opponents.
Pedersen approvingly quotes ATP’s chief investment officer, Bjarne Graven Larsen: “We assess the company not the country.” This was in reference to French energy major, Total, which has been the leading foreign company in Burma’s gas industry for 15 years. But by the end of October, both ATP and PKA among others announced they would divest from Total and similar stocks with activities in Burma, such as Chevron of the US. They felt their hand had been forced by Per Stig Møller, Denmark’s foreign minister, who declared he would prefer an investment ban on Myanma Oil and Gas Enterprise and Myanma Timber Enterprise.
This was probably a political opportunity for Denmark to reclaim some international standing after the torrid reaction to the publication of cartoons of the prophet Mohammed in a Danish newspaper in 2005 - described afterwards by the prime minister as the country’s worst international crisis since World War II. Møller, however, insisted that he was addressing the EU in general and not domestic pension funds, to which he was not in a position “to give business advice”. Fundamentally, Pedersen does not approve of the political behaviour of the Burma junta but would prefer gradual change rather than sudden gestures. He notes that energy-producing nations in the Middle East also have records of human rights abuse. So perhaps it is a question of when and where the politicians decide to point their finger. The inference brings to mind the thoughts of Roland van den Brink, investment chief at Mn Services in the Netherlands, who in last April’s IPE warned that politicians’ inability to solve major environmental and social issues lies behind their demands for pension funds to do so.
As an investor for the long term, Pedersen clearly does not appreciate having to make sudden changes to the portfolio for the sake of political exigency. PKA has its principles in place and they have been put into action in various ways. Moreover, its public explanation of how to define the ban on tobacco and weapons manufacturers shows up the inherent difficulties of responsible investing, even before the views of others have to be heard. Sub-contractors to such companies are not covered by the ban; nor are conglomerates wherein cigarettes and weapons generate only a fraction of revenues. Deciding such fractions is an ongoing process and the UK company EIRIS is mandated to monitor equity investments to ensure PKA’s ethical guidelines are not broached.
Pedersen emphasises positive examples of the plan’s principled investment. In a €65m scheme organised by the foreign ministry, PKA is the major stakeholder making direct foreign investments into frontier and emerging markets, including Vietnam and Tanzania. Pedersen describes this not as not only socially responsible investing but also developmental work. Some 10% the capital comes from the ministry and goes towards due diligence and training local people. From an investor’s perspective this is a risk, but one worth taking as it creates valuable experience on the ground. Pedersen views it as a high risk, high return strategy. It also strengthens ties between Danish and foreign societies.
Another embodiment of the ethos to make money in a highly useful manner is Invest Miljø, in which the eight healthworker plans have a 50% stake. Invest Miljø’s objective is to contribute to tackling environment change in a sound and businesslike way. The company invests know-how and capital in large and small companies as well as early-stage projects within the environmental sector in Denmark.
At a broader level, the work of EIRIS is made somewhat easier by the plan’s bias towards quantitative managers of foreign publicly traded equities, including QMA, Axa Rosenberg, Intech, Goldman Sachs Asset Management and State Street Global Advisors, to which it has just awarded 130/30 mandates for the UK and Japan and North America. Only in emerging markets does the fund prefer qualitative managers, in Legg Mason and Citigroup [appointed before the two asset management divisions merged] although even here for these regions it also employs PanAgora.
At home, the in-house team handles all kinds of Danish investments bar unlisted stocks. The team’s duty includes 25% of the entire equity portfolio, or roughly €1.2bn from €5bn. Pedersen is not fazed by this exceptional overweighting. First, it is only exceptional given Denmark’s share of global equities. In practice, most local funds prefer to exploit their familiarity with the domestic markets by overweighting. Second, Pedersen notes the international nature of many Danish stocks, such as shipping conglomerate, AP Møller-Maersk. “Ninety-nine per cent of its revenues derive from overseas. Is it reasonable to segregate Danish and foreign stocks merely by their place of listing?” he asks.
For the purposes of plain information to members, PKA does continue to segregate by geography and asset class. But among the internal 16-strong investment team, the policy is one guided by sources of return rather than asset class per se. Likewise, Pedersen says he is looking for asset managers who can add alpha, which may explain the recent adoption of 130/30 strategies.
PKA is in a stronger position than many peers to consider alpha and beta with some distinction. In the country that gave birth to liability driven investing, it was a fertile pioneer. In 2001, guided by scheme actuary, Peter Melchior, the fund implemented a Constant Portfolio Maturity Swap (CPMS) that guaranteed minimum pay-outs. This helped satisfy the plan’s obligation to return 4.25% every year net of taxes. Pedersen refers to this target throughout the interview. While other funds such as the plan for architects have dropped the fixed obligation, healthworkers have not.
Given even wild, patriotic optimism, the Danish economy will not generate growth in excess of 4% year in, year out. So while the CPMS and subsequent fixed income derivatives have lessened PKA’s total risk, it still needs to find excess returns too. “Hedging does not cover liabilities,” warns Pedersen, with reference to longevity but also perhaps the rising costs of hedging as interest rates globally rise. “I am reluctant to spend so much of the risk budget solely to immunise us against rates of 1-1.5%.”
In viewing alpha and beta, however, Pedersen rules out an ATP-style separation of liability-matching and return-seeking portfolios. He classifies PKA as a medium-sized institution and notes enviously that ATP has three times as many portfolio managers and has been able to buy in a team from a commercial rival. PKA’s human resources, on the other hand, resemble those of other domestic plans, with a crude ratio of one investment specialist to every €1bn owned. Pedersen would like more staff but is realistic. When he first joined the plan in the early 1990s, the team covering private equity was the biggest even though it then accounted for a mere 1% of assets. This was only partially explained by the fact that the investments were made directly.
Ironically, some ex-staff from the listed equities team now run some PKA money as part of Danske-owned PEP, one of nine international and four domestic private equity managers PKA employs. There is just one full-time private equity specialist in-house. PKA does not use consultants in any sphere, although the Danske PEP team helps out informally with market information - another sound reason for overweighting domestic concerns.
But a return to a large in-house team seems unlikely. “You need four to five people together for 10 years to be effective,” he says. Instead, collaboration is the name of the game: PKA has already linked up with the retirement funds of kindergarten and school teachers on administration, IT and actuarial services. More joint ventures will undoubtedly follow. Pedersen seems content with his position at the helm of investments. He took charge just two months before 9/11 and so has experienced turmoil. But even a move elsewhere in Denmark is unlikely to spell a change in attitude. Loud braces and cigars are not part of the Danish financier’s wardrobe.