Carnegie Asset Management in Copenhagen is focused on one thing and that is global stockpicking. “This probably accounts for 85% of the $4bn (E3.3bn) in assets we have under management,” says Morten Therkildsen, head of sales. About two thirds of assets come from institutional investors.
The group, which has operations throughout Nordic markets, manages 50% of the assets in Copenhagen, even though less than a quarter of the group is based there. “The reason is that we manage all the international equity portfolios here.”
This is done according the Carnegie’s trend-based stock picking process. In essence, this, means owning just 25 to 30 stocks to get enough risk diversification, but to be able to understand each equity sufficiently no more than that level can be owned, he says. “You must know exactly what you are buying as we acquire to hold as long as we can. Some of our stocks have been in the portfolio for more than eight years.”
The objective is to manage the portfolio with an absolute return focus. “Our risk measurement tool is standard deviation.” But even though we outperformed the equity market going through the bear market through 2000 – 2002, our clients lost money.
“What we wanted to be able to do was to offer our clients the alpha separate from the market risk. How to do that – the hedge fund market.” Carnegie AM took the step of offering one of the first hedge funds in Denmark and definitely the first to be offered to retail customers, based on its trend-based stockpicking.
“If you can create excess return at the level of 5 to 8% per annum, but take away the market risk and perhaps add a little extra return from interest rates and short selling, then you can create a product with a plus 10% return, with limited downside risk,” says Therkildsen.
With the dramatic changes in the Danish pension fund market in past few years, from trying to increase equity exposures to 50% or more, to the total reverse currently made Carnegie AM think this is an approach the market might be interested in. “We launched the product in June 2003, and have produced returns that on average are a little below the 10% target.”
The product is opportunistic in that “it takes bets, but does this in a controlled way,” he says At times the standard deviation of the product’s portfolio has the same as the equity market’s level.
So far the fund has some E16m is assets, which is lagging behind the group’s expectations, says Therkildsen. “We have to recognise that the hedge fund market is very new in Denmark, so it will take time to mature.” But he sees old attitudes changing.
Carnegie AM felt that with the inevitable doubts the pension fund market would have that it needed to adopt a very transparent approach. “You have to lay all the cards on the table.” The group had a further advantage that of knowing the requirements of these investors to understand the workings of the fund. “What we do not do is disclose any information about positions, where the disclosure would have market impact – that’s the only exception.”
All of the firm’s long equity products, covering global, Euroland, and domestic markets, have the same process. “We use the long term global trends as an information filter to focus on the stocks in the world that have the wind behind them.”
“Earlier, when a stock was rejected for the main portfolio we just left it and turned to something else or looked at it again later on. When managing our new hedge fund we are doing what we always have done, but now we are just taking the worst of the candidates we research for short selling”. In fact, they hired a short sales analyst 18 month ago from Merrill Lynch.
Carnegie believes it holds an unusual position as successful focused portfolio player, this hedge move will only enhance its position as a market player. “We believe the hedge fund will be leg number two in our business model. But with our long term performance we are gaining more recognition in other markets.”
The company listed on the Swedish stock exchange two years ago, when both UK group Singer & Friedlander which owned 55% and Carnegie employees (who owned the balance), reduced their shareholdings.