Strong at home and away
With its roots in the first Danish mutual fund launched in 1928, Danske Capital was established in 1996 by Danske Bank to consolidate the group’s asset management activities. It is now one of the largest asset managers in the Nordic area with total assets under management of DKK435bn (e58bn).
It considers itself a Nordic rather than Danish asset manager, says Niels-Ulrik Mousten, chief executive officer of Danske Capital.
“We don’t distinguish between markets inside and outside of Denmark. We distinguish between inside our home markets and outside our home markets. And our home markets are the Nordic countries – Denmark,
Norway, Sweden, and Finland”.
Danske Bank’s acquisition of Northern Bank in Northern Ireland and National Irish Bank in the Republic of Ireland has widened the definition of Danske Capital’s home market, says Mousten. “We are excited by the bank’s purchases in Ireland because that gives us access to these markets which will become our home markets in future.”
Danske Capital has established a real rather than nominal presence in these markets, says Mousten. “We don’t fly into these countries in the morning and go home in the afternoon. We have real operations with investment management and research skills and client support.”
This gives Danske Capital several advantages, he says. “First, it means we really get to know our clients. We know their needs, we know how they’re regulated, we know how they’re taxed, and we know the investment tradition in the area.
“Second, it means that in these
four markets we have the skills to manage the local assets as well. We are effectively a home player there. and are ready to give our clients
total solutions that encompass all asset classes, domestic as well as international.”
Today 24% of Danske Capital’s core income comes from non-Danish activities, and 35% of sales in 2005 have been to non-Danish clients.
Now it has begun to test the market further afield, says Mousten. “We haven’t focused on outside our home market until very recently. During the last 12 months we have tried to dip our toe in some markets outside Denmark, especially Germany.”
He says the response has been encouraging. “Even though it has been on an ad hoc basis we have been surprised by the success we have had. Therefore we have decided to make a more systematic approach to the markets outside of our home markets.
“We are now building up a small sales and client service function which will market our alpha skills both to institutions and to distributors outside of our home markets.”
Danske Capital has strengthened its European sales effort by creating a dedicated sales unit headed by a former head of Danish North American business at Nordea Investment Management as well as hiring a head for its European institutional sales.
The aim will be to offer European institutional investors specialist ‘alpha’ skills. Danske Capital pursues two different strategies, says Mousten: one for the home markets and one for the other European markets. “Inside our home market we see ourselves as a solutions provider. Outside our home market we see ourselves as a multi-specialist asset manager, where we provide skills in our selected areas of competence – what we call our alpha skills.”
On the equities side, Danske Capital’s alpha skills include Nordic, European, and eastern European equities. “We have seen strong interest in Danish and eastern European equities, and people are beginning to realise that there’s a distinct difference between economic developments in Scandinavia and in the rest of Europe,” says Mousten.
“So maybe more by coincidence than design, or maybe because of where we are located, we have picked on two of the growth areas of Europe – Scandinavia and eastern Europe.”
On the fixed income side, alpha skills include investment grade corporate bonds and mortgage-backed securities, a Danish speciality. “We have been especially able to add value in mortgage backed securities because they have many features that make them more complicated to model than ordinary government bonds.”
Mousten suggests that the Danish mortgage market has peculiarities that favour domestic players. “You need to have experience of being in the market day in and day out, over many years. Only then do you know where the bonds are placed, who are the underlying borrowers, and what is the likelihood of pre-payment.
“It is important to know the history of pre-payments. That tells you something about the underlying lenders and different lender segments have different pre-payment propensities.”
The Danish market for mortgage-backed securities has some similarities with the much larger US market. However, Mousten suggests there are some significant differences. “Our market is less developed than the US market and that is one of the advantages. In the US there is a strong
market in derivatives, and to some extent that has reduced a lot of the opportunities for attractive risk-reward characteristics.
“In Denmark, the derivatives market is not very developed, and that has left the mortgage market with insufficient ways to transpose the risk. That is what gives investors the possibility that, if they are willing to take the risk, they will also be rewarded. A less developed derivatives market leaves more opportunities for investors.”
Interest in mortgage-backed securities has also grown with interest in portable alpha, Mousten points out. “We think the strong interest in portable alpha plays to the hand of managers like us that have some strong skills, especially in asset classes that are non-mainstream.”
Another alpha skill is tactical asset allocation, where Danske Capital has built a strong capability over the past four years. But it does not try to market this skill outside its home market.
Danske Capital’s approach to the home market is to package its alpha skills within a total solution for the client, says Mousten. “We like to use the car industry as a metaphor. When we say we want to exercise our alpha skills, we mean we want to produce the best spark plugs, and the best braking system in the world and we will sell them to anyone in the world who wants these components.
“In our home markets, where we are providing total solutions, the situation is different. Here we will go to the best seat producer in the world and the best dashboard producer in the world to enable us to design and assemble a car that suits our clients.
“So we do not produce all the components of the total solution ourselves because we’re not world class in everything, It would be very difficult for us to claim with any confidence that we are world class, for instance, in Japanese equities or in US equities.
“We are not going to produce components in areas where we’re not world class. We would much rather use a partner who is world class and then build the right solution.”
This selective approach sets Danske Capital apart from some of its competitors, “We are convinced that a car produced our way is much better than the cars produced by some of our competitors who insist on producing every component themselves.”
One component Danske Capital has been tooling up to produce has been alternative investments. It launched its first hedge fund, Danske Hedge Mortgage Arbitrage Fund, on 1 January 2004. It arbitrages movements in the Danish mortgage-backed bond market and was closed to new clients earlier this year because it had reached the desired capacity, says Mousten. “The fund is a good example of both the demand for an alpha skill and for an alternative assets class, since it is a pure absolute return product, uncorrelated to other investments.”
Danske Capital has also launched a private equity fund that invests in the three Baltic republics. Mousten says the venture might look like “the Mickey Mouse of all Mickey Mouse markets”. Yet it has been remarkably successful. “We closed the fund in the spring when it reached €150m. Again, there was a strong demand for an asset class that is very little correlated with other classes, and where there’s a strong belief that we can add value.”
Danske Capital is now considering further alternative investment opportunities, he says. “What is exciting us currently is that we have put some of our own money into a European Nordic equity hedge fund. This has been running for four months, so it doesn’t have the world’s longest track record. But we had a very good start there and now we are up 30%.
“We are also looking into how we can build on our success in the mortgage arbitrage hedge fund to see if we can expand that, to have a broader investment basis for a new fund using much the same investment skills.”
Yet Danske Capital is wary of over-extending itself and spreading its alpha skills too thinly, Mousten says. “We are very conscious that whatever we do we build on our existing organisation and we build on our existing skills. We don’t want to dilute our alpha competence. That would be so harmful for our business.
“So if there is a demand for a particular asset class from some of our clients, we’d much rather say no and help them to find a supplier than dilute our alpha skills by moving into other asset classes.”
The other danger is that the two distinct strategies - providing alpha skills and total solutions – might become blurred or one will be seen as more important than the other. “We have to make sure that we are very clear with our employees that we have two areas where we have to be very strong. We have to continue to invest in our alpha areas and we have to continue to provide great solutions. And one is no less important than the other.”
Mousten likes to cite Jim Collins’ management theory bestseller ‘Good to Great’, which suggests successful firms do not make the mistake of doing ‘either or’ but are able to do ‘both and’. “At Danske Capital we’re trying to be a great company and do ‘both and’.”