Who better to understand the Nordic investment climate than Daniel Broby? With 21 years of fund management under his belt, including time at Nordea Investment Management, Copenhagen’s largest fund manager, he is currently chief investment officer of independent Nordic asset manager BankInvest.
While Scandinavian cities lag behind the UK, Switzerland, Germany, France, the Netherlands and Italy in terms of assets under management, they constitute a weighty market for US companies. After Stockholm, Copenhagen is the second largest Nordic market in terms of assets under management. Its top six institutions have more than $350 bn under management, with Nordea Investment Management and Nordea Invest alone holding $194 bn.
In contrast to his London counterparts, Broby says Copenhagen-based fund managers see less of company management, even though they travel more. ‘We have a longer investment period – BankInvest’s Global Core Fund’s average investment span is seven years,’ he continues. ‘This mainly evolved because mutual funds here have a different structure and pay dividends if they realize a capital gain within three years. Danish retail investors don’t want to receive dividends because of the high tax rate, so mutual funds are focused on a longer-term investment period. This suits us as it means viable companies have a loyal and solid shareholder base and we in turn have a better relationship with the companies.’
The Danish pension market has changed hugely in recent years. It is now coming out of the ‘traffic light regime’, where a red light signifies that only non-risk assets can be added to portfolios, amber is a bit more relaxed and a green light allows aggressive equity investments. A couple of years back everyone had a red light but investment houses are now taking on more risk. The trend will be for equities under management in Denmark to increase following this liberalization.
Expanding horizons
BankInvest’s funds under management have quadrupled in the last five years. It now has offices in Singapore and Mexico and is one of the largest emerging market investors in Scandinavia. It has taken BankInvest three years to build up its hedge fund assets, which remain modest at around $100 mn. It is currently launching a more return-oriented hedge fund.
BankInvest likes to be as unconstrained as possible in its investment style. ‘We don’t look at market capitalization, but focus on tracking error and how much our portfolios will diverge in terms of theoretical returns against the index,’ Broby explains. ‘Specialist portfolios can invest in smaller companies, but with global portfolios we need to focus on companies in the $1 bn-plus range.’
In keeping with Scandinavia’s green credentials, BankInvest has three types of socially responsible investment (SRI) funds. In partnership with the Danish Oil and Natural Gas Company, it runs the largest private equity alternative energy product. It also has funds with an SRI overlay, using a UK provider to do the screening; these came about largely thanks to demand from Swedish and Norwegian institutions. The third kind of SRI fund uses positive screening whereby capital is allocated according to whether a company is going in the right or wrong direction. This is done in conjunction with Innovest and Sweden’s Ethix.
BankInvest doesn’t have a dedicated US fund but it does have global funds and European funds. The firm doesn’t make asset allocation decisions ‘other than from a bottom-up point of view’, says Broby. ‘The firm is underweight in the US – we are not exposed to US financial companies or regional telecoms, as there’s still a lot of average revenue per user erosion going on.’ He adds that BankInvest currently favors technology and industrial companies in the US as they have a more impressive return on equity than European counterparts.
Hot stocks
Broby finds the US utility sector more interesting than the European one, naming Exelon Corporation in particular. ‘The very large-cap US companies that have gone through a major de-rating are starting to look attractive,’ he says. He cites Microsoft in particular, pointing out that it ‘still has significant cash, still has a monopoly, and is unloved by everyone, but if you think about it from a multiples point of view, it’s still attractive and is always going to maintain its place in the market.’ Broby acknowledges that ‘there are going to be threats from the likes of Google, where before the threat was free software, but either way Microsoft is large enough to adapt and maintain its market position.’
US stocks he’s not so keen on include the likes of Toll Brothers, given the slowdown in the housing market. ‘A lot of building companies and DIY groups have held strong, given the housing market, but so far the correction has been superficial if the long-term implications for their long-term business models are taken into account,’ he explains.
Focusing on IR, Broby feels companies visiting Copenhagen get a good reception. ‘As there are fewer firms visiting the region, investors have more time to prepare,’ he explains. He prefers management to get onto Q&A straightaway, rather than go through formal presentations. He also advises management to ‘focus on the strategic direction of the firm and what it is doing to make it a better business in ten years’ time.’ If a company is one margin point off for one quarter, that doesn’t matter very much to the ultimate long-term valuation.
