Show me your al­pha: ex­ter­nal man­agers fail to im­press in Nordics

Mint ST - - DEALS - Frances Schwartzkopff feed­[email protected] COPENHAGEN

The big­gest funds in one of the world’s best-run pen­sion mar­kets are grow­ing in­creas­ingly skep­ti­cal toward ex­ter­nal money man­agers.

PFA, Den­mark’s big­gest com­mer­cial pen­sion fund with about $90 bil­lion in as­sets, says it’s now sim­ply too costly to rou­tinely pay oth­ers to help man­age in­vest­ments, given the re­turn en­vi­ron­ment. ATP, which over­sees about $120 bil­lion, makes a sim­i­lar point.

“We’re happy to pay man­agers, if they de­liver al­pha,” Bo Foged, the act­ing chief ex­ec­u­tive of­fi­cer (CEO) of ATP, said in an in­ter­view, re­fer­ring to mar­ket-beat­ing re­turns. But re­turns are look­ing “more moder­ate” and there­fore “costs come to mean more and more and more.”

“It be­comes a big­ger and big­ger and big­ger share, and ex­ter­nal man­agers are rel­a­tively ex­pen­sive, so you have to be re­ally se­lec­tive,” he said.

Some of the big­gest as­set man­agers in­side the Nordic re­gion are al­ready feel­ing the chang­ing tide. The head of wealth man­age­ment at Nordea Bank Abp, Snorre Storset, said last week that in­sti­tu­tional in­vestors in Swe­den and Den­mark have started do­ing more in-house. That’s part of the rea­son why Nordea re­cently saw net out­flows, he said.

Al­lan Po­lack, the CEO of PFA, says that find­ing ways to cut costs is key to his fund’s strat­egy. He’s avoid­ing ex­ter­nal man­agers and in­stead us­ing his own staff to step up di­rect in­vest­ments, which now make up about 23 of the port­fo­lio. He wants to take that stake all the way to 30%. Do­ing it in-house sim­ply “low­ers in­vest­ment costs,” Po­lack said in an in­ter­view.

It also means “we don’t have to share the re­turns with so many other in­vestors,” he said. Both ATP and PFA lost money last year as mar­kets soured in the fi­nal months of 2018, mak- ing their fo­cus on costs all the more ur­gent.

To be sure, the two funds haven’t com­pletely turned their backs on ex­ter­nal man­agers. At PFA, Po­lack says pri­vate eq­uity firms stand out as an area where he still thinks it can be worth look­ing be­yond his own staff for in­vest­ing help, par­tic­u­larly in ar­eas in which the fund doesn’t have ex­per­tise.

They of­fer “fan­tas­tic fund struc­tures,” he said. “They’re just very ex­pen­sive. That’s an is­sue be­cause we com­pete on price with our clients, so our in­vest­ment cost is the heart of the cost struc­ture that we have.” At ATP, Foged says he in­tends to con­tinue us­ing pri­vate eq­uity firms, while not­ing that they’re part of the rea­son his fund’s over­all costs jumped last year. He says he’s keep­ing an eye on their charges.

“You have to be much more se­lec­tive than we have been in the last years,” Foged said. “The price de­vel­op­ments that you’ve seen with as­sets, you have to be much more se­lec­tive and much more crit­i­cal, and we’re do­ing that of course — and con­vinc­ing our man­agers that they should be.”


Al­lan Po­lack, CEO of PFA, says he’s avoid­ing ex­ter­nal man­agers and us­ing his own staff to step up di­rect in­vest­ments

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