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

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

“We’re happy to pay managers, if they deliver alpha,” Bo Foged, the acting chief executive officer of ATP, said | Photo: ATP/PR

PFA, Denmark’s biggest commercial pension fund with about EUR 79 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 EUR105.8 billion, makes a similar point.

“We’re happy to pay managers, if they deliver alpha,” Bo Foged, the acting chief executive officer 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.

Net Outflows

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.

Why Nordea AM’s chief is prioritizing growth in home markets

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 percent. 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, making 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.

Private Equity

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.”

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