Posted inNORDICS

Allan Møller – crisis lessons

In the autumn of 2008, financial markets were in unprecedented panic and the fund selection team at Danske Capital, the investment management arm of Denmark’s largest bank, Danske Bank, saw the value of its portfolios declining rapidly.
 
“Back then, we decided not to change our fund allocation but instead to put everything on hold,” says Allan Møller, a fund analyst at Danske Capital at the time, and now head of fund selection. “In such an acute situation which has never occurred before, you simply don’t know what to expect when you replace a fund.” You might indeed better stick to the devil you know. “If you sell a fund, you could end up losing even more.”

Reality check

So when the dust had settled in early 2009, Møller and his team sat down to discuss a new strategy which would be more resilient to market shocks. “For a number of years we had tried to find the best in breed in all asset classes we cater. But we realised that in some instances it felt like we had been chasing our own tail as it is really hard to find. One fund can be best in breed in one period and another one in the next period. Also, funds which score best on all aspects only exist in theory.”
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Møller and his colleagues decided to replace their cherry-picking strategy with a partnership structure, which basically means they choose a number of external managers providing at least three funds to the buy list. “Still, we only select the best funds from these managers. If we can’t find any funds in a specific asset class from one of our partners, we will look beyond our range of selected partners.”
 
Danske Capital now has six of these special partnerships. “But we could have a couple more”, says Møller, who has been head of fund selection since 2012. “Right now, these managers provide us with
about half of the 62 funds we have on our fund list. The other half comes from managers who are represented by one or two funds.”

Turnover turnaround

While the 2008 financial crisis was the main trigger for changing the selection model for Danske Capital, it was not the underlying reason. “Turnover of funds was too high until 2009. That was wrong, as it is very costly for the end client to change managers,” says Møller. “Now we look for managers who will be with us for at least three to five years. That’s how it should be, as we tell our clients when they invest in funds that they should hold that position for at least three to five years. Moreover, how can we ask clients to invest in funds for three years or more if we change funds every other year?”
 
Right now, turnover is ‘fairly low’, according to Møller. “Within the 48 asset classes we distinguish
we have 62 external funds, while we only change between three and five funds each year. That’s indeed one of our main objectives now, to keep turnover low.” Møller and his team strive to have two funds on their list in all asset classes, one internal and one external fund, “so our asset allocation team has something to choose from”. These two funds would be in equal competition for selection.
 
About two thirds of the asset classes distinguished by Danske Capital lie within the equity space,
ranging from Nordic, European, Global or GEM equity funds to a number of sector funds. The remaining 15 are fixed income funds, with about half of those being strategies denominated in Danish, Norwegian or Swedish kroner.

Consistency is key

The selection criteria Møller applies to mutual funds are all in the service of his over-arching goal of picking funds which can be held for several years and deliver a steady return. “A consistent strategy is very important for us. If, for example, a manager has a high turnover in his fund, we would check whether he has had a high turnover in the past too as it must be part of his strategy to justify this sort of trading. Besides that, we prefer a team approach, and don’t like star managers running their own business.”
 
One of Møller’s favourite funds is the Aberdeen Global Emerging Markets Fund, which has delivered good historic returns combined with a consistently low volatility. “From an allocation perspective
this fund makes good sense. Even during bull markets, it achieved a higher return with a lower volatility than the rest of the market, while at the same time it lost less than both its index and peers in 2008. “What I also like about Aberdeen is that they have a local presence in several of these countries. When it comes to emerging markets, it’s rather important for fund managers to be present on the ground.”
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When it comes to bond funds, Møller particularly likes the T. Rowe Price Global High Yield Bond Fund. “We have used this fund for many years. During that period it has shown it can deliver steady returns, while the management has remained pretty much unchanged. Even if the asset allocation team decides we shouldn’t allocate at all to high yield anymore, we would still keep this fund on the fund platform for private investors to invest in.”
 
Completely abandoning high yield is not just an imaginary thought indeed, as valuations across all fixed income categories have become so demanding that Møller has a hard time finding any value in the asset class. “We have now started to look at absolute return bonds. In this kind of bond fund, the manager has his hands free to change his allocation to different asset classes within fixed income.”

Bonds: thrown off balance

But in general he finds it hard to find opportunities in fixed income. “Risk and return should go hand in hand, but returns are so extremely low now in many fixed income products that this seems no longer the case. However, we still need to allocate to fixed income in our model portfolios.”
 
Danske Capital has been underweight government bonds since the start of the year, focusing instead on higher returning asset classes such as high yield and emerging market debt. “Most recently, we have been allocating away from high yield to EMD hard currency. On a macro level, in a strategic asset allocation in an average balanced portfolio we now have 55% in bonds and 45% in equities.” When it comes to equities, Danske Capital is pretty much neutrally weighted at present. “We are actually in limbo a bit, waiting for some more figures on the US economy of course, but also waiting
to see how the situation between Ukraine and Russia unfolds.”
 
Although Europe’s fund selector community is planning to step up its allocation to emerging market equities in great numbers, as EIE research has unequivocally shown over the past months, Møller remains wary. “Although we see improving figures coming out, we also see some headwinds. Property prices in the main cities of China have now begun to drop, while credit policy is still very easy. Our biggest concern therefore is now whether China dares to tell its banks to tighten their credit policy in a situation where housing prices are falling. If they do, it could become really nasty.”

 

Part of the Bonhill Group.