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the physics of good investment

“I never wanted to become an investor; I’m not sure I want to be one even now,” says Staffan Sevón wryly. “I originally tried to become a lawyer but I didn’t want to work that hard so I studied economics instead. In business school, when doing my masters, the only thing I found interesting was finance.”
The legal profession’s loss was the investment industry’s gain, with Sevón finally ending up as country head of Nordea in Finland before taking the CIO job at Veritas Pension Insurance.
As a Swedish-speaking Finn, Sevón found a place on the Swedish School of Economics and Business Administration in Helsinki.
His professor’s husband was a part-owner of a private bank and that is how he found himself managing portfolios for institutions and individuals.
Sevón describes it as ‘on the job training’ – but it is not exactly what we would call best practice now.
“It was not a very good way of managing money,” he confesses. “But I don’t think any of our competitors were much better – in general, the professionalism of portfolio management in the early ’90s was not particularly high.”
The problem, as he sees it, is that at the time there were no processes, no discipline, and not enough selfanalysis.
“If you don’t have a process then you can’t learn from your mistakes because there is no system that you can change,” he says.

Moving on
He worked as a private banker and portfolio manager for five years, after which he worked for the local government pension scheme for eight years.
“At the pension fund I started out managing European equities in a couple of sectors. You have to focus on a fairly small area to be good at it. I don’t think it’s possible to be a good generalist,” he says.
“In-house we did global equities and European government and investment grade fixed income, but we also had a lot of external funds and mandates – in US equities, in Japanese activist mandates, in high yield and so forth.”

Look at the numbers

A lot of his core training was learned in dealing with those external man- agers.
“One thing that taught me is that you cannot trust the marketing mate- rial,” he says. He tries to find managers whose driver of added value has a low correlation – and often the managers themselves do not know what those drivers are.
“You need to know the funds –a lot of funds don’t quite know how they invest. They might think they are growth investors but actually they are selecting in a slightly different way. Or they might say they are not growth investors but actually they have a growth bias – so then it’s important not to punish them when growth underperforms.”
Sevón is also definitely a sceptic on whether mutual fund managers add value.
“In the current fund, our selectors have been able to add value through the funds they’ve selected, but the value has not been very high and there is not added value every year. It is very difficult.”
The trick is not to switch funds as they move up and down the rankings – that is very hard – but instead to try to get the long-term performers and resist the temptation to sell them.


The Big Time
When Sevón was recruited to be Nordea’s country head, he was pleasantly surprised to find how well resourced it was.
“Very few fund management groups have great funds throughout their range but Nordea do have a lot of well-resourced funds with a very high degree of professionalism. So it was very nice to see from the inside how things are managed when they are really well managed.”
Many of his core investment skills were already well embedded, but there is one thing that Sevón had yet to learn…
“The politics of a large organisation. Politics is a big force driving the focus away from doing the actual business. It’s immensely unbeneficial as well. But of course, you can’t have a large, professional, driven organisation without there being politics. It comes with their jobs.”

Here comes trouble
In his experience, it is usually not the fund managers that cause the problems.
“Good fund managers are some- times difficult people,” he admits. “Many are truly obsessive – but they aren’t always as multi-dimensional in the way that senior management can be.”

Very few fund management groups have great funds throughout their range but Nordea do have a lot of well-resourced funds with a very high degree of professionalism alt=''

The diplomatic answer ‘multi-dimensional’ is a nice way of saying that the fund managers are in many ways much simpler in their needs – leave them to run their funds. Company executives are much more time consuming because their success is measured in a far more complex way.
Speaking of measurement difficulties, Sevón has an ambivalent view about one of the most high-profile members of a fund management team – the in-house economist.
“In an organisation as big as Nordea, there tends to be several economists because the story the economist has to tell might be very different when you talk to corporate banking clients versus asset management clients. You really can’t have the same economist. “Economists are at the same time highly beneficial in terms of giving the big picture, but very few of them are long term enough to be really of any value. An economist might have a prediction of US GDP for next year and maybe the year after – that is rarely of any value at all.
“I think where they do add value is in preaching about the principles of economics and the way that an economy works. So when we think about the European debt crisis or the US budget deficit, they can tell us what it might mean in ten years.”
Now he has moved to Veritas, with a smaller operation and with not so much contact with the end investor, there is less need for an economist.
“We speak to a lot of them but we don’t have one in house. We are a retail business so we don’t need the story teller.”


Of course, this doesn’t answer the following question: if you did have an economist that would give you a ten-year view, would you have the bravery to base the direction of your company on that view?
“That’s a very good question. It’s a bit like the drive for socially responsible investing – in the long term it might be a better way to invest, but in the short term you could be out of a job!”
It is this lack of longtermism that is at the core of the problems facing the industry and Sevón doesn’t think that governments are making the right kind of regulatory choices.
“A lot of bank legislation is formed in such a way that when performance is bad and equity markets come down you have to sell equity. That’s the kind of thing that is not beneficial for long-termism. What we need is legislation that is counter-cyclical.”


Staffan Sevón is chief investment officer for Veritas Pension Insurance, which manages approximately €2.2bn in assets for 65,000 insured.
Prior to this, Staffan was country manager for Nordea Investment Management with responsibility for the Institutional Asset Management arm of Nordea in Finland.
He has, during his 19 years in the asset management and insurance industries, also worked at Gyllenberg Asset Management (now a part of SEB) and as director of equities at the Local Government Pensions Institution in Finland, prior to which he taught finance at the Helsinki School of Economics and Business Administration.

Of course, asking for legislation that is counter-cyclical is like asking politicians to be unpopular, and it brings us back to the statement he made at the start of the interview – in the current environment, Sevón is not sure that he wants to be an investor.
But if not an investor and not a lawyer, what would he now choose to be if he could change his path? He doesn’t hesitate.
“I would have been a theoretical physicist,” he says. “I would have gone for quantum physics, but I’m afraid that it’s not entirely by chance that I’m in finance – I’m not quite clever enough to be a physicist.”


Dylan Emery

Dylan Emery is the group editorial director of Last Word. He is one of the founders of the company and he created International Adviser, Portfolio Adviser and Expert Investor. His primary responsibilities...

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