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Nordic values of openness and transparency have helped the country achieve economic success, and are in tune with European funds regulation. George Mitton from Funds Europe magazine reports.

Avanti Wind Systems began life in 1885 as a factory making ladders in a backyard in downtown Copenhagen. It still makes ladders – as well as service lifts, climbing rails and personal safety equipment – but today its main products are intended for a specific application: maintenance of wind turbines.

It may sound excessively specialised, but it is a good business to be supplying an industry erecting turbines in their thousands from the coast of Suffolk to the plains of China.

Avanti is “an extreme example of a Danish niche business”, says Jan Johan Kühl, managing partner at Polaris, a Danish private equity house that owns the company.

In fact, it is the type of company the Nordic countries have typically done well: efficient, competitive and, most importantly, global. Kühl says only eight of the firm’s employes work at the headquarters in Denmark. The other 250 produce the firm’s goods at factories in Germany, Spain, China and the US.

It seems Avanti confirms a recent marketing slogan that, “in the future even the smallest business will be multinational”. This is nothing new in the Nordic states, though. Nordic companies have always looked abroad to find markets for their products and, as continental Europe flounders in a swamp of bad debts, their openness is a source of strength.

Not only that, Nordic values of transparency and consensus seem uncannily in tune with the tone of regulation hitting the funds industry.

EXPORT-LED
Nordic companies have for years tended to be outward-facing because their home markets are small. Companies in the export business have tended to dominate the economy, such as car maker Volvo or shipping giant Maersk. These firms have been pioneers in developing new markets; Ericsson sold telephones in China as long ago as the 1890s.

In recent years, communications technology has allowed even small companies such as Avanti to spread themselves across continents.

“The size of our economies and the history of being international create the basis for creating strong niche companies,” says Kühl.
Alongside this trend, or perhaps because of it, a culture has grown up of openness and transparency that allows Nordic companies to integrate easily with other economies. Anyone who has met well-travelled Swedes or Danes can attest to their often excellent language skills. They are also known as skilled negotiators due to a culture of consensus that forms the basis of political systems in the various Nordic states.

It seems the rest of the world, and certainly the finance industry, is starting to appreciate the value of the Nordic model.
“Look at Nordic values of transparency and equality,” says Jari Kivihuhta, chief executive at Nordea Investment Funds. “From a fund management point of view, it is where the market is going.”

A shining example of the way Nordic values have dovetailed with European regulation is Ucits IV – the regulations that allow a fund to be marketed across borders. Because of their long history of openness to the global economy, Nordic fund companies were quick to realise the benefits of this “fund passporting”.

By allowing them to distribute across Europe, Nordic managers can compete with asset managers in larger and less open economies that had hitherto been beyond their reach – a perfect model for small, export-led economies.

Technical reasons make Ucits IV especially appealing to Nordic players. Third-party fund administrators in the Nordics are scarce and expensive. Many asset managers opt to do administration in-house, which is a drag on their profits.

But under Ucits IV, asset managers can set up their funds in Luxembourg and hire a global administrator at competitive rates.
“Our Nordic clients are setting up Ucits vehicles and looking to rationalise the number of funds they have and save costs,” says Håkan Valberg, president of Europe, Middle East and Africa at Advent Software. “They can have fewer funds and cover a large geographical area, which means less administration and more cost efficiency.”

The Nordic countries are also well positioned on the question of pay for financial services workers, a subject that seems set to dominate the news in coming months. European regulators have signalled they will seek to limit bonuses to fund management staff, and require that rewards are deferred or paid in company stock to encourage better long-term planning.

The push to limit excessive pay is unlikely to perturb the Nordic countries, which already have a much lower disparity between the wealth of the top and bottom earners. Redistributive taxation and a strong welfare state means Denmark, Norway, Finland and Sweden have among the highest levels of income equality in Europe, according to the Gini coefficient, a measurement of income inequality.

The broader regulatory push for more transparency on issues such as fund costs, third-party risks and depositary liability also seems in tune with Nordic values. Nordic countries are highly advanced at providing citizens with access to official records, and frequently score high on the Press Freedom Index, compiled by Reporters Without Borders.

Even great wealth has not changed their behaviour. Norway’s government pension fund, which looks after the country’s huge income from oil exports, scores ten out of ten on the Linaburg-Maduell transparency index, which measures transparency of sovereign wealth funds.

Being export-led and open to foreign trade is not always a benefit, though. When the global economy took a hit in 2008, Nordic companies were among the first to feel the pain, while some more closed economies did not feel the full force of the financial crisis until months later.

It was not a surprise. The Nordic economies have always been exposed to global market fluctuations and have been careful watchers of their currencies for that reason. However, some say the same forces that set the Nordics up for early pain helped them recover quickly.

“We are used to reacting fast,” says Jonas Eriksson, communications officer at Skagen Funds. “When things turned, companies performed pretty well. The export-oriented companies in the Nordics are quite lean, they didn’t have to cut a lot of waste.”

In Sweden, in particular, many attribute the strength of the economy to reforms made after a damaging banking crisis in 1992-93. To fix the problems, the government imposed tough losses on shareholders and nationalised bad banks.

The government also began a number of reforms that would improve productivity and lead to gradual lowering of the state’s contribution to GDP.

The result was that Sweden was better prepared for the financial crisis and did not have to implement state spending cuts in the midst of a recession, as many other European countries have tried to do.

This stability has helped support the local economy and provided a strong base for the region’s small companies as they do the important work of searching the world for customers.

©2013 funds europe

NORDICS: Looking abroad

This week saw ratings agency Fitch take the most shared news title with their worrying report “ The Money Printing Myth - Why Sovereigns Default on Local Currency Debt” Fitch Ratings says in a newly-published report that the popular perception that sovereigns cannot default on debt denominated in their own currency because of their power to print money, is a myth. They can and do according to Fitch - read the report here http://bit.ly/ZTIzCo. This report got the most sharing traction this week for a news release alongside the reporting of a boost for the Portuguese economy.

Bloomberg was the first to report that the Portuguese government was selling 10yr bonds again for the first time since its bailout, which trended earlier in the week. Later in the week Portugal was trending again, this time with a report from Reuters that “Portuguese banks should be forging a comeback to the debt capital markets after their sovereign staged a grand return this week, but treasurers are not convinced, saying spreads are too high and that cheap ECB funding is just too good to turn down.” Apparently, even a EUR 10Bn order book for Portugal’s sovereign bond isn’t enough to “wean them of the ECB drip”. http://reut.rs/15vsVl2

There was a rare moment of good news that trended mid-week as the EU, IMF and ECB published a joint report on their fact finding mission to Ireland. Apparently after their tenth review mission, staff teams from the Commission, European Central Bank and International Monetary Fund concluded that the beleaguered Celtic Tiger economy would grow 1 percent in 2013 and 2 percent in 2014. Behind this story it seems domestic demand is stronger than anticipated which has bolstered weak exports with Ireland’s main trading partners, but at least it’s out of recession.

The clear Twitter winner this week was Argentinian virtual TV broadcaster Diaro del Viajero, who webcasts a comedy & economics show from Buenos Aires. http://bit.ly/13jQSrW He’s a bit of an internet finance celebrity with his humorous graphics and casual special guests who explain in simple terms (subtitled in English) how macroeconomic policy affects the global economy… amongst other topics. Again, we’re seeing a video taking the top slot for sharing with the finance community this week, proving that the demand for serious news is shifting in favour of something you can watch in your lunchbreak.

This week’s top tweeter was Donna Borak (@donnaborak) the US Federal Reserve reporter for the American Banker magazine, but the most mentioned financial account on Twitter was more mysterious. The ominously named @MacroHedge received the most mentions, a shadowy, private account allegedly run by a Hedge Fund Manager & Founder with a “Strictly private account” with only 100 followers and 100 friends, but over 4,800 tweets under his or her belt. We think it’s a he as sometimes tweeters refer to him as “Joe”.

It shows that there’s always an interesting story simmering underneath the news when it comes to social media and international finances. @MacroHedge’s Twitter picture shows a mysterious cigarette smoking sillhouette and his page has a woman in her underwear sitting provocatively on a motorcycle… so no wonder he wants to remain anonymous. Either that or he’s really a 14 year old boy from Estonia playing a practical joke.

And finally, the excitement about online currency Bitcoin continues. Inventor of virtual currencies and host of “The Keiser Report” Max Keiser (@maxkeiser) leaves us all with something to ponder in the Huffington Post this week http://huff.to/11XMOdW - “What if all the Bitcoin Exchanges in the world were shut down?” I wonder what Diaro del Viajero would have to say about that?

Although consolidation at exchange and CSD level is a recurrent theme across the Nordics, securities services providers say local market differences remain a hallmark of the region, and remaining locally focused is still important in light of the challenges regulation is throwing up.

“From the outside, the Nordic markets appear to be very similar but if you compare Finland, Sweden, Norway and Denmark, there are a lot of market specificities such as legal structures, which are unique.” Anders Löfgren, head of product management, Euroclear Sweden

The Nordic countries are often lumped together as a homogenous region. In the last decade or so, the region has certainly witnessed a spate of cross-border consolidation with the Swedish and Finnish exchanges buying up a lot of the smaller Baltic exchanges before merging to become OMHEX, and then later OMX, which eventually became part of the Nasdaq group. At the CSD level, the Finnish and Swedish CSDs, VPC and APK merged to form the Nordic CSD Group (NCSD). Then in 2008, Bussels ICSD Euroclear acquired NCSD, which become Euroclear Sweden and Euroclear Finland.

However, consolidation belies the many differences that still exist across the Nordics. “It is still quite complex and fragmented with local flavours and regulation especially on the tax treatment side,” explains Janne Palvalin, manager at Nordea Securities Services.
Erik Öhman of the Swedish Securities Dealers Association says his members would welcome even more consolidation particularly at the CSD level. Despite becoming part of Euroclear Group, Euroclear Finland and Euroclear Sweden still maintain two separate settlement platforms.

Anders Löfgren, head of product management, Euroclear Sweden says that two previous attempts to consolidate the Swedish and Finnish settlement platforms were unsuccessful with the most recent attempt abandoned due to Euroclear’s Single Platform initiative being downscaled. “It is a lot more costly and difficult than you would think,” he says. “From the outside, the Nordic markets appear to be very similar but if you compare Finland, Sweden, Norway and Denmark, there are a lot of market specificities such as legal structures, which are unique.”

Löfgren says regulatory initiatives like T2S may see Euroclear Sweden and Euroclear Finland work more closely in defining a common asset-servicing platform. In the meantime, one of the more immediate benefits of joining Euroclear, he says, is that it can take advantage of Euroclear Bank’s FundSettle platform for automating fund transaction processing. Sweden has more than 1,300 funds with an estimated value of EUR 200 billion, but the processing of transactions is highly manual, says Löfgren. Using FundSettle, fund-transaction order routing between relevant parties and settlement of the cash-related part of the transaction will be done on a straight-through processing basis at Euroclear Sweden, making it cheaper and less prone to manual errors.

On the trading side, although there has been exchange consolidation, Swedish stocks are traded on a number of platforms including multilateral trading facilities (MTFs) such as Chi-X. This has fragmented liquidity, says Öhman’s colleague, Lars Afrell. Some MTFs, like Burgundy, are being swallowed up by conventional exchanges. Norway’s Oslo Børs acquired Burgundy from a group of Nordic banks and brokers.

Regulatory pressures
These days, however, consolidation in the Nordic markets has taken a back seat to the ‘tsunami’ of regulations the region faces. “The volume of regulation and also the way in which it is implemented does not give market participants much time to implement the new rules and entirely new procedures,” says Afrell. “There is a lot of uncertainty about how to interpret the new regulations.”

Although Finland is the only Nordic market that is a member of the eurozone, other markets are feeling the full force of EU regulation. The Nordics were forced to look at the issue of CCPs following Lehman Brother’s collapse in 2008. Up until then, Öhman says the Swedish market didn’t really see the need for a CCP. Sweden had (and still has) a settlement ratio that was higher than most CCP markets.

With the move to central clearing of OTC trades under the European Market Infrastructure Regulation (EMIR), Öhman says its members are concerned about whether they will need to be members of a number of CCPs, or just one or two. “Is LCH going to be the dominant CCP in Europe? It is too early to say. For the Nordic currencies, Nasdaq OMX is launching a CCP for OTC trading. Collateral management efficiency will be a key issue in choosing clearing arrangements in the coming year,” says Öhman.

T2S
Palvalin says its clients are also trying to analyse how regulation will impact them. “Clients are interested to see how these regulations will change the competitive landscape and the infrastructure.” One of the biggest changes for the Nordic markets will be T2S or Target2-Securities. Denmark and Finland are expected to join in the third and fourth migration waves, whilst Norway and Sweden are staying out at this stage.

“T2S will change the competitive landscape and will require huge investments by CSDs,” remarks Palvalin. Migrating accounts to the T2S platform is particularly challenging for the Nordics, which has a direct holding account structure. Direct holding means that individual investors are directly registered and hold an account with the CSD, Löfgren explains. “That doesn’t mean the CSD has a relationship with clients directly, but it does provide services directly to the end investor via an account operator – typically the four big banks that operate in Sweden,” says Löfgren. That means migrating end-investor accounts to T2S will not be straightforward if Sweden decides to join T2S in the future.

Alongside T2S are other initiatives such as shortening the settlement cycle to T+2, which is part of the European Commission’s CSD Regulation (CSDR). T+2 is unlikely to cause too many problems but the implementation of T2S in Finland and Denmark will shorten settlement timeframes further. “The Nordic markets have an efficient settlement process, which will have no major problems in moving to T+2. The biggest worry is for Asian and North American customers to submit settlement instructions in time,” says Öhman.

Teemu Pihlatie, head of client relations and sales, international clients at Nordea Securities Services, says there is an increased focus on risk by clients. “We are seeing demand from clients for deeper local expertise,” he says. With a presence in all four Nordic markets and deep historical roots in the region, Nordea believes it is well placed to meet that demand.

Given T2S’s impact on custodians’ margins and volumes, some Nordic custodians set up offshore centres of excellence in the Baltics for settlement processing. Nordea says it too is centralising settlement processing and is also looking to do the same for asset servicing out of Sweden. But instead of opting for cheaper locations in the Baltics, Palvalin says it felt it was important to maintain a local presence. “We still have staff in all four markets as clients are increasingly looking for depth of local market knowledge and low risk while maintaining service levels.”

(posted for The Benche by permission of ISS-mag Rooted In The Region - ISS)

This last week the news on Twitter was dominated by rumour, predictions and finally announcements about the historic cut in ECB interest rates by 0.25%, setting the new rate at 0.5% at a much tweeted, live webcast news conference with ECB President Mario Draghi. Last week, one of the big stories was German premier Angela Merkel’s outspoken remarks that a rise in interest rates would be better for Germany and France, but she expected that was unlikely because of the weaker players in the Eurozone. It’s interesting to note that the buzz generated by that story on Reuters was similar to the levels of Tweeting associated with the news this week, indicating how hot this topic is for bankers. Here’s how the story and news media attention grew this week:

On Monday, Reuters reported the ECB was under pressure to publish legal documentation for its government bond purchase programme (OMT) but would only do it if the scheme was actually used. http://reut.rs/16ceS2V Later that day, we saw the trends shift in favour of the prediction from Goldman Sachs that EUR/USD risks were skewed to the upside despite an expected ECB rate cut. http://bit.ly/10nqkRc

On Tuesday, the top story was analysis (again from Reuters) of the sharp drop in Eurozone inflation coupled with a rise in joblessness, indicating an ECB rate cut was needed for economies like spain. http://reut.rs/YaCSir That story competed for the top slot with analysis by Edward Hugh (fistfulofeuros.net blogger) with analysis of Spain’s worsening situation, again, pointing towards an ECB rate cut.

On Wednesday we has a short break from ECB news to discuss one of the underlying social factors in economic recovery - ‘Human capital’ in a very popular video discussion with economist Gary Becker and Emeritus CME Group Chairman Leo Melamed. This is one of the economic ‘back stories’ behind macroeconomic policy: http://bit.ly/17xeIl0

Thursday was dominated by the ECB announcement itself. In the morning Ransquawk analysis video dominated predicting the cut and reporting about the opinions of various ECB members. http://bit.ly/104Fkn8. There was a brief flurry of activity around another press announcement from the ECB that day about the eligibility of marketable debt instruments issued or guaranteed by the Cypriot government. The announcements of Cypriot ‘bond haircuts’ would normally be a little more controversial, so it was a good day to slip that one out before the main announcement the media was waiting for. http://bit.ly/18ukDpz

Then came the big one. Twitter lit up with the breaking news, with the WSJ Live Blog briefly taking top slot before the ECB’s own live webcast took the top honours for attention.

Friday sees the ECB webcast http://bit.ly/18h5OJy is still one of the top stories, but the fallout of analysis is now starting to dominate with more bad news and reasons why the ECB rate cut won’t make much difference to the European economy - as you might predict within the financial news cycle. As one tweeter put it “Germany doesn’t need it & inflation is too high in NL anyway” and others noted that Belgium will benefit, but no-one else. As I write this post, new EU figures predicting a decline in France and Italy’s economic prospects with −0.4% growth forecasts for the Eurozone caused by France moving into recession and Italy’s rising debts as percentage of GDP.

I guess you could say it was a break from the bad news this week and the media and finance community got excited about the ECB cut, although from the tweets and news articles we saw before and after, it was predictable and it seems, irrelevant to Europe’s economic prospects for the next year. But it was a good week for the @Zerohedge blog (www.zerohedge.com) which took the top slot for most retweeted news and comment feed, closely followed by @ForexLive (www.forexlive.com).

It was also a good week to spot the people who select and ‘curate’ the best news in their own Twitter magazines or paper.li daily news round-up. This week take a look at Edward Harrison’s paper.li “The Credit Writedowns Daily” http://bit.ly/18hbeEt - it seems he picks the best breaking news and analysis and it makes for very good reading.

The top tweet? A question from @Zerohedge “Does anyone still use the ECB’s Marginal Lending Facility?” - well, do you?

A friend of mine at Citywire.co.uk has sent me this regarding an investment conference at the Grand Hotel on May 30th... seems like a good time to organise an informal evening Benche meet-up. Anyone fancy it?

+++++

For any investment professional who is the business of choosing funds, two questions stand out above the rest.

First – where should I be allocating my assets right now and in what proportion? Bonds or equities is the top line decision of course but then there is the small matter of choosing between the developed and emerging economies or even going for a specialist theme such as say technology or the new consumer.

Second- once I have chosen my asset class, how to I select the right fund manager? A stock picker or one who makes macro call? A manager running a billion euros or more, backed by the resources of a mighty investment house, or a niche manager with a small nimble fund at his or her own boutique?

The debate over which question will reap more rewards in the long term is as old as investing itself. There is a consensus among commentators many that asset allocation brings 80% of returns and that stock (or fund or fund manager) selection is just the icing on the investment returns cake.

Such protagonists also tend to argue that relatively few active fund managers beat their benchmarks consistently, so it’s not worth breaking sweat to choose one over the other and definitely not worth paying the fees they charge. Far better to choose very low cost passive vehicles such as Exchange Traded Funds (ETFs) in proportion to the asset allocation you are seeking.

The protagonists on the other side argue that fund manager talent may be rare but can be spotted and is worth paying for (think of them like footballers – not too many Lionel Messis or Cristiano Ronaldos around are there?) because they will deliver alpha return while ETFs (after charges) are more or less guaranteed to trail the index.

They also argue that the ‘too few successful active managers’ argument is specious as it fails to reflect the average investor experience. If say there are just two fund managers in a sector, one running €1 billion and the other €100,000. If the billion-euro manager beats the benchmark and the other one lags, that’s a success ratio of 50%. Weighted by the assets held by investors however it is 91%.

If you are interested in such debates, you might want to join us at The Citywire Stockholm Fund Selector Forum held at the Grand Hotel on the morning of Thursday 30 May.

The Forum gives fund selectors the chance hold five intimate face-to-face workshops with specialist portfolio managers from these leading fund management groups:

· Wells Fargo Asset Management, Jean Baptiste Nadal – Global Equity fund
· BNY Mellon, Andrew Cawker – BNY Mellon Absolute Return Equity fund
· Ossiam (Natixis Global Asset Management), Isabelle Bourcier on Minimum Variance Investing
· Mirae Asset Global Investments, Joohee An – Mirae Asset Asia Great Consumer Equity fund
· Amundi – speaker to be confirmed.

After the workshops high yield veteran Anthony Robertson of BlueBay Asset Management will be joined by Beatrice Philippe of Philippe Investments to talk about US recovery, QE exit strategy and potential rate rises. We'll get to grips with the inflation/deflation debate and discuss how portfolios should be positioned once the liquidity taps are finally turned off.

Who is Citywire and how do I sign up?

Citywire is a leading international player in the world of retail investment funds, bringing together asset management houses and fund buyers via our websites, magazines and events, held in more than 10 countries in Europe, Asia and the Americas.

Attendance for this event is free for delegates but space is limited.

To confirm your place, or to find out more, please contact Tuomas Isoaho at tisoaho@citywire.co.uk.

Due to the popularity of our events we recommend a quick response to guarantee your place.

Details for the Citywire Stockholm Fund Selector Forum

Date
Thursday 30 May 2013




Venue
Grand Hotel Stockholm
S.Blasieholmshamnen
10327 Stockholm