DANSKE’s sub-advisory revolution

Danske Bank’s opening up to the use of third-party products played a key role in the strategic decision of its asset management arm to outsource the remaining investment activities to external managers, explains Niels Ulrik Mousten, chief executive officer at the Danske Capital funds house in Copenhagen. “I am sure that if the bank had not started discussing open architecture, we would have continued to manage everything in-house,” adds Mr Mousten. “That move has forced us to focus our investment activities and to be �competitive in what we are doing. I think this is wonderful. There is nothing worse than monopoly because then you get lazy and fat,” he states colourfully. The Nordic investment firm, which currently manages e85bn of assets, started its internal revolution at the beginning of 2003, taking one-and-a-half years to complete the restructure. “That was a hard decision to take,” says Mr Mousten, “but it was clear we would never be world-class at everything. We could see that �distribution was moving to open architecture and if you are mediocre, no one is going to sell your products to their customers.” The same concept applies to the institutional market, says Mr Mousten, where there is a continuous trend to either go for alpha capabilities, which institutional investors are willing to pay for, or to follow the index route. If an asset manager is average, it is sort of placed in-between and will certainly lose out, says Mr Mousten. In-house core The core investment areas to run in-house were �identified as those where the firm had a competitive edge, such as Nordic or European assets, or where it could �realistically build a competitive edge in the long term, such as Eastern European equities. “For the Nordic region, the decision was obvious. No other firm, with the exception of Nordea, is at our same level in terms of people on the ground and local representation,” says Mr Mousten. “There, the playing field is definitely tilted in our favour.” For all the regions outside Europe, though, the situation was different, having no resources on the ground, little �ability to attract and retain the right talent, and no chance of making a business case and building up local operations, says Mr Mousten. “It was much more than a question of simply evaluating how our funds were performing, because you are always going to have [bright and dark] periods.” The difficult call was Europe, explains Mr Mousten, where the firm wondered if it really had a competitive advantage. It also transpires from Mr Mousten’s words that perhaps their being based on the outskirts of Europe might have �initially cast some doubts on Danske Capital’s ability to operate on the ground. “Our competitors are based in London, Frankfurt, Zurich, Paris, Edinburgh and so on,” says Mr Mousten. “But I think we are all as local as we need to be. It is just a matter of �making sure we can attract the right people and work according to the right processes.” All their resources employed in investing in geographical areas outside Europe were then shifted to Europe. The move enabled the Nordic firm to gain critical mass in the region, according to Mr Mousten. “Of course, when you do that, it is always painful,” he says openly, “because some people who had spent years focusing on one area were suddenly told that would not be a focus area anymore and they had better spend their time on something else.” “But we were in the lucky situation where ours was not a cost-cutting exercise, it was a quality-enhancing or focusing exercise, so we did not have the additional problem of needing to let employees go. The issue was convincing employees that this strategy made sense.” Danske Bank’s series of acquisitions in the Nordic region, in the Baltic countries and Ireland since 1997 have made the Danish bank a traditional, universal and real northern European bank, explains Mr Mousten. Danske Bank’s most recent acquisition at the beginning of 2007 of the largest Finnish bank, Sampo Bank – also an important banking player in the Baltic region – provided Danske Capital with the opportunity to strengthen its asset management capabilities in Eastern Europe. The acquisition was made first and foremost because there was an excellent fit with Danske’s banking business, says Mr Mousten, but Danske Capital has certainly taken advantage of the large size of Sampo’s asset management operations, which represent 25 per cent of the merged group. Sampo’s focus on Finnish, European and Eastern European assets – the latter run from Helsinki and Tallinn – fully complemented Danske Capital’s core investment �activities, which included the plan of developing its Eastern European equity niche, says Mr Mousten. Eastern promise Having moved into the Baltic region in the mid 1990s, Danske Capital’s decision four years ago to further increase the number of analysts on the ground in Estonia and Lithuania was in some way independent from the presence of the banking network there. “Let’s be realistic, we are basically following the bank, because if the bank has a strong distribution in a market we will do our utmost to bring value out of it,” says Mr Mousten. “But in the case of Eastern Europe, we had moved �analysts there long before the bank moved into those �countries,” he says. With the acquisition of the Finnish bank, the number of multilingual investment professionals on the ground has increased to around 30. “We were convinced of the story of Eastern Europeex-Russia converging with the European Union, and that story is playing extremely well. Also, we had a strong �position in the Baltic region and our investment results in Eastern Europe were good.” Thanks to its Eastern European funds, the firm was able to break through in the close and appealing German fund market. “We are quite excited about that breakthrough, because all our home markets are tiny in the European �context. Just the German market is two-and-a-half times the size of all our home markets combined,” says Mr Mousten. The marketing efforts, driven by Danske Capital’s head of �institutional sales, Henrik Bak, have resulted in Eastern European funds sales of ?125m in one year, which Mr Bak considers a good start for a niche-oriented product and certainly as a door opener to their product range. Selecting managers Once Danske Capital’s decision to outsource was taken, it was paramount to build up an expertise in evaluating �external products, says Mr Mousten. A fund and rating �solution team was therefore created and made responsible for selecting external managers and products to be used in both products sold in the Danske name or used as building blocks in white-labelled Danske solution funds, which give the customers a full asset �allocation tool off the shelf. “We see that 80-90 per cent of our retail customers want just a solution to their investing problems so they get a decent competitive return.” For those customers, the best solution is to buy a solution, says Mr Mousten. Danske Capital’s external managers, which are used on a sub-advisory basis, include Wellington and Chicago Equity Partners, which manage small and midcaps in the US, Aberdeen Asset Management running the global emerging markets fund, Schroders covering the China equity market, and Daiwa and JP Morgan investing in the Japanese equity market. All together they cover 25 per cent of the total �equity assets of the Nordic firm. Fixed income, mostly regional, is one of Danske Bank’s areas of expertise and is managed in-house, representing 60 per cent of the total assets under management. The only exception is global high-yield emerging market debt, which is run by ING. Danske Capital’s wealth management operation, headed by Morten Kyhn Sindby, is responsible for defining the �product range in all banking activities in all home countries, following the research unit recommendations in case they want to use external funds. In some cases, the funds are also sold through the branches in the name of the external managers, but brand is not important for driving sales, says Mr Mousten. The Danske brand is very important for our �customers. “Danske bank’s customers are our customers because they trust the bank – that is the most important brand. Of course, there are funds that are very popular from time to time because they have a strong track record, and having well-known managers behind has an importance,” he says.