Turning a blind eye to the index

Roxane McMeeken explains why Nordea prefers a practical rather than a theoretical approach.

“We don’t have risk control guys telling us what we can invest in and what we cannot,” says Nordea’s head of investments in Luxembourg, Kim Olsen. This modus operandi appears to be bringing in results in the case of the Nordea I North America Value fund. The fund, which has appeared in two of the model portfolios created by our panel of experts each month, has grown from roughly E100m in December 2001 to nearly E2bn today. Nordea manages E262bn and, under chief executive Lars Nordström, has made a name for itself as a bottom-up stock-picker. Mr Olsen says that “stocks are selected without reference to whether they are in the index or not”. Nordea tends to limit its portfolios to 40-50 stocks. Mr Olsen says this not due to any theoretical approach, but rather because it is simply more practical to keep track of a smaller number of stocks. However, the American value fund has grown to 90 stocks due to the breadth of opportunities identified by Nordea. “When we participate in a stock it’s because we think it is so good that we would like to own all of it,” says Mr Olsen. He adds that while the fund invests in value style companies, “we try to avoid the traditional value trap of buying anything at a discounted price, instead we look for undervalued profitability”. The process begins with “rather mechanical screening”, explains Mr Olsen. This generates ideas, based on what he calls the “usual suspects”, such as price to earnings ratios. The results of the screening are then scanned for certain indicators. Nordea looks for companies that are highly profitable with low levels of debt. This creates a shortlist. “Any company that stands out from the shortlist as particularly interesting will be considered for the portfolio”, says Mr Olsen. These stocks will be assessed through a process of acquisition-style due diligence. “We believe that if you forget all the noise of the stock market, what people focus on when they are buying a company is whether it’s going to generate cash. What we want to get down to is the ability of companies to create discretionary cash.” In other words, cash that can be taken out of the company and still leave it a healthy business. “We try to be pragmatic. A lot of investments are not about developing the company and are more to do with survival. For example, buying new software will rarely put a company in a much better position, it’s often more the case that if the company doesn’t buy it, it will be dead.” Buy or sell Once Nordea has decided a company is worth investing in, it looks at the price. Mr Olsen says simply, “we calculate the value of a company and if it is at 50 per cent of that, we buy it. When it’s close to 100 per cent, we sell it.” Risk management is a critical part of Nordea’s fund management approach. However, Mr Olsen says that “Ninety per cent of the industry have risk control guys telling them at the end of the day when they can take a decision on a stock”. Nordea, he claims, is different. “We like to think of the fund as a venture capital vehicle.” The North America Value fund, like most Nordea value products, is run by a team of just two people – Greg Powers and Bruce Sherman. They are supported by one senior analyst. “People have asked if we have the capacity to scan the whole asset class,” says Mr Olsen. “We do because we don’t spend time writing think reports into industries. We are like hillbillies in a sense. We just ask, can these companies make money and how much will it cost us to invest. We do not really care too much about the particular product they are selling and what sector they are in.”

Under Lars Nordstörm, Nordea has made a name for itself as a bottom-up stock picking expert