By Jonas Wäingelin
Aktia is a Finnish banking group that have activities spanning over many areas including retail banking, life insurance and asset management. On the asset management side, through its subsidiary Aktia Asset Management (AAM), the bank oversees over 8 billion euro comprising direct and fund investments in various asset classes globally. Ville Toivakainen heads the alternative investment initiatives of AAM, which is one of three key focus areas, the other two being Emerging Market Debt and Nordic equities. In an interview with Nordic Investor, Toivakainen shares his views on why Aktia has had a long-term focus on emerging market debt and alternative credit, what he looks for on the alternative side and how he selects managers to Aktia’s fund-of-hedge funds portfolio.
”Our activities within Aktia Asset Management is partly done through in-house teams and partly through external managers. Within our focus areas, we manage equities and emerging market debt portfolios in-house while on the alternative side we use external managers”, says Toivakainen, who joined Aktia two years ago from OP Financial Group to set up the alternative investment unit.
The mandates run by AAM spans from tailor-made investments for large institutions to mutual funds targeting a broad audience, according to Toivakainen. The goal, especially for institutional mandates, is to offer something that stands out from the crowd. On the equity side, that manifests itself through a focus on Nordic small-caps, while on the fixed income side, the emerging market debt focus is a differentiator. Within alternatives, trade finance strategies have been favoured along with other strategies showing strongly uncorrelated features to the equity and fixed income parts of the portfolio.
”Emerging market debt has been a focus area for over ten years, and we have built strong internal competencies as the asset class has matured over time. Within this strategy we run over two billion euros making it a significant portion of our overall assets.”
we focus on strategies that are less crowded given we do not want to be the 10th manager offering same solutions.
”Our ambition to offer something new to our clients explains the efforts we have pursued within EM debt, but also within equities, where we run for example a Nordic micro-cap fund as well as on the alternatives side, where we focus on strategies that are less crowded given we do not want to be the 10th manager offering same solutions.”
The client focus for Aktia Asset Management is Finnish institutions, where approximately 5 out of the 8 billion managed are coming from. However, there is an increasing number of Swedish clients and, as a result of Aktia launching Luxembourg-domiciled EM debt funds end of last year, more interest is coming out of central Europe as well.
Sourcing external managers within alternatives
With regards to alternative investments, there has been an increased focus on the asset class from the AAM alternative investments team, which consists of three people, Toivakainen included.
”Within alternatives, we very much build portfolios out of client demand, should there be a more general strong appetite for the asset class among our clients, we set up a fund of funds for that purpose. We recently launched the Aktia Alternatives fund which is reflective of that. The largest available fund that we have on the alternative side is the Aktia Trade Finance Fund with around 100 million euros, only employing trade finance strategies. The latest addition is private-equity style fund called Aktia Opportunistic Credit fund with focus on various private credit strategies”, he explains.
In terms of selecting managers to the alternatives portfolio, Toivakainen and his team do not use any consultants but mainly screen the universe through database searches, consulting existing connections and talking to new managers on a regular basis.
Within alternatives, we very much build portfolios out of client demand, should there be a more general strong appetite for the asset class among our clients, we set up a fund of funds for that purpose.
”We typically start by having an idea of what type of strategies we are looking for and what limitations we have in terms of liquidity, fund domicile and so on. Then using our different sources we filter out a universe of interesting names. From there we go through the material we have on the strategies in a first so called ”desk study”, the next step is then to set up physical meetings and to do on-site visits. We do both investment due diligence and operational due diligence using largely the efforts of our own team, for the legal analysis on fund structures we can use external legal counsels”
Tovakainen and his team tend to travel a lot since the alternative investment mandate is global. The current set of managers across the entire set of alternative strategies currently amounts to around 25 names.
”The goal of the alternative portfolio is to have uncorrelated strategies that can help diversify the exposure of our clients fixed income and equities exposures. We tend to avoid long/short equity strategies for example as those typically have a long bias, instead we use equity market neutral and CTAs, as well as volatility strategies.”
Liquid trading strategies and alternative credit in demand
The client-driven approach that Aktia employs requires a lot of sensitivity when it comes to understanding what is in demand currently. Toivakainen says that clients have been asking for, and still ask for, alternative credit and liquid trading strategies.
”In our alternative portfolios we combine liquid trading strategies including hedge funds, risk premia strategies and commodities which is a result of client demand. The other big topic that clients are asking for is alternative credit, both illiquid and liquid options. We have seen increased demand for private debt over the last 7-8 years which has to do with the fact that these strategies have seen fantastic growth opportunities as global banks have scaled down lending activities. Trade finance strategies is one example of a strategy benefiting from that. And, going forward, we will see new attractive opportunities as well.”
Currently, Akita´s alternative investment team is looking for managers on both liquid trading strategies and alternative credit strategies.
In our alternative portfolios we combine liquid trading strategies including hedge funds, risk premia strategies and commodities which is a result of client demand. The other big topic that clients are asking for is alternative credit, both illiquid and liquid options
”For liquid trading strategies, we’re looking for equity market neutral as well as other relative value strategies with funds domiciled in Europe. For alternative credit strategies, we’re constantly searching globally additional trade finance managers, and on the illiquid for example side special situations and distressed debt managers, both US and Europe, are on our radar screen.”
Macro outlook supports defensive stance
On the overall portfolio level, Aktia holds a defensive stance with regards to its allocation between equities, fixed income and alternatives.
”Globally economic indicators reflect good economic activity, but the growth has already been priced in to the markets. In addition, the volatility levels have increased and we expect them to remain on the elevated level. Thus, AAM’s current view on the markets as a whole is rather defensive with underweight in Equities as well as High Yield. We still have positive expectations on emerging markets, especially for local currency debt. After many years of underperforming, we finally see fundamentals driving the markets more and more, and it should be positive for active investment styles, both on traditional long-only as well as on hedge funds. Given the high valuation levels on traditional asset classes, we recommend to look for opportunities beyond”, Toivakainen concludes.