In search for ”the five Ps”

Andreas Weilby is the COO of the Danish investment advisor and asset manager Spektrum, a company that was spun out of advisory giant Kirstein end of last year. Spektrum assists institutional investors, primarily in the Nordics, in setting up investment portfolios according to their individual needs. That includes assisting in portfolio construction, manager selection and asset allocation decisions. In an interview with Nordic Investor, Weilby gives his views on the challenges currently facing institutional investors, how they source external managers to their portfolios, what he sees allocators are looking for in terms of strategies and how regulatory changes affect their business.

By Jonas Wäingelin, NordicInvestor

”The reason that Spektrum was spun out of Kirstein last year really had to do with us wanting to be able to meet an untapped demand among institutional investors, that demand ultimately had to do with clients wanting us not only to be an advisory counterpart but also to be able to pull the trigger on trades”, Weilby says.

Currently, Spektrum has 4 billion euros in assets under advice and primarily works with fiduciary mandates, meaning that everything from allocation decisions, to manager selection and reporting is outsourced to the company. Spektrum employs nine people with most of them being analysts assisting in investment decisions.

Balanced Mandates at the Core

The portfolio solutions offered by Spektrum goes under the name of ”balanced mandates” which is the label of their fiduciary services where Spektrum recommends strategies based on clients´ needs. Spektrum runs a model portfolio which serves as the base case recommendation, but Weilby highlights that clients rarely run with that portfolio but rather tweak allocations according to what they look for in terms of risk and return profiles.

”A typical client to us is a tier 1 or a tier 2 institution that needs advice in setting up their portfolio in order for it to fit the requirements imposed on the mandate, that is everything from risk profile and timeline of investment to the actual choise of assets underlying the investment.”

Spektrum´s model portfolio for an investor with a medium risk profile as it stands today has a 40 percent equity allocation and a tilt towards Danish mortgage bonds as the secure part of the portfolio. Within the fixed income part is also an allocation to high yield and emerging mark debt. There is also an exposure to alternative credit.

The equity part of the portfolio consists of a number of global equity managers and regional mandates.

”We have a pool of global equity managers with different styles, some of which have emerging market exposures. We also have a couple of satellite investments, e.g. US small cap which has served us well post Trump being elected.”

During the last couple of years, there has been some significant changes to the portfolio which is reflective of changes in the market environment, according to Weilby.

”Going back a couple of years I would say that our allocation to bank loans wold be lower but the allocation to high yield would be higher. We still see good opportunities in senior bank loans given where yields are moving at the moment. At the same time we think investment grade and high yield bonds offer few opportunities today. We remain neutral to underweight on traditional credit. With regards to equities, we have been significantly overweight since the global financial crisis but that part has come down to more of a neutral allocation currently.”

In search for ”the five Ps”

When sourcing external managers to the Spektrum portfolios, Weilby says they are using an in-house database that builds on data from many years of meeting with managers, an external database called CAMRAdata is also being used to efficiently gather performance data on an ongoing basis.

”Our database allow us to be on top of things when it comes to how managers perform in a given environment and why that is. It was built in order for us to know the managers better but it is also used to ensure that the managers we have, using different styles and biases, are well-positioned in their relevant peer group.”

As for new funds entering the space, Weilby says that those would be spotted through ”them coming to us” or through meetings at conferences and similar. New names typically gets explored as Spektrum initiate searches for mandates.

”A few years ago we had a search for high yield managers that, surprisingly to us, included a large number of managers that we did not know of.”

When initiating targeted searches, Spektrum uses external search providers such as IPE Quest or Global Fund Search in order to efficiently gather information about managers that are suited to meet the requirements set forth by the specific mandate.

”That is usually how we start the process, then we have our own systems spitting out a number of statistics in order to get a good view of the opportunity-set and to analyse which managers to continue with”.

When looking for managers to enter client portfolios, Weilby and his team are also guided by what he refers to as ”the five Ps” meaning People, Philosophy, Process, Portfolio and Performance.

”In order to be included in our clients’ portfolios, managers need to meet up to requirements that we believe reflect a sound asset management business, these are well-summarized in the five Ps. Obviously the people behind the firm is of great importance, but everything needs to align. If you have the right people and philisophy but a lack of process that will ultimately show in the portfolio construction and performance”, Weilby says continuing:

”In the initial screening it is mostly about filtering out names that we do not believe live up to the standards we look for, so in that sense we start with a negative screening and then go on to ask more specific questions in separate conference calls. Our experience is that this process is a very good starting point in order not to waste anyone´s time. From there we then derive a short list, invite them to Copenhagen and have them sit down with our analysts to dig further into the strategy.”

According to Weilby, a typical search takes around three months and results in them chosing in on 2-3 managers for further on site due dilligence before the final selection. The number of external managers in Spektrum’s client accounts today mounts to between 15 and 20 names with 1 or 2 typically being replaced each year.

”Ideally we don´t want to change a lot, but we closely follow our investments in order to identify changes that affect our perception of the manager. Our most recent search was for emerging markets equity as a result of changes related to the corporate structure of the manager we had in place.”

Infrastructure and Private Debt among sought-after strategies

In terms of what investors are looking for, Weilby says that many allocators are worried about how long the growth theme can go on and are therefore looking to further diversify their portfolios.

”We see many investors coming from portfolios where they have huge exposures to certain styles. Investors are shorter term focused than you would ideally have hoped for but most of them are aware of their concentration to styles and come to us to help diversify.”

”We essentially make them get away from certain biases in the portfolio”

On the alternative side, Weilby says that Spektrum have been doing quite a lot, and among other things recently invested in infrastructure through the Copenhagen Infrastructure fund. Where he sees increased demand from investors is within private debt.

”It is probably the most outspoken alternative story during the last couple of years and we are definitely on the same lines looking to allocate to the asset class. There are so many positive things to say about the asset class, the only issue is that investors have piled into the strategy meaning that you cannot exploit the illiquidity premiums to the same degree that you could a couple of years ago, however on a relative return basis, the asset class still looks attractive.”

Weilby points to the fact that they are also looking into private equity but find it increasingly hard to find good investment opportunities.

”It is extremely hard to find interesting investments on that side, be it beta plays or individual investments. Having said that, we will continue looking at the space. We had a similar case with infrastructure, which was an asset class we had more or less given up on, but we managed to find an institutional setup that worked for our clients.”

With regards to investment trends related to sustainability, Weilby says that this has still to play out in actual allocations.

”It is definitely a topic, but in terms of allocations, I don´t see a lot of activity. We have had discussions with some investors about it but it is nothing that has materialised. I think it will continue to be watched by our clients.”

New regulation have institutional investors asking for more

With regards to the regularoty environment and how that plays into the business model of Spektrum, Weilby says that recent efforts to improve transparency towards investors through the Mifid II regulations plays in the hands of the way they manage portfolios and how reporting is done on behalf of clients.

”The changes in regulation really provides us with an additional growth driver as it requires more transparency and additional reporting. In our fiduciary mandates we take care of everything including the reporting functions, which of course provide us with an additional unique selling point.”

”We have always been very transparent in everything we do, the fact that new regulation now supports that transparency in order to prevent investors from being blindsided and take uninformed decisions really plays in our hands. We welcome regulation that improves the transparency of the industry overall.”