By Hamlin Lovell, NordicInvestor

SKAGEN Funds, based in Stavanger, Norway, is most famous for its value-oriented equity strategies, but the firm (which is part of Storebrand) also selects external managers for a growing execution-only platform, a fund of funds, and model portfolios. Nordic Investor interviewed Midhat Syed, Portfolio Manager, to hear about the firm’s approach and ambitions.

Actively managed equity value strategies are not the only item on the menu. “Our online platform has a list of over 600 funds including regional, thematic and global mandates all over the style spectrum. Clients can invest in a passive index tracker or an active technology fund. To help clients choose, we have published a recommended list of 18 funds,” says Syed. The platform is structured to give tax-efficient access to funds for a growing pool of Norwegian personal and pension savings (which some individuals may have on top of their state and employer pension funds). “A challenge is ensuring that the recommended list stays relevant for clients based on how they search for funds so it’s important for us to monitor client preferences. At the same time, we don’t want clients chasing short term performance, so we try to communicate the relative advantage of time in the market over timing the market”.

Meanwhile, SKAGEN’s five fund of funds allocate two-thirds of their assets internally and one-third externally. Asset allocation and manager selection are both done by the same team.

Sourcing managers globally

SKAGEN identifies funds partly through the Morningstar database, RFP and DDQ processes, and also receives some reverse enquiries. Three people at SKAGEN and three at Storebrand carry out due diligence, including operational due diligence, in house. They also have access to Mercer research for fund selection.

There is no bias to the Nordic region in manager selection and if anything, they make a special effort to identify managers that are harder to access in Norway. “We mostly recommend boutique managers or niche funds in the US, Europe and Asia that would otherwise not be visible or accessible to investors in Norway. We have spent more time meeting managers in London than anywhere else,” says Syed.

There are large managers such as Aberdeen Asset Management, Blackrock or Franklin Templeton, but it is also interesting to highlight two examples of UK based “boutique” equity managers which SKAGEN follow.

“Edinburgh based boutique, Kennox Asset Management, gives good downside protection and helps us address the loss aversion puzzle we are looking to address in our fund-of-fund portfolios,” says Syed. Kennox has one strategy, a small team and a long-term value philosophy, emphasizing quality companies. As of September 2020, the manager also has significant exposure to gold miners.

“London-based JO Hambro is recommended in emerging markets on our platform because we like their approach to top down macro screening of countries and sectors. In emerging markets, many things can go wrong as a result of the environment a company operates in. Once they identify the countries and sectors with tailwinds, their stock selection process within is bottom-up. The strategy is managed by three dedicated investors in a multi-boutique structure”.

Vehicles and fees

SKAGEN’s platform highlights three key statistics to investors: return, risk and cost. SKAGEN’s fund of funds access institutional share classes, which generally charge only management fees, but did consider a frontier equity market fund which also had a performance fee. “For a concentrated equity fund with a higher alpha target, we may pay a performance fee. For an incremental alpha product, we would want a fixed fee structure.” The fund of funds charge a wrapper fee (0.10% for the more fixed income oriented profiles and 0.20% for the more equities oriented profiles).

Managers do not necessarily need a Norwegian kroner share class: “On the equity side, we tend to invest in USD or GBP share classes and do not hedge because we believe currencies are a zero-sum game in the long run. However, on the fixed income side, we do not take currency risk and would require a NOK share class.”

Reasons for divesting funds

The main drive now is refining the recommended list so it remains relevant for clients, but of course the platform or fund of funds could remove managers for various reasons.

“We replaced Lindsell Train with GuardCap last year, because we think smaller managers are more agile and can harvest alpha more effectively,” says Syed.

SKAGEN has also divested from managers (or removed them from recommended lists) due to key person changes. “We removed one fund from our recommended list after it was acquired by a larger firm and its CIO resigned, and are in the process of evaluating another where the lead manager has stepped down,” says Syed.

“A breach of our ESG policy and unsuccessful engagement with the manager around it would also lead to divestment,” she added. SKAGEN applies the Storebrand group ESG policy to all internally managed funds, including its fund of funds. “Our ESG teams give useful input on specific themes to engage with managers about, and help us shape relevant questions when it comes to individual companies held by managers.”

“Our priority now is to find low carbon fixed income products for our fund of funds that can meet our accelerated decarbonisation criteria.” Readers should watch this space as Skagen expands the coverage of its platform…

Storebrand’s ESG policies have been discussed by NordicInvestor in August 2020 here: