By Jonas Wäingelin, NordicInvestor

Kirstein’s COO, Jan Willers, says Nordic Institutions are looking to increase alternative assets

Danish investment advisory firm Kirstein has consulted local asset managers and international managers through more than a decade. Among surveyed investors are some of the largest Nordic pension funds as well as smaller sized pensions, family offices and foundations. In an interview with Nordic Investor, the firm’s COO, Jan Willers, dives into what he sees as some of the major investment trends in the region, what local differences he sees for listed and unlisted, alternative, assets and what asset managers wanting to reach Nordic investors need to consider to be successful in the region.

“We have become much more quant driven in our investment analysis approach in recent years, which has allowed us to better understand what investor do in terms of allocations as compared to what they say they do.”

And so far, the analysis shows that the hard data on performance and fees matters less and the network and perception of a manager is what really matters.

“A lot is about presenting the investment idea and managing expectations about what an investment with the firm means. Explaning the right story rather than just presenting numbers – the importance of parameteres beyond performance has been an eye opener.” reflects Willers.

He continuous “It is a bit provocative and obviously investors are very sophisticated when they do manager searches. But still, we find that when it comes down to it, it´s all about who you know and trust. Which makes perfect sense in a way. And let´s face it, many of the managers are very alike and there is not much differentiating specific strategies, so again its more about trust rather than numbers that sets them apart.”

Over the past 12 years, Kirstein has surveyed  Nordic investors on portfolio construction issues, as well as supporting asset management firms wanting to attract the interest of these investors with market intelligence and strategic considerations for reaching out in the most efficient way.

“Kirstein is today split in two. On the one hand is Spektrum who does more of the fiduciary, implementing and controlling business as well as the manager selection. That part is really growing, particularly among Danish investors holding multi-asset portfolios. Spektrum also benefits from providing access to alternative investments to small- and medium sized investors. Then there is the other part, which is Kirstein, where we advice asset managers on how they can find opportunities with institutional investors.”

Every year Kirstein presents its Nordic research highlighting the trends in the Nordic institutional investor space.

“The research is becoming less of a yearly review and more of a research platform I would say. It is a review of all the information that we gather during the year to consult our clients”, Willers says.

Kirstein’s research is aimed at both smaller and emerging asset managers wanting to know more what the Nordic region is all about as well as more established players who need advice on how they can maintain the existing businesses and how they can grow, not only in terms of specific products but also involving solutions and partnerships.

“Providing solutions and entering partnerships are nice ambitions and wordings but we try to be more precise about what that should be. Typically you would not come and present a big solution and the investor would go for it. As a product provider you typically start with a product and then a broader solution-driven approach spins out from there”, Willers explains.

Unlisted assets currently in demand among Nordic Investors

Answering the question what the most pressing issues are when it comes to asset allocation decisions among Nordic CIO’s and investment boards, Willers says:

“I would say that looking at the portfolio, you would have the consideration of listed and non-listed assets. There is currently a lot of focus on the unlisted side. Everybody wants to increase the allocation on that side and are far from target allocations, basically within most of the alternative asset classes.”

“There is still a lot of interest in private debt and infrastructure. And even though private equity and real estate are more mature as asset classes, there is a lot going on in those areas to. In Denmark, there is a lot of interest on the unlisted credit side and to some extent in Finland. Basically everyone wants to do more on direct lending and private debt.”

Internal versus external

Willers sees differences in how institutions approach investments depending on their size.

There are differences when you compare the largest and most sophisticated investors with the smaller ones. What we see is that the large investors are typically behaving more alike. They are building up internal resources, they typically have a very structured approach to alternatives, it can also involve partnerships with other investors across the Nordics and partnerships with managers for instance.”

“Smaller managers, given less resources, are more dependent on external managers. The large names are building internal competencies not only with regards to alternatives but also related to listed assets, taking more of that internal.”

Willers highlights that some strategies are harder to internalise than others.

“Not all strategies are easily internalised. Emerging markets is a good example where even the larger investors still find it challenging to do themselves, hence relying more on external managers. The more niche an investment becomes, the more the need for an external manager”, Willers argues.

Differences in local investor appetite

According to Willers, there are some important local differences when it comes to what investors are looking for.

“The Swedes and the Finns are more into hedge fund investments. They are more interested in long/short risk premia mandates whereas the Danes think more in terms of buckets and are typically more into illiquid credit and infrastructure.

“In Finland, the smaller players are trying to replicate the bigger ones since you are benchmarked to competitors, you do not want to deviate too much from Varma and Ilmarinen for example”, he says.

Willers argues that within listed assets, most of the new deals are done as replacements to existing portfolios

“In terms of listed assets I think it is fair to say that it is not a growing market but that there is a lot of replacements going on. People are looking at things that could match their portfolio and allow for replacements,.”

Within fixed income investments, Willers sees investors moving away from high yield into direct lending and senior bank loans. Contrary to the general talk about Nordic investors going more and more passive and focusing on lowering fees, he sees quite a lot of activity on the active side, where managers are willing to pay for “high octane alpha”.

“The interesting thing is how they find the investments that they want to invest in. Are you looking for broader mandates, do you want something that is really high alpha? If you are paying for active management you want something that is really active. It is about understanding how they define the characteristics that they are after.”

Nordic investors on top of regulation and ESG

In terms of how Nordic investors are adapting to new regulatory requirements such as Solvency 2, Willers argues that the Nordic region is on top of things.

“Investors overall have been very good in adapting to Solvency 2 and have been putting pressure on the industry saying that we want you to provide us with products that optimises capital charges. We can find investment opportunities that way, I don’t see that they are behind the curve there in any way”, he says.

Regarding ESG, Nordic investors have been at the forefront talking about its importance, but as words are turning into action and actual portfolio allocations, the next question is how to measure its impact.

“A lot of it is about how you measure it. That is why we see more focus in impact including some of these carbon portfolios. We are seeing discussions about how you have integrated the ESG philosophy, but it can be more difficult to see what the outcome is. That is easier to understand if you look at an impact portfolio.”

Another question that Willers argues have become increasingly important is how you can impact the ESG-focus and impact investing in your credit portfolio. “That has become more important as it is typically a larger part of your portfolio”.

How to build a footprint in the Nordics?

Willers concludes the interview giving some final advice to asset managers that want to be successful in building relationships and raising assets in the Nordic region.

Know your clients , it is so important to know about the client demand. Not only if they want to invest, but also if they do it themselves, actively or passively and how they implement investments design-wise
Know your competition. Some managers are underestimating the power of knowing your competitors. Particularly on the listed side your always up against other similar products as it is all about replacement investments.

Be realistic on your own competencies . Understand where you have your competitive advantage, is it related to fee structures, performance or ESG? What do you want to compete on?

Be dedicated to the region . It takes time to do business here. The importance of consistency is underestimated.