The fund industry in the Nordic region is alive and well. The recovery in the wake of the financial crisis was quick and fund flows were at record levels last year. Niklas Tell, reporting from Sweden, gives an overview of the region
The Nordic region offers opportunities, but it should not be seen as one offering easy pickings for international fund groups looking to expand their reach. The competition is already here and the region requires dedicated resources and possibly even local presence. Large groups, such as Fidelity, Franklin Templeton and JP Morgan Asset Management, have been present in the region, with sizeable local offices, for more than ten years. Most choose Stockholm, Sweden, as their Nordic hub, although there are exceptions. Both T. Rowe Price and Schroders have, for example, placed their Nordic offices in Copenhagen, Denmark. It is also interesting to observe that the Nordic region in general, and Sweden in particular, has seen something of a second wave of international players establishing a local presence. Northern Trust opened an office in Stockholm in September 2009 and JP Morgan Securities Services opened offices in all Nordic capitals in autumn 2009. Early this year we saw Allianz Global Investors set up a Stockholm office with a staff of three and in March, Goldman Sachs Asset Management hired Mårten Bäck, the head of manager research at SEB, for a new Stockholm outpost.
The development of the Nordic fund market in 2008 and 2009 could be summarised using a lyric from the 1997 song Tubthumping by the British band Chumbawamba. They sing, “I get knocked down, but I get up again”, which is exactly what happened. The Nordic region – the combined fund markets of Denmark, Finland, Norway and Sweden – represents a sizable fund market in a European context and in contrast to some other European markets, the recovery has been quick following the massive outflows seen in the wake of the financial crisis. In Sweden, which is the largest fund market in the region, we saw a new record for net inflows last year. According to statistics from the Swedish Investment Fund Association, which includes fund flows to the PPM (a mandatory government pension), total net inflows amounted to SEK135bn (€13.9bn) in 2009. Net inflows in Norway were also at a new record at close to NOK58bn (€7.2bn).
It is also worth noting that although 2008 was a difficult year for the fund industry in general, it was still a very profitable business. This was highlighted by research from Tell Media Group. The firm collected and analysed annual reports from 19 Swedish (large, mid and small) fund groups with a combined market share of 86% of the Swedish market. The research showed that assets under management fell by 24% from December 2007 to December 2008 and even if these fund groups were able to reduce operating costs by some 19%, their operating profits fell by 55% in the same period. However, the average operating margin was still 15.8%, which can be seen as an indication of a healthy business. Numbers for 2009 have not been finalised, but the firm is confident results have gone up.
There are currently no firm statistics on how fund flows in the Nordic region are being distributed across different channels. It is, however, clear that bank distribution dominates, if for no other reason than history. If we use Sweden, the biggest market in the region, as an example, banks were early in providing mutual funds to their customers and they have been able to keep much of the distribution. This is especially true when it comes to retail direct savings in funds. But banks also hold a strong position when funds are distributed as part of an insurance wrapper (unit-linked products, etc).
Nordic banks opened up to external managers over the last couple of years and today offer either open architecture or at least guided architecture. This means they offer third-party funds, either as white-labelled solutions and funds of funds or directly through open platforms. Most Nordic banks today, therefore, employ fund and manager selection units, many which are fairly sizeable. However, there is a trend towards moving to guided architecture rather than offering full open architecture. Distributors are either cutting down on the number of funds on their platforms or are making an effort to more prominently display a subset (as prepopulated fund portfolios and/or as funds of funds) of their vast universe to guide investors to the most suitable offerings. Being on the platform is not enough to attract assets today.
There are, of course, other distribution channels for international investors looking to enter the Nordic market. Insurance companies play a significant role when funds are sold inside an insurance wrap, such as occupational and private pensions. In addition to these distribution giants, the Nordic markets also offer online platforms and private banking-type operations, as well as networks of independent advisors.
Another distribution platform is the Swedish premium pension (part of the PPM), which has SEK340bn of assets under management. At first glance this open architecture giant should offer a wealth of opportunities for international fund groups. Few have, however, been successful and most of the assets are still managed by Swedish fund groups. There are currently 774 funds on the platform, of which 58% are domiciled outside Sweden. However, only 15% of total assets are currently allocated to funds domiciled outside Sweden. Of that 15% a large part is invested with fund groups from other Nordic countries, such as Skagen Fonder. Only two truly international funds stand out as successful, having been able to gather more than SEK1bn of assets through the PPM as of December 31 2009: Baring Hong Kong China Fund, with SEK2.4bn, and First State Asia Pacific Leaders Fund, with SEK2.1bn.
A more topical issue is regulation in general and Ucits IV in particular, which is high on the agenda in the Swedish market. The background is that Swedish-domiciled funds are taxed at the fund level, in addition to a capital gains tax for investors, which puts them at a disadvantage compared with internationally domiciled funds. Swedish fund groups have therefore at an increasing pace launched new funds in other jurisdictions (primarily in Finland and Luxembourg), whereas old funds have remained in Sweden. That could potentially change with the introduction of Ucits IV in the summer of 2011, when fund groups will be allowed to merge funds across borders. Politicians woke up to this development in autumn 2009 and are worried that tax income, both directly and indirectly through loss of fund services jobs, will be lost in Sweden. On August 27 last year, the Swedish government launched an inquiry on the taxation of Swedish-domiciled funds. The findings were reported in early February this year and it was suggested that Swedish-domiciled funds should no longer be taxed on their income. The taxation should instead be transferred to fund investors who will pay a tax based on the value of the fund holdings. The proposed rules, should they be introduced as law, will hit Swedish investors in both Swedish and internationally domiciled funds. The situation is currently unclear as the Swedish government also recently highlighted that they are considering introducing new ‘accounts’ for fund and equity savings. This is not in line with the proposal regarding the transfer of the fund tax.
Another pertinent issue in the Nordic region is the intensified discussion on the merits of active management versus passive. We saw this early in 2009 with the AP funds in Sweden, which took a beating in the media and from politicians, and we saw it more recently in Norway with the Government Pension Fund – Global, the Norwegian sovereign wealth fund which has NOK2.6 trillion in assets under management. In both cases the discussions were sparked by very poor performance in 2008.
The Norwegian department of finance hosted a seminar in January. The 150 international experts in attendance discussed a report by finance professors Andrew Ang from Columbia Business School, William N. Goetzmann from Yale School of Management and Stephen M. Schaefer from London Business School. In the commissioned report, the professors analysed the active management of the fund between January 1998 and September 2009. The results, which were published later in the month, were not kind to those in favour of active management. However, it has been agreed that the fund will continue its active management, but with some modifications. The discussion on active versus passive will probably continue, not least in terms of the potential growth of the ETF marketplace. The Nordic region has so far not seen the same growth in this area as other parts of the world, but this is likely to change. Last year we saw the introduction of a new player to the Swedish ETF market, taking the total number of providers to two. There should be room for more.
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