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June 28, 2004 01:00 AM

More European funds go regional route

Manager expertise in specialization major reason for switch

Shahnaz Mahmud
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    European pension plans are focusing more on money managers that specialize in regional mandates as the search for higher alpha heats up.

    Pension plans in Denmark and Sweden have made a decisive move toward more regional managers, while others are examining it. Consultants are backing the move across European markets, recognizing the opportunities that regional managers present, namely in specialization.

    Among the funds:

    • The 43 billion Danish krone ($7 billion) labor market pension plan, Pen-Sam, Farum, appointed AXA Rosenberg Investment Management Ltd. and Capital International Ltd, both of London, to run 1.3 billion kroner in total European equities earlier this month. Pen-Sam officials are expected to appoint Asia-Pacific, U.S. and emerging markets equity managers later this year.

    • The 139 billion Swedish krona ($18.3 billion) AP Fonden 1, Stockholm, appointed U.S. managers for U.S. small-cap equities in the last two months and might make changes to the European equities portfolio.

    • The 6 billion Swiss franc ($5 billion) Nestle SA pension fund, Vevey, Switzerland, is reviewing its equity portfolio this week to discuss global versus regional mandates

    Large-cap tendency

    Global managers have a tendency to focus on large-cap equities and are missing out on higher return opportunities that small-cap and midcap companies have by virtue of their potential for growth, said Gary Dowsett, senior investment consultant for Watson Wyatt LLP, London. Smaller and midsized companies tend to grow faster than larger companies and are tied to their local economies, the opposite for large-cap companies.

    Mr. Dowsett noted the move to regional mandates is not a trend away from global equities. This is more about a way of "complementing" global managers so as not to overlook other opportunities, he added.

    Jens Elkjaer, head of equities for Pen-Sam, said the Danish fund has divided its equity portfolio, which is between 15% and 25% of total assets, between domestic and global. The global part is then portioned into North American equities, European equities and Asia-Pacific equities. Regional active managers are the best way to generate higher returns for the plan, said Mr. Elkjaer. Pen-Sam is seeking to find higher alpha through more active mandates, he added.

    The plan still takes a global view, Mr. Elkjaer emphasized; the global portfolio's overall benchmark remains the Morgan Stanley Capital International World Developed Markets index. Individual regional mandates will be judged against their corresponding parts of the benchmarks: MSCI North America; MSCI Europe; and MSCI Asia-Pacific.

    In addition to hiring AXA and Capital International, Mr. Elkjaer said officials had selected two managers for the 600 million kroner total Asia-Pacific portfolio, but he would not identify them because contracts have not been signed. Two managers also are being sought for the 2.5 billion kroner total U.S. equities portfolio. And a search is under way for one manager to handle the 306 million krone emerging market portfolio.

    State Street Global Advisors, Boston, runs 1.4 billion kroner in global enhanced equity, Mr. Elkjaer added. That mandate will not be changed under the new plan.

    The majority of its 2.2 billion kroner in domestic equities are run in-house with small-cap run externally by Alfred Berg Asset Management and Fundamental Asset Management, both of Copenhagen. Before the change, global equities were run by a Danish manager Mr. Elkjaer declined to name. He said the firm still runs Pen-Sam money in other asset classes.

    AP1 looking into regional

    In Sweden, AP1 is also focusing efforts on active, regional managers in its continued search for higher returns. This might involve a change in its European equities portfolio, but no concrete decisions have been made yet, said Nadine Viel Lamare, spokeswoman.

    The fund hired six managers to run $300 million in U.S. small-cap equities within the last two months: Dimensional Fund Advisers, Santa Monica, Calif.; IronBridge Capital Management Chicago; Martingale Asset Management, Boston; Morgan Stanley Investment Management and UBS Global Asset Management, both in New York; and State Street Global Advisors, Boston.

    Late last year, the plan also hired managers to run $750 million in Asia-Pacific equities: Capital International; Nomura Asset Management Ltd., Tokyo; Martin Currie Investment Management Ltd., Edinburgh; Lloyd George Management, Hong Kong; and Marathon Asset Management Ltd., Aberdeen Asset Management Ltd. and Schroder Investment Management Ltd., all of London.

    AP1 is trying to be tied closer to markets to gain alpha, and these changes mark a shift from passive to active management, said Ms. Lamare (Pensions & Investments, June 14). Equities account for 57%, or 79 billion kroner, of the AP1 portfolio. All-Swedish equities, at 17 billion Swedish kroner, are run internally. Emerging markets equity accounts for 5%, or 7 billion Swedish kroner, of the portfolio, which is run by UBS Global; 55 billion Swedish kroner are allocated to the developed markets.

    Arguments for both

    The Nestle pension fund will debate the makeup of its equity portfolio this week, said Jean-Pierre Steiner, chief executive officer. Executives of Nestle's pool of worldwide pension plans will convene to decide whether the plans will have a global bias or a more regional bias.

    Mr. Steiner said there is a lot of room to argue for both sides. For global equities, market capitalization is the key, rather than geography. But, clearly, smaller companies have an advantage for growth since they are influenced by local politics and the local economy, he said.

    The plan's overall asset allocation is: 37.5% listed equities, 7.5% private equity, 22.5% fixed income, 7.5% real estate, 15% hedge funds. Within equities, less than 20% is managed externally while all of private equity is outsourced. Mr. Steiner declined to provide names of external managers.

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