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Hot money masters: inside Nordea’s mega-sized mixed asset fund

Hot money masters: inside Nordea’s mega-sized mixed asset fund

As a father to four children, including a set of three-year-old twins, Asbjørn Trolle Hansen knows all about managing risk and volatility. He jokes that sometimes young children can be even more volatile than the financial markets.

Moving from one unpredictable environment to another, Hansen also manages the Nordea 1 Stable Return fund with Citywire AA-rated Claus Vorm and AAA-rated Kurt Kongsted. The fund is currently around €12 billion and the investment team have the flexibility to invest across a range asset classes.

All the securities in the fund have one thing in common: safety. Hansen looks for assets that are secure and ensures that protection is at the forefront of everything he does.

He looks for risks everywhere. While many investors are still cautious over China due to volatility at the start of the year, Hansen is clear that investors should look closer to home to avoid hazards.

‘Markets are risky and it’s not only about China, it also concerns the US. Q3 was a US story and China is getting the blame too much these days. I think the strategic growth outlook in the developed markets is poor,’ he says.

In this context, lowering your expectations is a compelling response, says Hansen.

‘Investors are probably becoming increasingly aware that low returns are not only for the preserve of the bond market, but for equities too. Expected returns will be around 6.5% for equities and not the usual 8% that people have been talking about,’ he says.

The prospect of smaller returns has not put people off. In the current uncertain environment, investors have piled into his fund as though it were a lifeboat. The strategy saw inflows of €2.58 billion in the first three months of this year and it was one of the biggest selling strategies in 2015.

All aboard

Nordea Asset Management recently soft-closed the popular Nordea 1 Stable Long/Short Equity fund run by Vorm and Citywire + rated Robert Naess after it reached $1.13 billion and hit its capacity limits. Hansen thinks there is still room for investors who wish to find open and outperforming funds.

‘We have said that we can manage at least €20 billion in the stable return funds and there is still some way to go. At the end of the day, if we get too much money, we will need to take action to protects investors, just like we have done in the Stable Long/ Short fund,’ he says.

While some may consider the fund an overnight attention-grabber, Hansen highlights how it has been a long road to popularity. The trio have managed the fund together since its launch in November 2005 and have navigated some stormy seas.

‘When we launched, we had quite a lot of financials, but they became unstable around 2007 so we exited almost completely and since then we have had a fairly low weighting in the sector,’ Hansen says.

Today the managers have 14.3% of the fund in financials and Hansen thinks banks still hold too much risk to be included.

‘There are a lot of headwinds for banks from a regulatory point of view and they don’t offer a lot of stability. More stable holdings can be found on the financial advisory and insurance side. That is the non-banking area of the financial markets, where we are positioned.’

Banks are not the only holding they avoid. As mixed-asset specialists, Hansen, Vorm and Kongsted treat securities differently to other fund managers. The team are unconstrained by asset class and pick holdings depending on their risk profile. High yield bonds, for example, are a security they are giving a wide berth.

‘We prefer equities. Many managers look at high yield as bonds. But we view it as a risky asset class and therefore categorise it with equities. It competes with equities, but we think the low risk equities we find have a lot more value than many high yield bonds, along with comparable volatility.

Working without the constraints of a benchmark, the managers populate their fund with around 300 holdings to ensure diversification and these are selected on a bottom-up basis across a range of sectors.

Bull versus bear

Regardless of the asset class, the team divide all securities into two distinct groups: bear market and bull market. This allows them to take both long and short positions across the investment universe, adding further protection.

‘We try to balance our bull and bear market trades so we are prepared for how the market moves,’ Hansen says.

As well as splitting investments into these two groups, Hansen pays close attention to the price of the assets.

‘It has to be a fairly safe trade with a good underlying stability on the cash flow side, and strong fundamentals. It also needs to be priced right, if it’s too expensive there could be a valuation risk.’

Hansen has about 55% of the fund in low-risk equities from developed markets, most of which is allocated to the US. Emerging markets account for about 15% of the portfolio in regions which he believes are relatively safe, such as South Korea and India.

These equities form part of his bull market selection. In terms of sectors, healthcare is the biggest holding in the fund at 22.6% but Hansen prefers stock-specific or subsector stories, including consumer goods company Johnson & Johnson. He avoids expensive biotech names and has been unaffected by mergers in the industry.

‘The part of healthcare that we like has very stable fundamentals, secure cash flows and secure earnings,’ he says.

Other large sectors in the fund are information technology at 18.6% and utilities at 10.9%. The managers have been gradually adding to telecoms services over the past year, bringing the sector up to 13.9%.

‘These sectors are quite attractive from a stability and valuation point of view. Whereas, if you go into something like consumer staples, such as Nestlé, it would be trading quite expensively. The company has underlying fundamental stability, but it is just too expensive,’ he says.

Along with fixed income and equities, Hansen uses currency trades to hedge the portfolio against volatility in the equity market. This boosts the safety element in the fund and helps the team counter the low liquidity environment.

‘We were long the dollar last year, but towards the end of year we switched to being long yen and short sterling and also short the US dollar and New Zealand dollar. The long dollar trade was very good last year for absorbing risk. This year it has been better to be long yen and then short on the commodity currencies, as well as sterling.’

The fixed income portion of the fund forms part of the bear market selection. This is a smaller proportion than the equities allocation and mostly consists of safer government bonds. Unlike many other managers, the team are staying away from energy and mining-related bonds, as they are seen as too risky.

‘We have US and UK bonds that we prefer – gilts and treasuries. We have around 27-30% of our bond allocation in those. We went into the year with 40% in US and UK bonds, but they have come down a bit after some strong performance. Most of our fixed income investment is in this area, we don’t have that much investment grade paper or high yield.’

Hansen thinks that his bull market trades are more predictable than the bear ones, and as such are a source of safer returns.

‘These trades are easier, because the underlying earnings are correlated with the business cycle. Credit is also a good bull market trade, where the defaults negatively correlate with the business cycle and therefore high yield is a clear bull market trade.’

Hansen is keen to point out that he remains committed to the team’s investment process and will stay away from the potential thrills that riding the roller coaster markets could provide.

‘We would rather miss out on a return opportunity than take risks. Safety comes first, we have a volatility of around 5% in the fund and we will not jeopardise that. Expected returns are coming down for the low risk funds, but that goes across the board,’ he says.

‘We have had good returns in the past. I think right now we are looking around maybe 3-4% for our funds. I think it is still a good offer for the risk level, but of course it is not like the historical returns – for both this fund and the market in general.’

This article originally appeared in the June edition of Citywire Selector magazine.

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