Portfolio 1 2011

Portfolio Aberdeen´s update for Nordic investment professionals • June 2011

8| Two decades of Asia

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Storebrand specializes in sustainable investments

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Nordic stability draws European investors Andrea Attisani from ABP meets Aberdeen At the Club

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“More than 40 percent of Nordic investors expect to invest more in emerging market debt,” says Jan Willers, Head of Department, Financial Market Research, at Kirstein A/S.

Photo Aberdeen

Steady As She Goes

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n rowing, it takes hard work and a crew welded together to win. This applies as much to the world of investing and our work at Aberdeen. It takes the same kind of steady teamwork, skill, and experience to realise investment opportunities.

This May, thousands of rowers across the USA kept their pace in the Aberdeen Dad Vail Regatta*, the largest collegiate regatta in the United States, held in Philadelphia.

The first regatta was held as long ago as 1934. We’ve been overwhelmed by the enthusiasm of those young athletes.

May the tailwind be with you! ▲

2 Perspective

Did you know that rowing is said to be the oldest intercollegiate sport in the USA? *Who was Dad Vail?

Harry Emerson “Dad” Vail was one of America’s early college coaches who coached at the University of Wisconsin between 1911 and the late 1920’s.

Aberdeen 3 rg l.o vai d a w.d com ww sset. : t es en-a ter f in berde o .a ks Lin www

Portfolio

1/2011

Perspective | 2 4 | Contents Editorial | 5 6 | In Brief

7 Horizons Next step ahead

Two decades of Asia

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10

Forum Taking another look

13 | In Brief

In the Spotlight Sustainability makes financial sense

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16 | It pays to be active 18 | Out of office Into the deep blue At the Club Nordic stability draws European investors

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21 | Around the Globe

4 Contents

Feedback and ideas with respect to Portfolio are welcome to aberdeen.helsinki@aberdeen-asset.com • Editor-in-chief: Hanna Duncker, hanna.duncker@aberdeen-asset.com, Lena Ellertsson, lena.ellertsson@aberdeen-asset.com • Editorial office and layout: Otavamedia Oy/ Viestintätoimisto Sanakunta • Change of address: aberdeen.helsinki@aberdeen-asset.com • Printed by: Newprint Oy • Cover photo: Kristian SØnderstrup-Granquist, Shutterstock.

Aberdeen Editorial 5

Dear Reader

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berdeen is delighted to be publishing a new edition of Portfolio, our latest update on what’s happening at Aberdeen, in the Nordic region and the wider world. One of our objectives with Portfolio is to have investors help shape the content. Therefore we are extremely happy that both Storebrand and AGP have agreed to talk to us about their special interests.

In this issue, we’ve put special emphasis on recent research. We commissioned Kirstein A/S to perform a study on investment appetite among institutional investors in the Nordic region for emerging market debt. While the article on page 16 provides insight on Professor Martijn Cremers’ global research and why he believes that being active pays off.

We also touch on two increasingly interesting regions: Asia and Latin America. While Aberdeen Asia celebrates its twentieth anniversary in February 2012, Latin America is in the spotlight because of its potential. Seeing the region solely as commodity play would be short-sighted though. Growing consumer spending power is increasingly going to drive Latin America’s economies, which is why Aberdeen is focusing on consumer orientated companies like local retailers, banks, and healthcare.

“I want to thank all our interviewees for taking the time to share their professional views, and Anniina Isomäki, a portfolio manager at Varma, for sharing her life outside of office hours with us.”

Photo Magnus Fond

I hope you find this issue an interesting read!

Kristina Najjar Head of Business Development Nordic region

Important information FOR PROFESSIONAL INVESTORS ONLY - NOT FOR USE BY PRIVATE INDIVIDUALS Issued in the EU by Aberdeen Asset Managers Limited. Registered in Scotland No.108419. Registered Office:10 Queen’s Terrace, Aberdeen, AB10 1YG. Authorised and regulated by the Financial Services Authority in the United Kingdom. This document is strictly for information purposes and should not be considered as an offer or solicitation to deal in any of the investments mentioned herein. Aberdeen reserves the right to make changes and corrections to any information in this document at any time, without notice.

Property is a relatively illiquid asset class, the valuation of which is a matter of opinion. There is no recognised market for property and there can be delays in realising the value of property assets. The capital value of investments and the income from them can go down as well as up, and an investor may get back less than the amount originally invested. Past performance is not a guide to the future.

Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Professional advice should be obtained before making any investment decision. © 2011 Aberdeen Asset Management PLC. All rights reserved.

Text Heini Santos Photo Aberdeen

Aberdeen reinforces indirect property with hires in the US and Asia

New fund brings lower risk exposure to the Asian growth story

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berdeen Asset Management recently announced new appointments in Philadelphia and Singapore.

Katherine Giordano joins the team from ING Select to take on the role of Indirect Property Portfolio Manager based in Philadelphia. Giordano will cover the US property fund market, undertaking due diligence and selecting funds suitable for global indirect portfolios as well as dedicated US portfolios.

“Katherine will be key to continuing the development of our global indirect property platform. Her experience, knowledge, and exceptional analytical skills will complement our existing strength in the Asian and European indirect property product area,” says Jon Lekander, Global Head of

Indirect Property at Aberdeen Asset Management.

Christiaan van Beek, the new Senior Property Investment Specialist in Singapore has seven years of property experience, primarily in deal sourcing for institutional investors. His most recent position was with CBRE – Real Estate Finance Asia in Hong Kong.

Operating from the Singapore HQ, van Beek will promote the group’s substantial European direct property strategies into Asia and develop an Asian investor base for the local team’s indirect business. “He combines a strong technical understanding of product structures and financing with insight into what clients want, so he is well equipped to open doors,” explains Corinne Cheok, Head of Distribution at Aberdeen Asia. 

6 In Brief

Aberdeen awarded sizeable pan-Nordic property mandate

berdeen Asset Management has created a fund that provides dedicated exposure to local currency short duration Asian bonds. It will invest mostly in sovereign bonds, across as many as ten different countries in the Asia ex-Japan region, where finances remain robust.

“Our core view is that Asian currencies are undervalued and will appreciate over time. China is often singled out, but other countries’ currencies could appreciate faster. The renminbi’s return against the US dollar was one of Asia’s weakest performers in 2010, bar the Hong Kong dollar, which is pegged to the US dollar; so it makes perfect sense to spread one’s exposure across the region. In that respect the fund offers a more diversified strategy than alternatives such as the offshore Chinese RMB or “Dim Sum” market,” explains Anthony Michael, Head of Fixed Income – Asia Pacific.

The short-duration strategy should appeal to investors seeking for lower risk exposure to the Asian growth story.

It will also interest investors looking to diversify away from western bond markets, and who want to increase exposure to Asia without taking on duration, credit or equity risk. 

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berdeen Asset Management has been mandated to manage a Nordic Property portfolio. Previously managed by the Property Group, a Danish property asset manager, the portfolio’s total value is € 537 million, and consists of retail and residential properties mainly located in Denmark, Sweden and Finland.

A number of the properties are distressed assets which will require active management to reach their full potential. Aberdeen’s focus is to optimize the portfolio until it is ready to be sold.

“I am delighted to see financial institutions increasingly optimising their portfolios by outsourcing to specialist management companies, instead of passively managing properties,” says Tonny Nielsen, Head of Investment Management for Aberdeen in the Nordic region.

The portfolio was taken-on a week after Aberdeen in Sweden was chosen to manage distressed assets to the value of €308 million on behalf of Danish financial institutions. With the addition of these two portfolios, Aberdeen in the Nordic region has grown its property assets under management by € 846 million to € 9.9 billion. 

Aberdeen 7

Two decades of solid longterm investing in Asia Since its establishment in Singapore, in 1992, Aberdeen Asset Management Asia has grown from a two-man effort to a staff of 400. By sticking to its long-term views and investing in quality companies, Aberdeen is one of the few fund management companies that have remained strong in Asia for two decades.

Text Heini Santos Photo Aberdeen

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anaging Director for Aberdeen Asset Management Asia, Hugh Young, was among the first people to make the move and lay the foundations.

Having previously worked from the UK, it felt like it was the right time to take the next step in the early nineties.

“We wanted to be closer to the markets and companies that we were investing in. We spent all our time looking at them – that’s called a bottom-up fundamental. So we moved to Asia to be able to monitor things more closely,” Young recalls.

Currently located in Singapore, Hong Kong, Thailand, Malaysia, Australia, Japan, Taiwan and China, the company has become one of the

largest managers of Asian regional equities, managing $75 billion.

Eyes on Asia Two-thirds of the world’s population live in Asia. A rapidly growing middle class, young working age people moving to cities, and the growing demand for properties and services attract investors to the region. Young acknowledges that the competition in Asia can be fierce. A lot of Aberdeen’s competitors 20 years ago have since gone out of business. As far as undiscovered areas investing wise, there are no surprises in sight.

“Vietnam was a hot story three or four years ago, but it has been a disaster. It still has lots of potential, but the companies there are very immature. I can think of

one exception but it was not of the quality we would want to invest in,” he remembers, and goes on to explain that Aberdeen invests in more developed markets such as India.

can be very volatile. While annual growth has been about 15% over the last 20 years, stocks can be up 100% one year and down 50 % the next. So it can be a painful ride.”

Speaking confidently about the future is always tricky, but as far “The growing demand for as Aberdeen Asia is concerned, properties and services attract he believes that investors to the region.” following Aberdeen’s principles will result in more growth and profitability.

Future prospects With plans for one or two new Young sees the future in Asia as a offices in the Asian region in the continuation of the past 20 years. next two years, looking after client’s Regional stock markets will grow interests and continuing to invest and make up a larger and larger well on their behalf will remain the proportion of the global market. primary focus.  “Anyone who does his homework can enjoy strong returns, but things

Next step ahead Emerging market debt remains a small part of fixed income portfolios in the Nordics, says an independent survey, but this may grow. Seasoned investors are also entering into local currency bond funds.

Text Satu Jussila Photos Kristian SĂ˜nderstrup-Granquist

8 Horizons

Jan Willers, Head of Department, Financial Market Research, at Kirstein A/S.

Aberdeen 9

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berdeen Asset Management recently commissioned researchers from Kirstein A/S, an independent consultancy firm, to study investor attitudes in the Nordic countries regarding emerging market debt.

“The study confirmed that investors are generally interested in these types of debt investments,” explains Jan Willers, Head of Department, Financial Market Research, at Kirstein A/S. Denmark and Finland led the Nordic countries in terms of both interest in emerging market debt and experience.

“Hard currency is the first step into emerging market debt but many investors are already taking ‘the next step’ investing in local currency debt. Additionally, there’s substantial interest in emerging market corporate debt amongst a select few investors.”

The study was conducted via a questionnaire that was sent in the beginning of March to 50 end-investors, of which 40 provided responses.

In addition to the information obtained from the questionnaire, qualitative data was obtained through interviews.

“No less than three out of four investors in Sweden expect to increase their allocation,” says Willers. As investors get more familiar with emerging market debt investments, the interest in other types of emerging market debt investments also increases.

Increased allocations possible

Preference for active management

Currently, the average allocation to emerging market debt among the Nordic investors surveyed is close to four per cent of the total portfolio. Emerging market equities remains a more integrated part of investments. However, more than 40 per cent of the Nordic investors expect to allocate more to emerging market debt. The biggest change is expected from Norwegian and Swedish investors, who trail behind their Danish and Finnish counterparts.

While perceptions regarding the outlook for the emerging markets have improved over the years, these are still investments that have risks.

The investors surveyed by Kirstein mentioned political instability and inflation as the two highest risk factors. Nonetheless, investors believe in the emerging markets “story” and wish to access these markets via emerging market debt.

About Kirstein

“Investors regard local as a clever play on currencies.”

The researcher notes that many investors find the greatest opportunities in local currency products.

“Investors regard local as a clever play on currencies. Close to 80 per cent of the investors surveyed expect emerging market currencies to appreciate against developed markets.”

Additionally, emerging market corporate debt attracts attention from some of the more experienced investors.

“They offer attractive performance, though this is offset by less attractive risk and liquidity features.”

Kirstein A/S is a consultancy firm based in Denmark that advises professional clients on investment and strategy. The clients are mainly pension companies, banks, asset managers and other institutional investors. They offer tailored analyses and solutions based on internally designed models and databases.

“Investors think economic growth and fiscal balances in emerging markets are significantly better compared to developed markets, which has been the general consensus following the financial turmoil,” says Willers.

However, during the interviews many of the investors voiced their concern about Solvency II and the possible affect it may have on emerging market debt. This regulation, which impacts insurance firms operating in the European Union, comes into effect in January 2013 and may impose significant capital requirements for emerging market debt investments. But the details, for now, remain unclear.

“The most important factors when selecting an emerging market debt fund manager are a track record and a team of inhouse analysts.”

“So far, investors tend to prefer mandates with global exposure and the possibility to invest in different regions and credit rankings.

The majority of investors have a strategic approach to emerging markets debt investment, and investors are comfortable with dedicated mandates.”

Investors also have a clear preference for active management styles.

“The most important factors when selecting an emerging market debt fund manager are a track record and the team of analysts,” adds Willers. 

Kirstein’s Financial Market Research (FMR) unit serves as the link between investors and asset managers.

FMR’s main service is investor surveys. Additionally, FMR carries out bespoke analysis for investors and asset managers.

10 Forum

Taking another look

Aberdeen 11

As Latin America shakes off the global recession and moves on, investors are taking notice. While Asia is getting most of the attention, this is also a region worth investigating.

Text Satu Jussila Photos Shutterstock, Aberdeen

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t was not long ago that the popular perception of Latin America was of a region riddled with weak political systems, hyperinflation, and economies dependent on the United States for survival. Indeed, you do not have to go far back in history to remember the currency devaluations and debt defaults that crippled many of these countries.

Latin American companies also had a bad reputation. Many were inefficient state-run monopolies, or were family-controlled with opaque management and poor corporate governance.

“As a result, investors were reluctant to acknowledge the long-term investment opportunities in the region,” explains Nick Robinson, Head of Brazilian Equities at Aberdeen Asset Management. Attention turned, instead, to Asia as the primary source of returns in emerging markets.

Reforms in multiple sectors But over the past 10 years, Latin America has made huge strides in becoming an important contributor to global growth. Central banks have learnt to use monetary policy measures to tame inflation, while tax reforms and prudent government spending policies have led to current account surpluses in many countries.

“Fiscal deficits are, in fact, lower in most cases among the region’s countries than in the eurozone, Japan, the United Kingdom and the United States,” notes Robinson.

At the same time, companies have worked to restructure their balance sheets, reduce debt and focus on core skills, resulting in improved profitability and earnings. Latin America, it seems, is worth another look.

Broadening of the market The rise of Latin America has broadened the market. While trade for high-value goods heads to northern markets, demand for commodities – copper and silver from Chile, and steel from Brazil – largely heads east. But it’s short-sighted to see the region solely as a commodity play, says Robinson.

“What Aberdeen is most interested in is the increase in domestic consumption. Growing youthful populations, with burgeoning workforces, are enhancing spending power in the region. This is why we’re focusing on consumer orientated companies like local retailers, banks and drinks companies,” he adds.

But this is also a region that requires careful understanding.

“Given the differences between countries, and that it’s sparsely covered by analysts, there are opportunities for stock pickers who know the terrain to tap into the market,” notes Chris Watling, CEO and Chief Market Strategist, Longview Economics, an independent global macroeconomic and asset allocation research boutique based in London.

Threats from abroad Latin America has come a long way since the 1980s, Watling says. “The banking system is cleaner than in the West, even today. Lenders largely focus on taking deposits and making loans, so understanding their balance sheets is easier.”

He also admits, however, that not all countries are investable.

“Venezuela and Bolivia remain too volatile, given the lack of property rights and government interference, in contrast to Chile and Brazil.” There are good companies in Columbia, but the market is looking expensive at the moment.

For now, Latin America is still playing catchup to get income levels closer to Western levels.

The average worker in the region earns some USD 8,000–15,000 per year, in comparison to USD 45,000 in the US. This figure should climb though, as the domestic economy grows. Last year, Latin America grew by about six per cent.

“The banking system is cleaner than in the West, even today.”

“Political risks remain one of the greatest threats, though, with Venezuela on one end of the political spectrum and Brazil, on the other,” says Watling.

Investing in Latin America Investors can take advantage of the region through the Aberdeen Global Latin America Equity Fund. The fund’s investment objective is long-term total return that is achieved by investing at least two-thirds of the fund’s assets in Latin American equities and equity-related securities. It currently has USD 665.2 million invested.

12 Forum

“We follow a bottom-up investment process that is based on the disciplined evaluation of companies through direct company visits,” explains Nick Robinson, Head of Brazilian Equities at Aberdeen Asset Management.

Every stock has to pass two key metrics: quality and price, as risk in the purest form is buying a bad company at the wrong price.

As long-term investors who buy and hold, a healthy balance sheet is also crucial, which is why the fund has a low debt to equity ratio.

Over the last two years, the fund has returned 64.17%, outperforming the MSCI EM Latin America index by 13.95% (in US dollar terms, net of fees). 

“Wobbles from China could also hugely impact commodity prices, just as the end of quantitative easing is increasing risk aversion. With question marks over the Chinese property market, this is obviously a concern – although we think the global recovery is still in a self-sustaining phase – which is why Aberdeen underweights the Latin American materials sector,” says Robinson.

Like all emerging markets, investors have to focus on a long-term strategy.

“We view our investments as partnerships with the companies,” adds Robinson.

“Right now we’re seeing a steady flow of wellmanaged companies coming to the market, which bodes well for the future.”

Aberdeen 13

Nordic markets attract investors, but vigilance prevails due to near-term global macro risks The global economy started the year 2011 on a sounder footing than was evident only six months earlier. Growth in emerging markets has clearly permeated into the developed economies, boosting manufacturing and employment figures. The Nordic region offers good opportunities for investment, but near-term risks like the eurozone sovereign debt crisis, slowing Asian growth, and commodity price inflation are increasing market volatility and forcing investors to remain vigilant.

Text Nina Garlo Photo Olav Heggo

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he global economy remains resilient.

However, there’s mounting evidence of a slowdown in China, and Germany is likely to lose momentum over the coming year, after an explosive start. Yet, despite the likely increase in volatility, there is still enough momentum to suggest that we are entering a more self-sustaining phase.

The Nordic region has been doing well economically, with unemployment falling and domestic demand improving. The Nordic economies grew by an aggregate 2.9% in 2010, compared to 1.8% in the eurozone, and we forecast they will grow by an average of 2.7% a year between 2011–2015, compared to 2.2% in the eurozone.

Sound public finances have given the Nordic countries room to maintain a neutral, or even expansive fiscal policy. As a result the “Nordic model” has once again become an international talking point.

“There are several risks to the outlook in the Nordics though, that could dampen investor sentiment in the short term,” warns Lars Flåøyen, Head of Nordic Property Research at Aberdeen.

The sovereign debt crisis in Europe, geopolitical instability in the Middle East and North Africa, and commodity price inflation are impacting on investors’ confidence. On the whole though we feel global liquidity should continue to support risk appetite in general. So even if the balance

between risk and reward is deteriorating, we’re reasonably sanguine about investment returns.

Possible mid-year asset price correction

recorded the highest returns, followed by Norway, Finland, and Denmark.

Despite the low investment activity recorded in the first quarter of 2011, prime property yields continue to fall, according to Flåøyen. With relatively low yields for prime and core properties, improving rental markets, and increasing interest rates, we expect more investors to gradually start looking for higher yielding properties. However,

“However, there’s a risk of a correction in asset prices in mid-2011, and equity markets are likely to remain under pressure during the second half of the year – though risk appetite should be sustained following any sell-off,” says Mike Turner, Head of Global Strategy & Asset Allocation at Aberdeen.

“Aberdeen’s base case is that “The “Nordic model” has once again investors start worrying over become an international talking point.” growth sustainability as global growth momentum fades. If we are proven wrong, then the focus will shift to monetary policy cycle, as governments the banks’ willingness to finance riskier property begin to raise rates. In any case, we’re likely to investments will be key going forward. remain in a volatile capital price environment, and On the rental front, Nordic rental markets yields will continue to be important in smoothing have generally continued to improve. As business returns,” Turner adds. sentiment is sound and there’s limited new supply entering the market in 2011, vacancies are declining and prime rents remain stable or Property market still robust are growing moderately. But while vacancy rates Aberdeen has several unlisted property funds continue to trend downwards, absolute vacancy investing in the Nordic region and things are levels are still relatively high in many sub-markets looking positive. The Nordic IPD index, launched with fierce competition among landlords. in April, shows that the Nordic property market Going forward, successful leasing activities are returned 8.5% in 2010; of which capital growth going to be an important source of value creation, accounted for 2.8%, following an aggregated due to the wide pricing spread between secure decline of 6.1% in 2008 and 2009. Sweden and insecure cash flows.

Sustainability makes financial sense Storebrand has been making sustainable investments for 15 years.

As Jan Erik Saugestad, Director of Investment, and Christine T. Meisingset, Head of Sustainable Investments at Storebrand, explain: “In our experience, such requirements do not harm the return to customers – rather the reverse.”

Text Bjørn Erik Sættem, Storebrand Photo Cox and Varg Aamo

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14 In the Spotlight

ut of the Nordic financial services groups, Storebrand has the largest department specialising in sustainable investments. With NOK 400 billion in investment capital to manage – most of it pension assets belonging to Norwegian and Swedish employees – its investment perspective has to be long-term.

Storebrand invests in companies whose operations are global in scope, and is particularly concerned that business should help to uphold human

Storebrand and sustainable investments

Storebrand aims to be the Nordic region’s leading financial services group in the area of corporate social responsibility. Sustainable investments are by far the most important factor i.e. in creating value in a way that contributes to the enhancement of conditions for people and the

rights, exercise good environmental management and combat corruption.

“We do this because it is good for business,” says Christine T. Meisingset.

“The world is facing major challenges in the form of hard-pressed ecosystems and strong population growth.

That is something we must also take into consideration when we set about generating good returns for our customers.”

Almost 4,500 companies are kept under close scrutiny by Storebrand’s department of Sustainable Investments.

environment. To achieve this, Storebrand uses tools such as analysis, active ownership and cooperation. Since 1995, the group has worked on more than 3,000 cases where pressure has been put on companies to work systematically and over the long term. 

Aberdeen 15 Around 100 companies are currently excluded from any investment by the group. These companies represent approximately seven per cent of the total value of Morgan Stanley’s World Index, which is a considerable amount.

You say that taking ethical and social responsibility into consideration when investing is good for business. What do you base that on, Christine?

“The framework conditions for business change when natural resources become scarce, for example. We believe that companies that take account of the environment and people will be winners in the longer term. We also see that running a business in a way that exploits people or pollutes the environment can have major financial downsides.

The exclusion of ‘bad boy’ companies reduces the risk of investing in tomorrow’s financial underdogs.”

Can you give us any examples of losses you have avoided as a result of exclusions?

“In 2008, we excluded a large international mining company due to human rights violations and serious environmental damage. Amongst other things, the company had been found guilty of using inadequate safety systems which had led to injuries, pollution and even fatalities.

We felt the risk of further violations was very high and the company showed no willingness to improve the conditions. We therefore sold all our shares in this company, thereby avoiding a substantial drop in their share price. Last year, the Indian environmental authorities also rejected the company’s application for a mining licence on the basis of these issues and the company is struggling because it cannot fully exploit its smelting capacity.”

Can Storebrand show that its returns on investment are higher than its competitors’ as a result of these exclusions?

“I would love to be able to present figures showing just that”, says Jan Erik Saugestad, who heads a team of around 40 investment managers.

“What I can say is that our analyses over the past 15 years show that our exclusions do not affect the level of risk to any great degree. The same can be said about returns. By altering the weighting of the shares – so-called optimisation – we are still able to own, and it is possible to maintain the same level of risk and return as the Reference Index. International analyses, by Mercer among others, show that you can actually expect a slightly positive correlation between financial performance and taking sustainability considerations into account. I therefore feel relatively confident that we are on the right track.”

“The exclusion of ‘bad boy’ companies reduces the risk of investing in tomorrow’s financial underdogs.”

Christine T. Meisingset

Almost all Nordic capital managers say they take ethics and social responsibility into account when they make their investment decisions. What distinguishes Storebrand from the others in this area?

“I understand that it is difficult to see the difference here,” Ms. Meisingset replies. “It is true that most Norwegian fund managers abide by the Norwegian Government Pension Fund’s blacklist and exclude the same companies. That’s an easy

and it is here that the risk of job. Only a few companies employ violations is the greatest. We keep dedicated staff whose job it is to these companies under surveillance check whether the companies being using advanced online search invested in operate sustainably, and engines and contact NGOs or public put pressure on businesses through authorities when we need their shareholder engagement. Often expertise or local knowledge. If investment managers don’t focus we find serious allegations, we ask on preventing their customers’ the company to respond to certain money from being invested in major questions. We want to know what polluters or companies that engage in human rights violations. That’s not they are doing to rectify the situation how we work.”

“Storebrand has a separate department with eight analysts who monitor and analyse companies from all around the world,” Ms. Meisingset explains.

“We avoid the worst ones and invest more heavily in the best. Besides excluding the companies that violate our rules, we work actively to put pressure on companies to get them to reduce their greenhouse gas emissions, to draw Christine T. Meisingset, Head of Sustainable Investments and up ethical guidelines Jan Erik Saugestad, Director of Investment at Storebrand. or to improve their risk management. We take a pro-active role and try to and how they are working to reduce understand the risks, not simply do the risk of the same thing happening what the Norwegian Government again. Sometimes we also meet with Pension Fund’s Ethics Council says.” company representatives and discuss guidelines and measures to combat We know that most of the growth in the world economy is happening corruption, environmental damage, human rights violations, etc. If we in emerging markets, like China, don’t get any proper answers after India and Brazil. These countries have the least amount of regulation repeated reminders, we exclude the company from our investments.” and it is easier to make mistakes.

“We are about to launch How can you monitor companies in a sustainable index fund for emerging distant countries? markets. The fund will sell to both “This is something we have put a lot small investors and professional of work into. A significant proportion customers. As part of our effort to set of the companies is excluded due up the fund, we have expanded our to violations that have taken place expertise in the field of surveillance in emerging markets. Typically, the and analysis with regard to companies companies are listed in the USA in Russia, China, India and Brazil,” or Europe and have substantial Ms. Meisingset concludes.  operations in emerging markets –

An important study says that you can track a fund’s performance based on how actively the stocks are managed. Beating the market might just be possible.

It pays to be active Text Satu Jussila Illustration Päivi RostrÜm

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16 Aberdeen

ack in 2004, Martijn Cremers was reading an article in the Wall Street Journal about the Fidelity Magellan Fund, the largest US equity fund at the time, when something struck him. The high correlation between its returns and the returns on its index, the S&P 500, suggested the fund was not as active as it was supposed to be.

The Yale University finance professor got together with another colleague, Antti Petajisto, and decided to investigate. A very well-diversified fund might also cause a high return correlation, he postulated.

Aberdeen 17 “To find out whether the fund was active, we looked at the actual holdings and compared those. We found that the Fidelity Magellan fund was, indeed, a closet index fund.” It did not come as much of a surprise to later learn that the manager was replaced by a manager who made the fund much more active again.

Subsequently, the pair went on to develop something called the ‘Active Share’ measure, arguing that it provides predictive power for mutual-fund performance. Their study, first published in 2009, looked only at US equity mutual funds, but now an extended team is adding international markets.

“Recently updated by Antti, the US database now consists of almost 3,000 funds, over 80,000 portfolio holding reports and performance results over 20 years, from 1990–2009,” reports Cremers.

Predicting fund performance The choice between active and passive fund management, feels Cremers, is one of the most fundamental choices investors face.

But to get to the heart of this issue, you first have to get your hands around what it means to be active.

In his view, ‘active’ means the fund is different from the benchmark it is trying to outperform. Traditional practice has considered this difference in terms of returns, focusing on tracking error volatility, thus, the standard deviation of the difference in the return between a fund and its benchmark.

The new ‘Active Share’ measure, by comparison, compares the holdings (rather than the returns) of the fund to the holdings of its benchmark. “Take the absolute value of the differences in portfolio weights for all positions in the fund and its benchmark, sum them up and divide by two. The measure is simple to compute and can be interpreted as the fraction of the portfolio holdings that is different from the benchmark,” says Cremers.

If the portfolio has very similar holdings to the benchmark, Cremers calls it a ‘closet index fund’, provided that it markets itself as an active fund.

So, what is the end result? The closet index funds generally underperform, once you take out expenses and trading costs.

“In our sample, we find that these funds underperform their benchmarks by close to 1 per cent a year, on average, over the last 20 years, which is close to their expenses.”

But when you look at actively managed funds, the results are quite different.

“The most active funds, with the highest Active Share,” explains Cremers, “tend to outperform their benchmarks in the future, especially if they also have a good track record. In our sample, the highest 20 per cent of Active Share funds outperform their benchmark by about 1.2 per cent a year, on average, over the last 20 years.”

Important empirical evidence While we have all heard that beating the market is close to impossible, this study finds that highly actively managed funds

consistently outperform the market − at least as far as the subset of funds investigated.

“It’s the first extensive study I’ve come across that empirically finds a strong link between the extent to which a fund is different to its benchmark and future benchmark-adjusted performance,” says Peter Elston, Strategist, Aberdeen Asset Management in Asia.

Understood more broadly, being average – the principle behind passive investing – or close-to-average does not produce market-beating performance. “In theory, being different doesn’t guarantee good performance,” Elston stresses, “but Cremers and Petajisto’s evidence suggests that it does so in practice, at least for most high Active Share funds.”

Skilful managers not only stand out from the crowd, but they also know how and when to act. “Successful investing is about understanding your edge, and pouncing when you see something that’s mispriced.”

In identifying what type of funds tend to produce good performance, Cremers and Petajisto’s results should also help investors to better appreciate risk. “I think the study helps investors to understand that high tracking error, generally associated with high Active Share funds, is not a risk to be avoided, but simply the cost of good longterm performance,” says Elston.

“And once you combine that understanding with an appreciation of the power of compounding over, say, ten years, you realise it’s a pretty small cost to pay.” 

“´Active´ means the fund is different from the benchmark it is trying to outperform.”

“The US database now consists of almost 3,000 funds, over 80,000 portfolio holding reports and performance results over 20 years.”

“Successful investing is about understanding your edge, and pouncing when you see something that’s mispriced.”

Martijn Cremers

Antti Petajisto

Peter Elston

Find out more

• www.aberdeen-asset.com/aam.nsf/ mediacentre/activeshare • The full report at How Active is Your Fund Manager? A New Measure that Predicts Performance. Online version: http://papers.ssrn.com/sol3/papers. cfm?abstract_id=891719

The ‘Active Share’ measure is now widely used in the financial industry and is incorporated in Morningstar Direct, Morningstar’s products for financial advisors.

• For more research from Antti Petajisto visit: http://petajisto.net/media/magellan_ oped.pdf http://petajisto.net/research.html

Text Päivi Brink Photos Seppo Saarentola, Shutterstock

Anniina Isomäki loves diving. She travels once a year to some exotic destination for a couple of weeks in order to dive two to three times a day.

She says there is nothing like feeling that you are part of the ocean. Isomäki works as a portfolio manager for the Finnish Mutual Pension Insurance Company Varma.

Into the deep blue “A

bout ten years ago, I was travelling in Australia and had the chance to take a course that allowed me to dive on The Great Barrier Reef. It was wonderful,” Isomäki recalls.

But isn’t it difficult to trust the equipment, while you are underwater?

“Not for me. I am very used to the water, so I’m in my element. During the course, the first dives are always in a swimming pool or shallow water, so there’s no real danger.

Some people may have problems with their ears when diving deep, but I’m fine underwater. I have my own equipment these days, and that brings comfort, because it is reliable and the right fit for me. Safety always comes first, so you have to check the diving conditions.”

New places, cultures and waters Isomäki likes to visit warm water destinations, with good water visibility, and plentiful sea life.

“I try to go diving at least once a year. Most of the time I travel alone, but I always meet interesting new people. You never dive by yourself anyway, so you are always in a group of like-minded people. So far, the best place to dive for me has been West Papua, where the coral reefs are still intact and unspoilt,” Isomäki says.

She is very interested in sea life: the fish, the crabs, the turtles, and the corals. The greatest experience she ever had was seeing manta rays on her last trip to the island of Yap in Micronesia in the western Pacific Ocean.

“We saw many manta rays there, and that was awesome.

They are so big, sleek and birdlike, with their ‘wings’. They kept coming to so-called cleaning stations, where other smaller

18 Horizons

AT WORK I KEEP THINKING ABOUT…different fund screening projects; picking long-only equity funds for Varma’s equity fund portfolio, according to our requirements and investment criteria.

Aberdeen 19 fish cleaned them from vermin, and we could just watch them swimming around and above us for a long time.”

Yap is famous for manta rays, but it also has an ancient and unique culture.

“They still use for example stone money as big as 0,5–2 metres in diameter. It’s fascinating to learn about sea life but also about new cultures.”

There are still many diving destinations to explore, but now she is dreaming of a trip to the Cocos Islands in Costa Rica, where she might see a whale shark or a hammerhead.

“I’m also planning to start taking photos underwater. The ocean is full of miracles, and it is wonderful and relaxing to be part of that world for the one hour a dive takes,” Isomäki confides.

ings Three th I cannot out live with 1. Water Obviously we all need water to survive, but I also need water for my wellbeing. I always carry a water bottle with me, and I like to spend my free time around lakes and the sea. There was a lake near our house, so I learned to love swimming as a child.

2. Friends I have friends around Finland, and abroad, who are very important to me. We share the good times as well as the bad times.

3. Dark chocolate Chocolate tastes good anywhere, and dark chocolate is also healthy. But it’s only dark enough for me when it’s got more than 70 % cocoa.

Nordic stability draws European investors Sometimes you just need a change of perspective to see things in a new light, and investing is no different. APG, the asset manager for one of the largest pension funds in the world, Stichting Pensioenfonds ABP, has so far invested ₏ 550 million into the Nordic countries. APG AM Senior Portfolio Manager Andrea Attisani and Pertti Vanhanen, Aberdeen’s Head of Direct Property in Europe, shed some light on how European investors view the Nordic region.

Text Heini Santos Photos Seppo Saarentola, Eljee Bergwerff

The conversation took place 23rd May.

20 At the Club

Pertti Vanhanen, Head of Direct Property, Europe

Aberdeen 21 Pertti Vanhanen: Let’s talk about some general issues concerning the European markets. Overall, do you feel that the recovery from the financial crisis has advanced faster than expected?

Andrea Attisani: Yes. When you think about the depth of the crisis and the level of leverage in 2008-09, things have improved sooner than we thought. However, a deeper analysis reveals that it was not a complete surprise. The responsiveness from governments and central banks has helped to bring things back on track.

PV: Countries such as Ireland and Portugal are, should we say, walking on thin ice. How have you adjusted your investment allocations?

AA: We have primarily been active in the core Europe, countries such as Germany, France and the United Kingdom, but also Scandinavia.

These fundamental eurozone markets are safer and have less risk. But other markets have some good opportunities also, some good niche investments.

PV: How has the crisis impacted your interest in property investments?

AA: Well, the main result is a more modest and intelligent use of leverage. We want to put a higher focus on monitoring the financial structure of the investment. Cash flow is also important, as well as lower level of gearing. In terms of sectors, the office sector offers good returns if you can enter the market at the bottom of the rental cycle. The retail sector is more stable and residential is good for longterm investors such as pension funds.

Andrea Attisani, APG AM Senior Portfolio Manager

“How does the Nordic region look through the eyes of a central European investor?”

Pertti Vanhanen

PV: What are some post-crisis trends and tendencies?

AA: Larger investors tend to prefer seed investments and to strengthen their existing relationship with managers. They like to have more influence and enter into products with better terms. Smaller and medium-sized investors have returned to the market with more precise due diligences. Investment decisions now take longer.

PV: In 2013, a large number of loans will expire and there will there be lack of refinancing in the realestate sector. What do you think about that?

AA: I do not see this as a major risk for properties offering a stable cash flow because, like we have seen in these past couple of years, banks may not be issuing new loans but they are extending

them. Conversely, for those assets with cash flow problems there may be potential risks to refinance and thus opportunities for buyers.

PV: Let’s zoom in on the Nordic countries. How does the region look through the eyes of a continental European investor?

AA: There is significant integrity in these markets, and they are relatively strong, thanks to economic growth and strong public accounts. There are no significant imbalances in current accounts, which makes the region stable for investing. Just like anywhere else, APG looks for partners with a good network and a proven track record. Overall the Nordic market is very competitive. Finland and Norway especially are not very large; Sweden on the other hand has more liquidity.

PV: And do you see any negatives?

AA: I can think of two concerns regarding the Nordic markets. First, the small size can cause added volatility. Second, the banks tend to give bigger loans than in Western Europe, which also has the potential to increase volatility.

PV: Has the financial crisis affected investors’ interest in the Nordic region?

AA: I would say no. I think that the region is just as interesting as it was before the crisis hit. However, the currency risk is a factor to consider carefully in the investment decisions for international investors.

PV: How are property investment volumes looking in 2011 for the Nordic region?

AA: The general trend is that property markets are more stable. So yes, volumes will increase.

The expectations of buyers and sellers are coming closer to each other, so we should see more deals in the future.

PV: Do you think there will be distressed portfolios available in the Nordic region?

AA: Much fewer than what was expected. Most, I think, anticipated a high number of distressed portfolios. There were some in Eastern Europe, and in the North, too. It will be interesting to see whether it will even make sense for banks to keep having these loans in their books.

“There is significant integrity in these markets, and they are relatively strong, thanks to economic growth and strong public accounts.”

22 At the Club

Andrea Attisani

Aberdeen Around Aberdeen the Globe 23

Aberdeen goes Latin America After a tour in Continental Europe, Aberdeen also took the Latin American fund campaign to Sweden, Finland and Norway, on the theme of “Our Fund Managers best tools – local knowledge and a good pair of shoes”.

Latin America has better growth prospects than many developed economies, and domestic orientated companies offer the opportunity to capitalise on the rising middle class in the region.

But we only invest in solid well-run companies whose business models we really understand. To do this we always meet with management, which is why our portfolio managers need to be on the ground where we invest.

The ad makes you wonder, if the portfolio managers in Latin America really get to wear flip flops and take long, peaceful walks on the beach… 

Celebration in New York On June 7th, Aberdeen Asset Management celebrated 25 years of investing in the AsiaPacific region with a closing bell ceremony at the New York Stock Exchange. Aberdeen’s U.S. fund directors, executives and guests visited the exchange to honour the Aberdeen Asia-Pacific Income Fund, Inc., which was founded in 1986, and the Aberdeen Australia Equity Fund, Inc. The ceremony aired live on CNBC. Earlier the same day Nick Robinson, Head of Brazilian Equities at Aberdeen Asset Management on the global emerging markets equity team, appeared on CNBC's Squawk on the Street, discussing investment opportunities in Latin America.

A short film on the history of the Aberdeen Asia-Pacific Income Fund can be viewed on Aberdeen website at: http://www.aberdeen-asset.us/cef. 

For more information on Aberdeen Asset Management, contact our local Business Development team: Denmark Henrik Kruse +45 33 444 080

Finland Pia Michelsson +358 10 3040 530

E-mail firstname.lastname@aberdeen-asset.com

Norway Joakim Hagabakken +47 9160 5822

Sweden Kristina Najjar +46 8 412 8069

Green light for Infrastructure Aberdeen’s Traffic Signal campaign in France has helped boosting Aberdeen’s Global Infrastructure Fund, which seeks to capitalise on increasing global spending on infrastructure.

Many emerging markets have underinvested in infrastructure, and now need to catch up. This is an opportunity for global equity investors to invest directly in parts of Latin America and Asia that should see good long-term returns in the years ahead. 

www.aberdeen-asset.com