Klaus Ingemann of AllianceBernstein Copenhagen talks to Gill Newton about investment opportunities and strategies, dealing with Mifid II and what is ruled in and out due to ESG
AllianceBernstein (AB) worldwide has $779 bn in assets under management, 51 locations and 4,050 employees, including 352 investment professionals. The Copenhagen office has assets under management of $21 bn.
AB Copenhagen was founded in 2014 when CPH Capital, founded in 2010, was acquired by AB. The Copenhagen-based investment team manages its investments autonomously but has access to AB’s global reach, managing equity portfolios for both retail and institutional clients from around the world.
Klaus Ingemann, co-CIO, joined AB in 2014 as portfolio manager and senior research analyst and was promoted to co-chief investment officer of global core equity in 2018. He served as an executive member of the investment board at CPH Capital, which he co-founded in 2011. Before that, he was chief portfolio manager and a member of the investment board at BankInvest. He worked as a corporate finance adviser for Carnegie Bank and spent four years in the finance department at Tele Danmark. He holds a BSc in business administration and an MSc in finance and accounting from the Copenhagen Business School and is a CFA charterholder.
How many staff do you have in the AB Copenhagen office and what are your roles? There are eight of us – seven are fundamental analysts and one is a quant analyst. We manage one portfolio and are fully invested in holding 60 stocks, style-neutral – so not value, growth or quality. We are well diversified across geographies including emerging markets and industries.
The list of companies we hold is very different from our benchmark. The 60 stocks are benchmark-agnostic but the portfolio itself is a very risk-neutral strategy, and the fund behaves like our benchmarks (MSCI All Country World Index and MSCI World). Our beta is 1.0.
We focus on companies with exposure to growth, sound business strategies and value-creative characteristics. We like companies that grow and pay dividends at the same time, but we don’t require a dividend so we favor companies that can grow and create positive cash flow at the same time. Having a long-term license to operate takes us into ESG territory. We want to invest when a stock is cheap, and we use free cash flow-based valuation models.
The portfolio should grow faster and be of higher quality than the market, have a cleaner ESG profile and be cheaper. That’s the balance we try to strike. We do use some quant tools, but we use a bottom-up qualitative approach to find opportunities.
One other thing to mention is that we’ve been doing it a long time – 20 years in my case. The average tenure of the team is 15 years so it’s an extremely stable group.
How do you work with other AB offices? Do you share meetings and investment ideas? AB has a siloed approach to investment research. We can buy a stock when others sell and there is no global buy list. But we do share meetings so if I take a meeting, my colleagues can dial in, and we will share viewpoints afterwards.
On ESG, though, we collaborate a lot more. We share research and conclusions and we push companies with our combined voting power, rather than each team voting individually.
Sixty holdings from a 4,000-stock universe: what do you look for? We look for structurally attractive and growing industries, competitive advantage/wide moat and good stewards of capital. Strong balance sheets, long-term license to operate – with an ESG flavor – and attractive valuation.
We don’t want our clients to find anything in their portfolios that will create problems with their board of governance
Can you tell us about some of the investment opportunities you’re seeing? Sanofi in European pharmaceuticals ticks most, if not all, of the boxes above. Healthcare and pharmaceuticals in general are structurally attractive industries: populations age so there’s more illness and, therefore, more public and personal household budgets will be spent on healthcare. The industry will grow faster than other industries. Sanofi has exposure to immunology and has launched a new drug to control and contain the immune system – it can tackle arthritis and eczema, for example. Immune diseases are where the body attacks itself and Sanofi’s drug reduces these attacks.
Sanofi has a very young portfolio, a clean balance sheet, net cash – it is a good steward of capital – and is very cheap. We believe it has 40 percent upside. It is safe, growing and has the capability to grow for the next 10 years. It’s a 3 percent position ($630 mn).
Cognizant is an IT services company and a self-help story. It is transforming itself from a business process outsource company to be a firm that helps companies digitize their go-to-market strategies, products and internal operations.
It will transform itself from no growth to high growth and with that come higher margins. The previous management five years ago was focused on squeezing margins, but forgot about growth. The new management is now righting the ship and has a dual focus on growth and profitability. Its legacy management means it trades at a discount to peers such as Accenture.
We wanted to be exposed to a diversified set of industries that includes utilities. Iberdrola is a renewable energy generator with a large asset base and an extremely long-term investment plan. It can invest in renewables with regulated returns so it can grow and commit capital to growth but with guaranteed returns on that growth. Utilities trade as value and that is the case for Iberdrola but, unusually, it has a growth profile.
Can you give examples of the investment approaches you take? Otis is an example of low-risk investment – most of the business is servicing and maintaining elevators and escalators that were installed years ago. The business model is very secure and low risk. When you construct a new high-rise building, the regulator will tell you how often you need to service the elevators, maybe twice or four times a year. The maintenance contract is usually awarded to the elevator vendor. Otis lives off its service contracts, which is why it is low risk.
CME Group has high fundamental returns. It has an entirely digital business model that earns revenues on transactions. Its cost base doesn’t change if clients trade more, which will happen as people become more financially sophisticated. It is mostly fixed-income derivatives. CME doesn’t have to spend to grow: it can grow its revenues without increasing its cost base. It is the same for Microsoft, which recently increased the price of its Office subscription offering.
You incorporate ESG into the investment process and collaborate with the AB responsible investment team as well as using external agencies such as ISS, MSCI and Sustainalytics. But you exclude weapons, tobacco, coal, adult entertainment and ‘gross ethical violations’, don’t you? As a Scandinavian investment manager, we have long used the Norges Bank exclusion list. Companies that violate certain ethical norms are excluded. Ultimately, we don’t want our clients to find anything in their portfolios that will create problems with their board of governance. We want our clients to sleep at night!
You also have ‘a bias against some energy, utilities and materials companies’. Why? These sectors have little growth, don’t have high return on invested capital and sometimes have governance issues. They also tend to be asset-heavy so fundamental returns are low. Their ESG scores are often poor, too, so it’s hard to get them through our investment criteria.
Are your smallest and largest positions 0.5 percent to benchmark +4 percent? Yes – so Apple (4 percent of the benchmark) could be 8 percent of the portfolio but we don’t hold it. Microsoft is 6 percent ($1.26 bn) as it ticks all six boxes above. Anthem is 4 percent ($840 mn), for example. Otis is 2.5 percent.
What is your active share? It’s 85 percent – it was 90 percent but Microsoft and Alphabet are such a substantial proportion of the index that they eat your active share.
What is your smallest market cap? Our lowest threshold is $5 bn.
Do you prefer buybacks or dividends? We prefer buybacks but are happy with a combination.
Do you vote your proxy for foreign shares? Yes, and we vote with AB collectively.
We very much like to meet management. We are looking forward to getting back to in-person meetings
Do you have to meet management before you will buy a stock? We very much like to meet management. We’ve got used to virtual one-on-ones, but a colleague recently went to a conference in Miami and met industrial companies and I’m booked for a conference in Boston in May to meet technology companies. We're looking forward to getting back to in-person meetings.
Has Mifid II affected you? How do you work with sell-side analysts? AB decided to pay for research used by all investment activities within Mifid II’s scope, which includes our team in Copenhagen. Despite the restrictions of Mifid II on payment for investment research, the process used for establishing the research budget remains global. Each voter for research continues to have the same vote value based on his/her role.
How should companies communicate with AB Copenhagen? Cognizant has excellent IR. We have a quarterly one-on-one call with the company, often hosted by the CEO or CFO but we’ve also had access to the chairman of the board. On the other hand, there’s another big holding that we never hear from. We might meet it at a conference but not outside of that!
Why should corporates target AB Copenhagen? The average length of a holding for us is four years. We are very long term and focused on firms having the right business strategy, not quarterly earnings. Management will have a better discussion with a long-term partner focused on long-term value creation.
Gill Newton is a partner at Phoenix IR, an independent investor relations consulting firm that also operates Corporate Access Network
