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 previously served as an executive member of the investment board at CPH Capital, which he co-founded in 2011. Prior to that, Klaus was chief portfolio manager and a member of the investment board at BankInvest. He previously worked as a corporate finance advisor for Carnegie Bank and before that, 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.
AllianceBernstein (AB) worldwide has $779 billion AUM, 51 locations and 4,050 employees, including 352 investment professionals. The Copenhagen office has AUM of $21 billion. AB Copenhagen, was founded in 2014, when CPH Capital (founded 2010), was acquired by AB. The Copenhagen-based investment team manages its investments autonomously but gains access to AB’s broad global reach. AB Copenhagen manages global equity portfolios for both retail and institutional clients from around the world.
AB globally has AUM of $779 billion and the Copenhagen office $21 billion
Correct
In Copenhagen, what percentage is in equities? All long only?
All equities and all long only.
How many of you in the AB Copenhagen office?
There are eight of us. Seven are fundamental analysts and one is a quant analyst. We manage one portfolio and are fully invested 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 to our benchmark. The 60 stocks are benchmark agnostic. But the portfolio itself is a very risk neutral strategy, and the fund behaves like our benchmark (MSCI ACWI 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 companies to pay 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 FCF based valuation models.
The portfolio should grow faster than the market and to 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 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? Share 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 do collaborate a lot more. We share research and conclusions on ESG, and we push companies with our combined voting power (rather than each team voting individually).
60 holdings – from a 4,000-stock universe – how do you whittle it down / what do you look for?
- Structurally attractive + growing industries
- Competitive advantage/wide moat
- Good stewards of capital
- Strong balance sheet
- Long term license to operate (has an ESG flavor)
- Attractive valuation
You see good opportunities in the following sectors (investment thesis for those in bold highlighted below)
European pharmaceuticals – AstraZeneca, Sanofi, Roche
Digital advertising – Amazon, Meta, Alphabet
Corporate IT Spend – Cognizant, Microsoft, SAP, Amazon
Digital Gaming – Tencent, Nintendo, EA, Microsoft
Holding Companies – GBL, Prosus, SoftBank
European banking – Jyske, Julius Baer, Credit Suisse
Decarbonisation – Neste, Iberdrola
European Pharmaceuticals / Sanofi – ticks most, if not all, of the six boxes above. Healthcare and pharmaceuticals in general are structurally attractive industries as people become wealthier and populations age, so more illness. 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 which 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 (good stewards of capital) and is very cheap. We believe it has 40% upside. It is safe, growing and has the capability to grow for the next 10 years. It’s a 3% position ($630 million).
Corporate IT Spend / Cognizant – an IT services company. It is a self-help story. It is transforming itself from a business process outsource company and pivoting to becoming a company 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 comes higher margins. The previous management (5 years ago) was focused on squeezing margins, but they 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.
Decarbonisation / Iberdrola – we wanted to be exposed to a diversified set of industries which includes utilities. Iberdrola is a renewable energy generator which has a large asset base. It has 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, Iberdrola has a growth profile.
You have a number of investment approaches (explain why you hold those in bold below):
Low price – ABN, Anthem, Samsung
Capital allocation – Shell, Iberdrola, Softbank
Low-Risk – Sanofi, Otis, Coca-Cola
Long term growth – Amazon, Thermo Fischer Scientific, Electronic Arts
High Fundamental Returns – Meta, Microsoft, CME Group
Low-risk / Otis – most of the business is servicing and maintaining elevators and escalators that were installed years ago. Most elevators in the Western world are already installed. The business model is very secure and low risk. When you construct a new high rise, the regulator will tell you how often you need to service the elevators (e.g., 2 or 4 times a year). The maintenance contract is usually awarded to the vendor. Otis lives off its service contracts which is why it is low risk.
High fundamental returns / CME Group – the Chicago Mercantile Exchange has an entirely digital business model. It earns revenues on transactions. Its cost base doesn’t change if clients trade more and that 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 RI team as well as using external agencies such as ISS, MSCI and Sustainalytics. Exclusions: weapons, tobacco, coal, adult entertainment and “gross ethical violations”?
“Gross ethical violatiors” – 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” – discuss.
We have a bias against energy, materials and utilities as these sectors have little growth, don’t have high ROIC 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.
Sector Weightings:
| Technology | 23.8% |
| Healthcare | 15.8% |
| Comms Services | 13.5% |
| Financials | 13.0% |
| Consumer Discretionary | 10.6% |
| Industrials | 10.1% |
| Consumer staples | 5.4% |
| Energy | 2.9% |
| Real Estate | 1.8% |
| Materials | 1.6% |
| Utilities | 1.0% |
Top 10 Holdings:
| Microsoft |
| Anthem |
| Meta |
| Otis |
| Coca-Cola |
| Alphabet |
| Samsung |
| Cognizant |
| Visa |
| Prosus |
Your smallest and largest positions are 0.5% to benchmark + 4%?
Yes – so Apple (4% of the benchmark) could be 8% of the portfolio but we don’t hold it. Microsoft is 6% ($1.26 billion) as it ticks all six boxes (above). Anthem is 4% ($840 million) for example. Otis is 2.5%.
Active share?
85% – it was 90% but Microsoft and Alphabet are such a substantial proportion of the index that they eat your active share.
Smallest market cap?
$5 billion
Buy-backs or dividends?
We prefer buy-backs but are happy with a combination.
Do you vote your proxy for foreign shares?
Yes, and we vote with AllianceBernstein collectively.
Do you have to meet management before you 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 are looking forward to getting back to in-person meetings.
MiFID II – has it affected you? How do you work with sell-side analysts?
AllianceBernstein decided to pay hard dollars for research consumed by all investment activities that are within MiFID II’s scope, which includes our team in Copenhagen. Despite the restrictions placed by MIFID II for the payment of 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 the Voter’s role.
Any tips for companies about how they should communicate with AB Copenhagen?
Cognizant have 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, another big holding, we never hear from. We might meet them at a conference but not outside of that!
Why should corporates target AB Copenhagen?
The average length of a holding for us is 4 years. We are very long term and focused on companies having the right business strategy, not quarterly earnings. Management will have a better discussion with a long-term partner who is focused on long-term value creation.
This interview appeared in the summer issue of IR Magazine.