Interview with Jannik Arvesen, Sector Asset Management

Jannik ArvesenJannik Arvesen has more than 25 years of extensive capital markets experience from various positions within the financial services industry. He co-founded Sigma Fondsforvaltning AS in 2006, and until Sector Asset Management acquired Sigma in 2012, he held the position of CIO. The Sector Sigma Nordic Fund is one of the very few UCITS alternative funds managed out of Scandinavia. Are Scandinavian investors not interested in hedge funds?
Jannik Arvesen: Every country is different in Scandinavia. Sweden for example has a long tradition of managing and investing in hedge funds, but until recently there was little focus on liquidity, so investors were happy to buy hedge funds with monthly or quarterly liquidity. More recently however, we also have seen more demand for UCITS alternative funds in Sweden and we believe this trend will become stronger. At the opposite end, Norway does not have a long tradition of managing and investing in hedge funds. Apart from a few large institutions that invest significantly in hedge funds, the focus of the vast majority of investors has been on traditional long only funds. Despite this, also in Norway we are noticing a slight change in mentality, where more investors understand that reducing your downside risk is just as important as capturing the upside in markets. Where are your investors from?
Arvesen: In the Sector Sigma Nordic Fund we currently have around 75% of investors from Norway and Sweden, with the rest from outside Scandinavia. We are however seeing very strong interest both from Scandinavia and from other European investors who are looking to diversify their portfolios. Looking at current demand and investor meetings, we expect this ratio to become more balanced going forward. Why are the Nordic markets particularly well suited for a long/short strategy?
Arvesen: We strongly believe that the Nordic equity market is an attractive place to be – in the long run. Value creation as reflected in the long-term performance of the MSCI Nordic Index has far outstripped compounded returns in both European and global equities. Since 1995 the Nordic MSCI Index has outperformed the MSCI Europe Index by a factor of 2, while measured all the way back to 1971 the MSCI Nordic Index has outperformed the MSCI World Index by an impressive factor of 4,3.
However, the Nordics are far more volatile compared to other developed markets, and investors are at risk of losing serious money (and patience) along the way in the rather violent and large draw-downs if past history is any guide. The composition of listed companies in the Nordic universe offers a rational explanation for a volatile market, with roughly 50% of total market capitalization of USD 1.9 trillion classified within cyclical sectors as opposed to the remaining 50% in non-cyclical sectors. Another possible explanation for the volatility in the Nordic equity market (perhaps perceived from the outside as “esoteric” despite its high rankings in competitiveness), with large swings in expected annual returns over the course of a global business cycle, is that volatility is amplified by large foreign ownership changes in Nordic equities. Foreign investors tend to adjust their allocation to the Nordic markets, individually or on a regional basis, rather aggressively and opportunistically across sectors, in concert with the changing outlook for global growth.
This backdrop provides an excellent investment environment for an active, long-short equity mandate such as the Sector Sigma Nordic Fund. Through risk management, with targeted volatility well below the historical average for the Nordic equity market, the Fund aims to capture the Nordics record of superior long-term value creation while reducing the variability of the Fund’s returns. Taking a look at the markets: Is it time to consider long positions in oil service companies after they massively underperformed the Nordic benchmark index over the past twelve months?
Arvesen: IIn our view, it is too early, as offshore-related oil service companies face a multi-year, structural downturn. Most oil majors have announced plans for large E&P spending cuts, highlighting a focus on capital discipline and ROACE (i.e. return on average capital employed). The oil majors’ focus on capital discipline started with plans for “no-growth” budgets for E&P spending beginning in 2014, and extends over a period of several years after that.
Oil services companies, especially with exposure to offshore E&P activity, will be faced with idled capacity, competitive pricing pressures, and bloated SG&A costs. Earnings estimates within the sector will most likely be reduced further, perhaps significantly, and news flow will continue to be decidedly negative. Valuations have come down, but do not reflect the structural nature of the trend, i.e. the risk of a prolonged downturn due to the Western oil majors’ newly refocused long-term commitment to increasing ROACE.
With the advent of land-based North American shale oil, the era of decade-long structural growth targeting exploitation of offshore oil resources is over. Thank you for the interview.


About Sector Asset Management

SAM logo m_independent thinkingSector Asset Management was established with the purpose of generating investment returns away from the “beaten tracks”. We specialize on high value added, non-mainstream strategies where we have an edge. Such focus could be oriented toward geography, industry, investment process or simply a specific type of risk. More fundamentally, our very business model proves our commitment to Thinking Independently: We select the best investment talent, we allow them to focus exclusively on what they do best –investing and trading, in complete autonomy –yet we keep their risk under control for the safety of our and our clients’ money.