The global financial crisis has seen Iceland’s banking industry take a serious hit to its reputation. The collapse of all three major commercial banks sent shockwaves around the financial markets, causing many international investors to turn their backs on the country’s financial institutions.
The banking crisis saw a range of new regulations introduced by the Central Bank of Iceland (CBI) and the Financial Supervisory Authority (FSA), so that the country could get back on a steady financial footing. Many institutions have collapsed as a result of the changes, with just a few firms managing to survive in the new environment. Those that survived needed to adopt a more prudent and analytical approach to investing to ensure that they were not tainted by the carefree ways of firms like Kaupthing, Glitnir and Landsbanki.
Recent years have seen a number of smaller, specialist firms rise up from the ashes of the banking crisis and restore some of the faith that the global investment community previously had in Iceland’s financial markets. One of these firms is MP banki, which has battled through the crisis thanks to its commitment to prudent and analytical strategies.
Recent years have seen a number of smaller, specialist firms rise up from the ashes of the banking crisis
Founded as MP Securities in 1999, MP banki became an investment bank four years later with a full range of investment banking services on offer to both institutional and individual clients. It gained a full commercial license in 2008, and has steadily grown its operations from its headquarters in Reykjavik ever since. The firm has also maintained a diverse number of shareholders, without any single investor holding more than 10 percent of total equity.
Last year proved to be a successful year for the firm, with the asset management side of the business performing especially well. It has remained highly liquid, with cash holdings well above the minimum requirements set by the FSA and CBI. The group has achieved this steady growth through its focus on providing businesses with specialised banking services that draw from its employees’ expertise and knowledge of the domestic market.
World Finance spoke to Sigurður Hannesson, Managing Director of MP Asset Management, about how the company has managed to maintain its steady growth in recent years, playing on its knowledge of and expertise within Iceland’s markets.
What role does your company’s asset management arm play in its overall banking operations?
Established as an asset management company in 1999, MP Asset Management has been the cornerstone of MP banki’s operations from the beginning. Now, MP Asset Management offers comprehensive solutions in major asset classes, such as fixed income, equities and real estate; both in the local and international markets.
Why do you consider a smaller amount of assets under management to be an advantage for your asset management arm?
A relatively small size of assets under management compared to the market is on the whole considered to be an advantage. The main reason is that we can more swiftly change our strategies without having to impact prices. That gives us a certain freedom.
What is your investment philosophy?
The main criteria in our investment philosophy are active management style, flexibility of investment policy and a strategic and tactical view of the markets. The strategies are actively managed and the goal is to achieve outperformance in comparison to our benchmarks. Investment policy for each strategy is flexible and is the main driver for outperformance. The size of our assets under management gives us more freedom to revise asset allocation.
Fundamental analysis of bond and equity markets is the basis for our strategy, and this plays an important role for our performance, in addition to our reporting on the micro and macroeconomics in the economy as a whole. Momentum, technical analysis and arbitrage are the basis for this tactical view. The role of the fund manager is to run the strategies according to the investment committee’s advice and find opportunities for tactical allocation.
How do your services differ between individual and institutional clients?MP Asset Management strives to have close connections to both individual customers and institutional clients. All clients receive a thorough service and reports on their portfolio regularly, and by request. However, there are some differences between clients’ requirements for information. Institutional clients often require custom reporting packages. In addition, service to institutional clients may include more frequent update meetings at which their portfolio and performance is reviewed. Otherwise the services provided to individuals and institutional clients are similar.
Which markets is MP Asset Management represented in and why?
Our aim is to be the first choice for individuals and institutional investors by providing quality services and consistent long-term performance. MP Asset Management offers investment services in the local market to domestic and international investors. Successful partnership with global investment banks for 10 years has given MP Asset Management the opportunity to offer Icelandic investors top class services in global markets.
Could you explain a little about your stock-picking tactics?
Our process is based on a thorough fundamental analysis of all companies listed on the Icelandic Stock Exchange, as there are only 14 companies listed currently. We do a discounted cash flow valuation with three scenarios – bear, base, bull – to capture the standalone risk, and subsequently the companies are ranked relatively. The stock portfolio consists of the highest ranked stocks with certain restraints that relate to diversification and liquidity. Returns of the Icelandic Equities fund in 2013 were about 46 percent, far above the OMX Icelandic equity index that returned about 20 percent during the same period.
Three of your strategies invest in equities. Which ones do you typically go for?
Our equity strategies invest in domestic – in particular listed – equities. The equity market is gradually gaining strength, with 14 listed companies – up from four in 2011. There have been 10 IPOs over the last couple of years, and value has been added to the portfolios by participating selectively in IPOs. On top of that, these portfolios have got exposure to private equity that is aiming at an IPO within 12 months.
What tech innovations does MP Asset Management have?
We know that transparency matters to our clients. Our clients have access to online portfolio overviews that enable them to be up-to-date on positions and trading activity. We have put effort into improving our IT systems so that we can provide our clients with even better information such as specific statistics on risk and return.
How do you approach risk in the current regulatory environment?
With an uncertain environment we are careful about political and economic risk. We believe that understanding the risk comes first. Then it is possible to decide whether or not to take the risk. This approach has given our clients an advantage in a tough market environment, and has lead to higher returns.
What can we expect from MP Asset Management in the year ahead?
Although still dealing with the aftermath of the 2008 economic collapse, the Icelandic economy is picking up, with healthy growth last year. There are challenges ahead, but they can also be seen as opportunities. The equity market is gaining strength and investors are gradually regaining confidence in the market. We are looking to exploit opportunities in equity IPOs as well as in the bond market. We expect a further increase in the number of accounts and decent returns in 2014.
