Episode 334 - Magnus Reitan: Managing (Significant) Family Wealth

December 5, 2024 Kelsey Robichaud

Magnus Reitan (1975) is the manager and CEO of the company Reitan Kapital.

Han was educated at NHH Norwegian School of Economics, BI Norwegian Business School and Florida International University in the US and, like his brother, was “raised on retail.

He has held various executive positions in REITAN and Reitan Convenience since the 2000s. Since 2016, he has been the CEO of REITAN KAPITAL, which is a financial investment company.

Magnus is a member of the boards of REITAN AS, Reitan Retail and Reitan Convenience.

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How do you balance family values, evidence-based investing, and building long-term wealth? In this episode, we are joined by Magnus Reitan, CEO of Reitan Kapital, to discuss his evidence-based approach to wealth management. Reitan Kapital is a leading investment firm specializing in index fund strategies and innovative portfolio optimization techniques. Under his leadership, the firm has become a key player in the investment industry, known for its analytical approach and commitment to sustainable and effective financial solutions. In our conversation, we delve into the disciplined, evidence-based philosophy driving Reitan Kapital’s investment strategy, the importance of simplicity in managing wealth, and the lessons he’s learned as an investor and a leader. We also explore the nuances around managing family wealth, unpack the importance of aligning investment strategies with family and business goals, and uncover the influence of Norway’s Sovereign Wealth Fund on Reitan Kapital’s approach. Join us as we explore the intersection of finance, legacy, and innovation and learn why a low-cost, evidence-based investment strategy works with Magnus Reitan. Tune in now!

Key Points From This Episode:

(0:03:27) The Reitan family’s journey from a single grocery store to a multinational group.

(0:04:20) How Reitan Kapital fits into the broader Reitan Group and how it started.

(0:06:35) Discover how Reitan Kapital defines risk and the role of access liquidity.

(0:08:06) Magnus shares how he developed his personal investment philosophy.

(0:09:33) Hear how his personal interest in finance led to founding Reitan Kapital.

(0:11:24) Explore the differences between managing a business and a family portfolio.

(0:12:26) Why the company chose to hire a CIO who was not part of the Reitan family.

(0:13:59) Reitan Kapital’s values: long-term perspective, diversification, liquidity, and low costs.

(0:17:37) Hear how the family decided on and agreed to the company's investment approach.

(0:18:58) Asset allocation at Reitan Kapital and the reasons behind its approach.

(0:21:50) Avoiding portfolio complexity and the benefits of evidence-based investing.

(0:24:30) The influence of Norway’s Sovereign Wealth Fund on Reitan Kapital’s philosophy.

(0:26:07) Sources of information for learning about portfolio management and financial markets.

(0:27:00) Lessons and key takeaways from the recent Reitan Kapital investor conference.

(0:29:38) He shares his definition of success and why passion is important.

Read The Transcript:

Ben Felix: This is the Rational Reminder podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer at PWL Capital, and Cameron Passmore, Portfolio Manager at PWL Capital.

Cameron Passmore: Welcome to episode 334. And, Ben, this week we have a very interesting, and special, and kind of inside baseball conversation with Magnus Reitan, who is the CEO of Reitan Kapital. And listeners might remember that back in episode 321, we had Håkon Kavli on, who is the CIO of that family office. And this is the group, the people that invited me to join in their Inaugural Investment Conference in Norway a month or so ago, which was an incredible event. And we talk about that at the back end of this conversation with Magnus.

Incredible story, incredible family. They're a storied family in the retail and grocery and convenience stores across Scandinavian countries. And we thought it'd be interesting to have Magnus join us just to give us his perspective as someone in a family that has capital to manage that comes at it from an evidence-based perspective. Kudos to you, Ben, for reaching out to him to have him on after Håkon joined us, which was also a very solid conversation.

Ben Felix: You call it inside baseball, Cameron, but it's a different kind of inside baseball because Magnus sits in the seat of the asset owner. He is himself an investor managing money on behalf of his family businesses. Similar to many listeners who might be managing money for their spouse and maybe their kids but on a different scale, obviously. But the interesting thing about Magnus is that he's in that seat, and many people who were in that seat and have large amounts of capital to invest end up getting really complicated portfolios, taking the advice of financial institutions to invest large amounts in illiquid assets and private equity and private credit and all that stuff. And Magnus has not done that. He's kept a super low-cost, evidence-based approach to managing this holding company's assets.

And I just think that's really impressive because it's not easy. And as he mentions at one point in our conversation, he is like everyone else at that level of wealth bombarded by pitches from asset managers about why they should be making their portfolio more complicated by adding other asset classes. But based on his own personal investment philosophy and clearly some discipline, he's been able to build this thing out in a super low-cost evidence-based manner similar to the Norwegian sovereign wealth fund, which we also talk about and how that has influenced what they've done. I just think his perspective on this is really interesting as an asset owner who has kept things simple.

Cameron Passmore: And built consensus in the family as to the policy, the investment policy and the investment philosophy of the family, that also can be a challenge. Hats off to Magnus and the entire family. Very thoughtful organization.

Ben Felix: Yeah. But getting buy-in from family members as a committee is no joke. I agree. All of it is impressive. I think it's interesting and relevant conversation to anybody who's taking charge of managing their family's wealth.

Cameron Passmore: Yeah. Here's our conversation with the CEO of Reitan Kapital, Magnus Reitan.

***

Cameron Passmore: Magnus Reitan, it's so great to welcome you to the Rational Reminder podcast.

Magnus Reitan: Thanks for having me.

Cameron Passmore: Great to see you again. Off the top, Magnus, what is the story of Reitan family?

Magnus Reitan: Well, our story started with a small grocery store in Trondheim in Norway in 1948, which my grandfather opened. And over decades, we've expanded to become one of Norway's largest companies with over 3,600 stores across seven countries, and we are 45,000 employees. Today, our business includes discount grocery stores and gas stations in Norway and Denmark, convenience stores across the Nordic and Baltic countries, and one of Norway's largest real estate investment companies, in addition to Reitan Kapital, which manages a globally diversified investment portfolio.

Ben Felix: That's incredible. Can you talk more about how Reitan Kapital fits into the broader Reitan Group of Companies?

Magnus Reitan: Our holding company, which we have simply named Reitan, exercises active ownership through independent business areas. And we have three business areas; Reitan Retail, Reitan Eiendom, and Reitan Kapital. And Retain Retail operates discount grocery stores in Denmark and Norway and convenience stores in Nordics and Baltics, and the energy and gas stations that I talked about earlier.

Retan Eiendom is our real estate investment company, focusing on city-centred properties in the three largest cities in Norway, which is Trondheim, Bergen and Oslo, as well as logistics, industrial and retail properties across Scandinavia.

Reitan Kapital is the newest and currently the smallest of the three divisions. However, the group's long-term goal is for the three business areas, Reitan Retail, Reitan Eiendom, and Reitan Kapital to become relatively equal in value. In other words, Reitan Kapital is not just the source of capital for the other business areas. But it's also a business area in its own right, which we plan to grow aggressively going forward.

Cameron Passmore: Can you talk about the genesis of Reitan Kapital?

Magnus Reitan: Reitan Kapital was born from a desire to safeguard and build financial wealth for the broader Reitan Group and for future generations. The intent was to consolidate and professionally manage the excess liquidity generated from our operating businesses, applying a disciplined evidence-based investment philosophy. And it's important to understand that we are not only safeguarding and building financial wealth for future generations of owners but also for future generations of employees and franchisees. Because we want our 45,000 people to go to work each day with companies, knowing that they have a financially secure employer, one that can weather tough times and these business opportunities when they arise.

Ben Felix: You touched on it there. How does Reitan Kapital define risk?

Magnus Reitan: For us, risk is measured by volatility and maximum drawdown or tail risk, which perhaps is more important than the volatility in the long run. We aim to build a portfolio batch over time that maintains the same level of risk while seeking to generate higher returns than our benchmark. And we try to achieve this by diversifying even more than the benchmark, which helps us reduce the overall portfolio volatility without sacrificing expected returns.

This allows us to reintroduce slightly more risk to the portfolio to meet our volatility targets, creating a portfolio that aligns with the benchmark's risk profile while generating higher expected returns. At least that's a theory.

Cameron Passmore: I'm curious, how do the operating businesses define what you call access liquidity, which ends up flowing to Reitan Kapital?

Magnus Reitan: Access liquidity represents the funds beyond what is required to sustain and grow our operating businesses. This surplus is channelled to Reitan Kapital where it is managed to generate optimal returns and support the broader financial strategy of the Reitan group.

Ben Felix: We're going to talk more about your role with Reitan Kapital in a minute. But I want to ask first, how did you develop your personal investment philosophy?

Magnus Reitan: My interest in financial markets began during business school. And I think, like for many others, I was initially drawn to stock picking. It's fun. It's intriguing. It's exciting. However, as I quickly learned through personal experience, it's also very humbling. And the more I delved into it, the more I realized just how challenging it is to consistently generate alpha through stock picking.

I think this realization shifted my focus toward asset allocation. I was introduced to research showing that roughly 90% of the long-term risk and returns is driven by the strategic asset allocation. In other words, decisions about how much to allocate to equities, bonds, and other asset classes, while only 10% comes from the individual stock or bond selection or perhaps tactical allocation.

I think this insight convinced me to dedicate 90% of my efforts to getting the strategic allocation right. And from there, I just focused on finding the cheapest and most efficient ways to gain exposure to the major asset classes, primarily through low-cost index funds.

Cameron Passmore: Love it. How did the family decide on your role overseeing Reitan Kapital?

Magnus Reitan: Reitan Kapital was my initiative. The company likely wouldn't have been established if not for my personal interest and passion for asset management. And I think as a family, we are fortunate that one of the three owners has a personal interest in this area, as it's not always common in family businesses. I think in all major profitable, at least family enterprises, excess liquidity inevitably builds up and requires professional management. And often I see families outsource this function to external managers or sometimes higher hotshots from the investment industry often based on what they read in the financial press.

And the challenge with this approach is that, without a deep understanding or personal interest in asset management, many families fall into the trap of investing in expensive and poorly diversified funds or investment strategies that may have delivered strong returns by sheer luck over the, say, past three to five years, which is a dangerous strategy, I think. By taking on this role personally, I've ensured that Reitan Kapital is managed with a disciplined evidence-based approach that aligns with our family's values and long-term objectives.

Ben Felix: The example you gave of families outsourcing and ending up in high-fee products is it happens everywhere. It's crazy. And it's not just families with wealth, it's also institutions. It's unbelievable. I agree with you, and it's great to see you taking that role on. Can you talk about how managing the assets of Reitan Kapital on behalf of your family as a business is different from managing your own personal portfolio?

Magnus Reitan: Yeah, I think managing Reitan Kapital involves balancing the family's collective objectives with a disciplined and scalable approach. In contrast, personal portfolios may prioritize individual preferences and are often less constrained by formal governance or the collective goals.

Reitan Kapital has humbly taken on the responsibility of managing the financial values that have been created by more than 45,000 people over the past 76 years, which feels like a tremendous responsibility. But most of all, it's an incredible honour. It is much more important than just managing my own wealth.

Cameron Passmore: On episode 321, Magnus, as you know, we welcomed your CIO, Håkon Kavli, onto the podcast for a great conversation. I'm curious, what made you eventually decide to bring in a CIO that was not part of the family for Reitan Kapital?

Magnus Reitan: In the beginning, Reitan Kapital was just basically just me. We started in 2016 and it was basically just me and I wanted to keep costs as low as possible and the structure as simple as possible. However, as the complexity and the scale of Reitan Kapital grew, it became evident that additional resources were necessary.

In 2023, we brought on Sindre Drevland to focus on manager selection and Håkon Kavli to lead the asset allocation part. Håkon joined us Storebrand, which is one of Norway's largest asset owners and managers, where he was already a senior portfolio manager. And it quickly became clear to me that Håkon is an exceptional investment professional. And later that year, he was appointed as CIO.

I believe that our current team, we are only five people in Reitan Kapital. And this team is highly scalable. We are well-equipped to manage two times or even five or 10 times the capital that we handle today. And we take great pride in operating as a small, cost-efficient, and highly skilled team.

Ben Felix: That is impressive. You talked earlier about your personal investment philosophy and basically using low-cost index funds. Can you talk about Reitan Kapital's investment philosophy? You just mentioned manager selection, for example, which is obviously different from buying an index fund.

Magnus Reitan: We follow an evidence-based investment philosophy where investment decisions are driven by research and data rather than assumptions, speculations, and anecdotal evidence. This includes analyzing historical return data, understanding and respecting market efficiency, applying modern portfolio theories and using statistical methods to assess risk and return.

And we have defined four main principles for our investment philosophy, which are long-term perspective, diversification, liquidity and low costs. We have a long-term perspective. In fact, eternity is probably our perspective, which increases our risk tolerance. We can manage short-term volatility and drawdowns and viewing them as the price we pay for long-term excess returns.

Diversification is the only free lunch in investing, as we all know. And with a well-diversified portfolio, we expect the same or even higher returns compared to a less diversified one, yet with dramatically lower volatility and drawdown risk. Our equity portfolio is exposed to roughly 10,000 companies across all industries and geographies worldwide, both listed and unlisted. And our fixed-income portfolio is a global mix of government and corporate bonds. And additionally, we've included alternative sources of diversification also, such as capacity bonds, music rights, art, and also market-neutral multi-asset strategies.

The third principle is liquidity. All excess cash from the Reitan group is channeled into Reitan Kapital. Capital flows in and out of Reitan Kapital on a weekly basis. Reitan Kapital serves as a buffer for all group companies during challenging times. And we also provide liquidity when exciting opportunities arise. Reitan Kapital needs to maintain high liquidity with a maximum of 20% of the portfolio in illiquid assets. And we aim for 60% of our assets to be accessible within three business days without incurring significant transaction costs.

And in our discount grocery stores, low costs are our most important competitive advantage. And principle number four for Reitan Kapital is also low costs. We believe that low costs are just as critical in investing as in any other business. And if you incur unnecessary costs, say one million dollars, you not only lose that one million in returns for the year, but you also lose all future returns on that million forever. The compounding effect of one million today over eternity is infinitely high.

Ben Felix: You mentioned the alternative. There was music rights, art, and market-neutral funds. Roughly, how much of the portfolio would be in alternatives as opposed to stocks and bonds?

Magnus Reitan: Not that much. We target small allocations to those diversifying resources, mostly because the fees are higher and our belief in the excess return is perhaps lower than in some of the more broader asset classes.

Cameron Passmore: What role did the rest of your family play in defining and also agreeing to the Reitan Kapital investment philosophy?

Magnus Reitan: Before establishing Reitan Kapital, I spent considerable time with the rest of my family trying to manage expectations mostly. I demonstrated how a similar portfolio would have performed historically, terms of returns, volatility and maximum drawdowns. And I also emphasized that expected returns going forward are likely to be lower than historical returns for various reasons I won't elaborate on here. And additionally, I prepared them for the possibility of drawdowns exceeding 40% or more.

Since our inception in 2016, we have navigated several challenging periods. A falling market in the second half of 2018, the COVID-19 pandemic, and the inflation and interest rates surge in 2022, which impacted both our equity and bond portfolios significantly at the same time. But despite these setbacks, there has been no sign of panic or pressure to abandon our long-term investment strategy demonstrating the family's alignment and commitment to the agreed-upon philosophy.

Cameron Passmore: So interesting. So what is Reitan Kapital's?

Magnus Reitan: While the benchmark for our portfolio is 60% global equities and 40% global fixed income, our actual portfolio can differ substantially from these weights. The key objective it's not strict adherence to the benchmark allocation, but rather ensuring that the portfolio's overall risk measured by volatility and maximum drawdown aligns with the benchmark over time. Within this framework, we aim to generate excess returns by leveraging evidence-based investment strategies, ensuring that we achieve our financial objectives while managing risk effectively.

Currently, our equities allocation slightly exceeds the benchmark 60%. The majority of our equity portfolio consists of global index funds and ETFs that collectively mirrors the MSCI All Country World Investable Markets Index, which includes emerging markets and small caps. And additionally, we have incorporated a minimum volatility ETF and allocated roughly 5% of the equity portfolio to equity.

The bond portfolio, while primarily made up of passive funds as well, is much smaller than the benchmark's 40% allocation. And this is to make space for more diversification. They made room for alternative strategies, such as the ones I mentioned earlier. And some of these strategies have low or even zero correlation with the broader portfolio, helping us to mitigate risk while enabling a slight overbite in equities as well.

Cameron Passmore: How did you choose the 60/40?

Magnus Reitan: We started initially with a 30% allocation to equities and 70% to fixed income. At that time, the portfolio was much smaller and represented a smaller proportion of our overall wealth. Consequently, our priority was to ensure that the limited excess cash that we had was relatively stable and liquid. In case it was needed for acquisitions or to support our core business during challenging times.

As Reitan Kapital grew and became a more significant part of our overall wealth, we were able to take on more portfolio risk. Despite this, the 40% fixed income allocation we have today continues to serve as a substantial and stable liquidity buffer for the system. The current benchmark allocation reflects our overall risk tolerance and our long-term financial goals.

Ben Felix: Make sense. Have you felt any pressure or need? Obviously, you've had some alternatives like we talked about, but beyond that, any pressure or need to add more complexity to the portfolio through less liquid assets or other alternatives?

Magnus Reitan: Yeah, lots of pressure, especially from financial institutions that are really trying to push these solutions on us. But we have deliberately maintained a relatively simple portfolio. Our philosophy prioritizes simplicity, transparency and evidence-based strategies, which we believe lead to better long-term results. That said, as previously mentioned, we have made small targeted allocations to alternative assets to enhance diversification without compromising the portfolio's overall simplicity and efficiency.

Ben Felix: How do other large asset owners who, as we've talked about earlier, tend to have more complex portfolios? How do they respond when they learn about the relative simplicity of the Reitan Kapital portfolio?

Magnus Reitan: Yeah, I think many are surprised and also intrigued. They often use this as an opportunity to explain the advantages of simplicity, including lower costs, increased liquidity, and reduced operational risk as well.

Cameron Passmore: Is there also an element of peace of mind too? Keeping things simpler?

Magnus Reitan: Yeah, it's easier to understand our portfolio. It's easier to know what kind of risk we're taking on when we understand all the strategies that makes up the total portfolio. If we go into something alternative, we will spend a lot of time trying to understand the strategy, trying to understand the asset class. Keeping it simple makes it easier for us to know what risk we are taking on.

Cameron Passmore: How do you communicate the benefits of evidence-based investing to other large asset owners like yourselves?

Magnus Reitan: We don't aim to convince others of the merits of our approach. Instead, our goal is to share ideas and to foster dialogue with other asset owners. And many of them follow investment strategies that differ significantly from ours. And we remain humble to the possibility of learning from their methods while at the same time we hope they can also gain valuable insights from our approach.

Ben Felix: It's funny you say that. Cameron and I decided probably ten years ago that we wouldn't try and convince anyone that what we do make sense. And instead, we would just put the information out there, which ended up being part of the purpose of this podcast. But you can't change people's mind by beating them over the head with it. You could just give them the information.

Magnus Reitan: That's true.

Ben Felix: How influential is your proximity to the Norwegian sovereign wealth fund, which is a pretty famous, very large, basically index investor? How influential has that been to how you manage your portfolio?

Magnus Reitan: Sovereign wealth fund, commonly known as the oil fund, has been a significant influence on our approach. They openly share their research online, free of charge, providing valuable insights into evidence-based investing. And additionally, they are willing to engage in discussions and share their experiences with other Norwegian asset owners, including us, which has further enriched our understanding and investment strategy.

And in many ways, Reitan Kapital is Reitan's own oil fund in miniature. Just as the sovereign wealth fund is tasked with ensuring financial security for current and future generation Norwegians, Reitan Kapital's mission is to provide financial security for current and future generations, employees, and franchisees, and owners.

Cameron Passmore: Do you think there's something about Norwegian culture that's conducive to evidence-based investing?

Magnus Reitan: Norwegian culture emphasizes pragmatism, long-term thinking, and the trust in research and expertise. And I think these values align closely with evidence-based investing. And we also have the sovereign wealth fund, which is a great representative of evidence-based investing, which I think all Norwegians look up to.

Ben Felix: It really is an incredible program. And the fact that you guys are doing something similar, it's really interesting. That's why we had that cultural question in Canada. It's the opposite. Our pension funds are famous for employing huge amounts of active management. I don't know what that says about Canadians, but anyway. What are your main sources of information for learning about portfolio management and financial markets?

Magnus Reitan: We try to rely on high-quality academic research, preferably peer-reviewed, to ground our approach on evidence-based insights. And additionally, we draw valuable knowledge from respected institutions such as the Norwegian Sovereign Wealth Fund. I could mention AQR, Dimensional and other asset managers as well. And our professional networks also play a crucial role, enabling us to stay informed and continuously refine our strategies.

Cameron Passmore: Last month you are gracious and kind enough to welcome me to your Inaugural Investor and Investment Conference that you hosted for around 100 of your peers in the Norwegian investment community. I thought the event was spectacular. I'm curious from your perspective, Magnus, what is the main benefit of that conference?

Magnus Reitan: I think it has been the significant expansion of our professional network, asset owners, both in Norway and international, now reach out to us to discuss evidence-based investing. This aligns closely with our primary reason for hosting the conference to foster dialogue and collaboration.

With a team of only five people at Reitan Kapital, access to external expertise is essential for enhancing our knowledge and improving our strategies. Most of the time, we are invited to conferences hosted by fund managers or investment banks where they are usually trying to sell products, whether it's a fund, investment strategy. Or perhaps one of the many conferences-based focused on macroeconomics, specific industries or companies.

And we wanted to create something different, a space where asset owners could come together, discuss the art and science of portfolio management. And the feedback shows that the participants found it's both engaging and valuable. And that it encourages more frequent dialogue among asset owners moving forward.

Ben Felix: Really smart idea. Personally, for you, what were your biggest takeaways from the inaugural conference?

Magnus Reitan: There were many, but Antti Ilmanen, who had a speech on expected returns. I think the key takeaway was the sobering reminder not to expect future returns anywhere near the levels we've experienced since the financial crisis. Professor Marcos López de Prado, he highlighted how machine learning can enhance portfolio optimization techniques and offering valuable insights into its practical application.

Erik Hilde, who is responsible for selecting external managers for the Norwegian Sovereign Wealth Fund, he surprised the audience by stating that he doesn't even consider past performance when selecting managers.

Cameron Passmore: There's a collective gasp when he said that.

Magnus Reitan: Yeah, it was. Lastly, of course, Cameron Passmore did an excellent job of breaching the academic insights with actionable strategies for asset owners, making the contents highly relevant and practical. Thank you, Cameron, for your contribution.

Cameron Passmore: Thank you. I thought the event was phenomenal. The people were so interesting. And to say there was conversations, putting it mildly, the event after the lovely dinner you hosted afterwards at your incredible property. It was a real special event. Final question for you, Magnus. How do you define success in your life?

Magnus Reitan: That's a huge question. I think for me personally, success in life is simply about living a happy and fulfilling life. Perhaps a bit boring answer, but since we spend the majority of our waking hours at work, having a genuine passion for what you do at work is essential to achieving that happiness. And I feel incredibly fortunate to work every day with a great team in a field that aligns with one of my greatest passions, which is evidence-based investing.

Cameron Passmore: Beautiful. Well, great to see you again and thanks so much for coming on the pod this week.

Magnus Reitan: Thank you very much.

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