| Investor Profile: Towards 10% in alternatives for Finland's State Pension Fund |
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| 4.06.2006 | |
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Times change quickly in the public pension investment world. With a 40/60 investment split in equities and fixed income, Finland's State Pension Fund (Valtion Eläkerahasto – VER) has come a long way since the end of the nineties, when, as part of the Finnish Treasury, it was not considered as a separate organisation and could not diversify away from fixed income. Now an off-budget pension fund with €8.2bn in assets under management covering future pension liabilities and balancing pension expenditure for the employees of the Finnish State, the VER confidently looks to the future and the new opportunities offered by diversification. After a fruitful entry in equity markets, thanks to a gradual approach and a successful timing between 2001 and 2004, VER is to venture further into alternative assets in the years to come. "We are aiming to allocate 10% of our assets into alternatives, including unlisted real estate vehicles, private equity, as well as as a little bit of hedge funds over the next four to five years, all of which is to be outsourced", confirms Timo Löyttyniemi, managing director of the scheme "We have already invested about 2% in alternatives at the moment and we are steadily increasing that share, most of which will be in unlisted real estate in the future." Returns According to VER's managing director, this move into alternatives will improve VER's investment portfolio construction and decrease its exposure to risks caused by market fluctuations. A wise move that, once again, could be well-timed given the general expectations of lower equity returns in 2006. Even if Mr. Löyttynniemi cautiously avoids any speculation about what VER's returns might look like in 2006 after having posted an overall return of 14.9% in 2005, a fair bet would be on the downside rather than on the upside. "We are not as optimistic for equity market returns in 2006 as we were in 2005", he says, adding that VER's estimates are for the moment quite conservative. As for any other pension funds, tepid equity markets in 2006 could mean lower overall investment returns. In 2005, VER made a whopping 30.8% return on equities thanks to highly successful Nordic and Asian equity markets as well as its placements in funds focussing on small companies. In comparison, VER's fixed-income portfolio, which accounts for 60% of its investments and remains mostly invested in Euro-area sovereign bonds (about 50% of VER's total investments), returned 5.4% in 2005. About 90% of the bond portfolio remained managed in-house by VER's staff of 15 people. The remaining 10%, heavily geared towards corporate credit and high yield, is invested through funds. If VER's fixed-income portfolio bears the Euro mark, that's not the case of its equity portfolio, split equally between Euro-area investments and international investments in mostly US and Asian equities. Once again, most of the investments are made directly by the VER's teams based in Helsinki. "We are managing internally mainly those products and areas that are geographically closer to us, mainly Scandinavia and parts of the Euro area", explains Mr. Löyttyniemi. All other assets, including small caps investments, are outsourced. Risk control So far, VER has not deemed it necessary to hedge the currency risk on its foreign currency equity investments. "We prefer to leave currency risk open, which is of course one of the factors that we take into account when we are about to enter or not an equity market", says Mr. Löyttynniemi. "We are happy to take that slight extra risk which an unhedged foreign currency investment involves. In the end, it remains quite a small risk compared to our size, and we think that this is manageable." And yet, taking risk is no small business at VER. As the scheme's volume of investment portfolios has grown in 2005, VER has increasingly focussed on risk, which has involved the formulation of a risk management plan and the establishment of a committee with the duty of processing and developing VER's key risk management issues. That determination to master risks, along with the scheme's excellent performance, hasn't gone unnoticed by the jury of the 2005 IPE Awards, which has selected VER as the Finnish pension fund of the year. J.L. |
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