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A fan of shareholder value

Who do you most admire in the industry and why?

Over 20 years I have been in several different sectors in finance: asset management, corporate finance and investment banking. I have especially admired two people's skills. Peter Fagernäs was at what was then Prospectus and later Merita Corporate Finance. Prospectus was a corporate finance house involved in IPOs, equity issues and raising funds for companies. Bjorn Wahlroos was at Mandatum, and is now chief executive officer of Sampo Group. Mandatum was a corporate finance house with a brokerage and an asset management arm. Finland internationalised willingly in the 1980s and 1990s. From Peter I learned the quality of taking care of clients, knowing their needs and making sure they get what they expected. Bjorn I admire for the way he runs the business: his capacity for structuring and developing new solutions and his intellectual capabilities.

 

Which writers' or economists' books have influenced you the most?

I enjoy reading a diverse range of professional books but if I had to choose one it would be Alfred Rappaport's Creating Shareholder Value. I read it in 1989 and was very convinced of the themes and the need for shareholder value in corporate life. I appreciate Rappaport because he is an academic - he still teaches at Northwestern University in Illinois - who has put ideas into business practice and influenced business leaders and executives in how they do things.

 

What event, good or bad, has influenced how you approach your present role?

There are three I would like to recount. The first was in the period 1990-91 when I was a global equities portfolio manager and the markets turned from hugely optimistic to hugely pessimistic. It was an experience seeing the effects of that swing and having responsibility for managing money in the midst of it. You have to have both the ups and the downs. I learned that it was necessary to have conservatism and diversification for success in the long term as an investor.

The second involved overseeing money for the students' foundation of the Helsinki School of Economics, where I did my dissertation. It has a traditional culture and the foundation is the second largest of its kind in Finland. It owned a lot of businesses such as restaurants directly and had a stake in Amer. The foundation also had taken a few direct loans and got into difficulties when markets turned negative in the early 1990s. I was made vice-chairman of the board and my first job was to write a strategy paper with some students, the students' union being the decisive body in the foundation. We proposed to change policy from active ownership using debt to investing exclusively in pooled funds. Our reasoning was that only via pooled funds could the foundation achieve clear diversification. Getting the backing of all the students was a psychological exercise but we did it and solved problems like holding too many loans. Later I became the chairman of the foundation.

The third is not really an event but an experience, when I was managing director of Norvestia, a publicly listed investment company, in the late 1990s. I was still only 35 when I started and quite young to be running a public company buying shares in other companies across the Nordic region. What I learned at Norvestia, which was backed by two major Swedish family offices, was the difference between family offices and other institutional investors. The latter were keener to invest aggressively. Looking at the actions of a family office taught me that it is very important to bear capital preservation in mind when markets are volatile.

 

What is your investment philosophy?

First off, there is no such thing as a universal investment philosophy. I think there is a philosophy for each client. Pension fund management is mainly risk management and diversification is the key. You can't perfectly time the markets so you have to hold enough assets that embed the risk premium.

VER is a pension fund and a buffer fund. We resemble the Fonds de Réserves pour les Retraites in France and the National Pensions Reserve Fund in Ireland. Government supervision gives us a long-term perspective.

Having mentioned Rappaport, I am of course a fan of shareholder value metrics. I think that in northern Europe, corporate governance has been well established over the past 20 years and the structures in place work well. It has led to a situation where in some ways activism is limited.

Having said that, activism also relates to the business cycle. When there is a downturn and bad news generally, often this is the time that portfolio managers have to be activists. The problem is that some corporations, and some regions of Europe generally are not able, or rather not used, to adapting under such pressure.

 

What are the most important challenges facing the industry?

The key issue is the ageing challenge. Understanding ageing is understanding what may come in the future. Rising longevity means we will be working longer than we currently imagine. People today may think they are going to retire between 60 and 65 but I think it will be more like 65 to 70; and our children will retire after 70. We haven't really considered the implications of this yet for society but it is also a financing challenge.

 

What is the future for state funds?

The Finnish state fund is aiming to fund 25% of pension liabilities by around 2020. We started later than occupational arrangements here but parliament voted to give us an extra €3bn last year so we are in the build-up phase. There is unanimity in Finland on this policy of partial pension funding. Finnish people are happy with a funded/unfunded split of 30%/70% so I don't see that changing.

I don't think full funding works for all countries - that is, every country looking to save for 100% of pension liabilities. Some experts have argued that the assets needed would be so enormous that this would be an impossible solution.

 

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