Advantage still to Finnish players
As the only Nordic country to have so far taken the euro route, Finland has marked itself out from its Scandinavian neighbours. However, the switch to the single currency has by no means meant one-way euroland-bound investment traffic.
While having undergone radical cultural transformation in the past two years, with a noticeable shift towards Anglo-Saxon practice, the Finnish institutional investment scene – much like its idiosyncratic pension system – looks set to retain many domestic characteristics going forward.
Asset managers estimate that total figures for Finnish institutional assets are around FIM350bn (e59bn).
The real catalyst for Finnish investment diversification came with the requirement under Finnish law in 1996 that insurance companies split out pension management operations from the mother company. Company backloaning – accounting for just over 30% of overall pension assets in 1995 – dropped dramatically to 13% by 1998, according to the 1999 TELA regulatory body figures.
Carnegie Asset Management in Helsinki has Finnish assets of around FIM2.5bn, half in pensions money. Lea Österman, Carnegie’s investment manager, explains: “The loans existed because there were not so many investment instruments. Now the companies can get cheaper euro loans and the instruments are there, so asset allocation is the issue.”
The euro effect on the Finnish market, though, has been gradual, with new share portions switching into Euroland for diversification reasons.
Timo Leskinen is portfolio manager at Opstock Investment banking, the asset management arm of Okobank, itself majority-owned by 246 of the country’s co-operative banks with total assets under management of e2.7bn. He says: “Most investors want to stay in the home market, particularly if they are running the portfolios. For both political and cultural reasons, they won’t desert the Finnish market.”
Kirsi Hokka, investment director at Alfred Berg Asset Management (Finland) with assets under management of FIM10bn, of which 80% is institutional assets, with half in pension money, adds: “Looking at the structure of the Finnish stock market, we have lots of good performing telecommunications and hi-tech stocks. These are likely to provide better returns in the long run than the euro market. In the long term, the question of volatility is less important.”
Nevertheless, diversification is pushing institutions to increased outsourcing of euro mandates. TELA statistics for 1999 show equities accounting for 17.3% of portfolios compared to 7% in 1995.
Institutions, especially those of small and medium size, are using foreign managers for international investment, with larger institutions also outsourcing products such as credit risk and small caps – even in Finland, but especially in Europe, according to managers.
Hokka believes regulatory changes are an important factor behind this, together with increased sophistication, the euro and greater competition. “The Finnish market is talking more and more about these issues these days,” he says.
On the bond side, holdings have remained staunchly Finnish, and Leskinen at Opstock sees little reason for any move at present. “Pensions are still related to Finnish earnings and the correlation is better with domestic bonds.”
Hokka at Alfred Berg sees the future lies in euros: “ New bond money, particularly from the larger institutions is going to euro government bonds. The yield from Finnish government bonds is 20–30 basis points greater than German bunds, but if you look at the Finnish market we have a government paying back debt at the moment giving a budget surplus, so the borrowing requirements are not huge.
“ The government is also privatising and using the money to repay debt, so the whole size of the Finnish bond market is not increasing, which is bound to have an effect on liquidity.”
As Markku Kaloniemi, chairman at FIM Asset Management, notes, liquidity is already an issue: “We have recently switched into German bunds for precisely this reason.”
Low bond yields and the gradual shift to equities are also beginning to push currency-hedged credits – outsourced to a variety of managers and risk characteristics – as an option. And the discussion over more flavoured investment products is beginning to catch on in the Finnish market, with particular debate on the issue of core index/satellite-driven approaches.
Opstock’s Leskinen says: “We see a trend here. The more mathematical the approach to investment the more the need for clear building blocks - what is core and what is satellite, instead of balanced portfolios. In the old days you could appoint three balanced managers but it is very difficult to optimise investment like that.”
He adds that both indexation and the sectoral approach are increasing. “The percentage of clients going passive is not very high at the moment but the demand is there for clearer products as the market changes. We think this is moving quite rapidly.”
Kaloniemi at FIM, however, feels being passive could be dangerous for Finnish managers: “We don’t consider it a problem to deviate from the index and make investment decisions. With index funds, how could we compete with the big European players apart from on client servicing? I don’t think there is much point in Finnish managers going down this route and it could be something they later regret.”
Foreign managers have inevitably followed such market potential closely, and as one fund manager notes: “Our clients tell us they have different managers calling to see them every day.” There is consensus, however, that only a few have made a tangible dent in the market.
Matti Rantalainen, director at Opstock says the advantage is still with the home players, but that they are increasingly looking for overseas link-ups. “As a local manager we still have the bulk of institutional assets and we can compete well in the standard products. But in specialist and sector products outside euroland, we need to look for co-operation where we don’t have the resources. We have joint venture global arrangements with Flemings and Schroders.”
Hokka at Alfred Berg says the issue is clear-cut: “With the fastest growth in outsourcing internationally, the international houses will be the winners.”
But Veso Puttonen at fund manager Conventum believes foreign players will have to go the mergers and acquisitions route to really break the market: “There are foreign players selling funds successfully through Finnish groups, but for a serious presence in the market they will have to buy in.”
Growth in the mutual fund market – which has increased by 50% in two years from approximately FIM20bn at the end of 1997 to roughly FIM45bn today – is also encouraging asset managers to create new funds, particularly in pharmaceuticals and technology, and to develop clearer fund profiles as competition hots up.
Puttonen says: “The money is coming both from institutions and individuals, and next summer we expect to see taxation of all bank accounts and this money will perhaps begin moving into funds.”
Kaloniemi at FIM, which among others runs eurobond, technology and Russia funds, says the fund market is developing: “We could see hedge funds and fund of funds investment coming in the future, perhaps not too far away.”
He also believes Finnish managers could be a little more aggressive in their self-promotion: “We Finns are a little understated, and it is about time that we stood up and showed we can go out and compete for European business with our funds. I believe we are quite able to do so.”
And as the market develops, the issue of third-party consultancy looks like it may become an issue. Tomi Yli-Kyyny, managing director at independent consultant Oy Porasto, says he believes pension funds or foundations could become a cheaper solution than pension insurance for companies to arrange their compulsory employee pension arrangements.
“Competition will become more even in the market. At the moment, if a company leaves a foundation to go to an insurer then the foundation has to hand over all the assets to the insurance company, but the same rule does not apply the other way around.
“If the market was open and fair then we would see greater competition and the Anglo-Saxon consultants would more than likely come into the market. We would then have to go into investment consulting or form a partnership with a local investment consulting company.”
He says the market is finally moving towards a global investment approach, but adds that the focus is very much on index funds, with little direct investment abroad yet.
Rantalainen at Opstock believes investment managers can offer the advice that small and medium clients need within the operational environment, adding that the client–manager advisory role will remain a core business factor. “We are going more and more down the advisory route offering value added services because, as a local professional, we have knowledge of the investment environment and regulations and there is a need to differentiate from the competition,” he says.
Change in the market set-up seems inevitable, as Leskinen at Opstock says: “Within five years this market will be very different, the big questions is how.”
Many believe the new Sampo-Leonia venture could herald a beefing up of the group’s asset management capabilities. And the current examination of competition rules between pension funds and pension insurance contracts, alongside various government initiatives to make transparent performance a priority for investors, will continue to stir the market.
As Puttonen at Conventum sums up: “ It is difficult to see who is winning pensions money in Finland and it is almost impossible to shop around for the best deal. While pension funds seem to know what their liabilities are and what assets they have, they don’t know how they are put together. It is so non-transparent. A lot of things have happened in Finland in the past couple of years, but there is still a lot of room for reform.”