No stopping Nokia
The Finnish group has a long established fund with youthful dynamics. Fennell Betson reports
If corporate Europe ever needs a symbol of rejuvenation and reinvigoration, it need look no further than Finnish group Nokia, battling with Ericsson and Motorola for domination of the cellular telecoms markets globally. Over a half of its 45,000 workforce has joined the group in the past three years and in 1999 it expects to take on a further 12,000 or so employees worldwide.
“The average age of our workforce is 32 years and this may well decrease as we take on more people,” says Arto Sirvio, who runs the investment of the assets of the group’s pension foundation in Finland. This he does from Geneva where one of Nokia’s treasury operations is based.
The foundation forms part of the country’s TEL system, under which 20% of an employee’s defined benefits are funded, with the remaining 80% provided through the social security system. It was established in 1926 and covers 17,000 workers, both blue and white collar.
“While the foundation goes back to the 1920s, the investment history really only starts in the mid-1990s,” Sirvio points out. Up to then, like many other Finnish schemes, the assets were frequently loaned to the employer, but as Nokia became cash rich and the terms on which pension loans could be taken turned less favourable, the loans were paid back. Even though much of the new work force is outside Finland, the pension foundation there is growing fast from employer and employee contributions.
Originally, when Nokia repaid the loans, the money was put straight into government bonds. “But as the duration of our liabilities is very long, we started to do some calculations and it turned out that the optimal recommendation for equities could be very high,” says Sirvio. “We reckoned the proportion could be in the 60 to 80% range, according to asset allocation strategy we made.”
A full asset liability study was not considered necessary at that point given the very positive cash flow position of the fund, which currently has assets of E580m.
“Nonetheless, we did an internal study, breaking down the workforce into various age bands and took the weighted average and a different weighting of equities for these different age groupings, with 100% for the very young groups and zero for those near retirement.”
This in fact, produced a recommended weighting for equities of around 70%. “We wanted to be more cautious than that initially, but we are increasing our equity weightings over the coming years at the expense of the portfolio’s fixed income and real estate components,” he says.
The benchmarks used are the Morgan Stanley World for global equities, the Finnish government bond index and the Salomon Smith Barney Emu government bond index. “And for real estate we use the only Finnish property index available, that for small apartment prices in Helsinki. We regard this as a proxy for a property index, as we reckon both the commercial and private markets should be trending in the same way.”
The aim is to handle as much as can be in-house, so no consultants are currently used. “We have bought a product which enables us to doe the asset allocation modelling and portfolio optimisation, which is based on the traditional mean variance framework of Markowitz.”
The move to equities is being done over time, so the portfolio is not yet near the strategic weighting. “Our intention is to move to the benchmark gradually over the next couple of years. We aim to follow a ‘dollar cost averaging’ principle, and have allocated a definite amount to be invested in equities each month to get a certain average entry rate.”
He adds: “This makes sense in our view, even though we are well away from our strategic benchmark, we are not going to make this adjustment overnight.”
Apart from the foundation’s holding in Nokia, the rest of the Finnish equity portfolio is on an indexed basis to track the FOX index, run in-house by Sirvio.
“Once you take out the Nokia stake, there are only 23 stocks in the index. I do this myself and it poses no difficulties, so we save the 10 to 15 basis points we would have to pass to an external manager.”
The same decision was taken to manage for the fixed interest portfolio internally, both the domestic and foreign issues. “In addition to Geneva, we have two other treasury management centres in Nokia and have the necessary fund management tools and experienced people within the organisation. The short term assets in the group’s books at the end of 1998 came to over FIM15bn (E2.5bn).”
The passive approach applies to the rest of the equity portfolio, which might be best described as being still under construction. “We have accepted a core satellite strategy in building the portfolio, since being indexed can cut down the average management fees payable. So when we have put together our core portfolio on an indexed basis, then we will add our satellites.”
However, the foundation is still some way off that stage. A global indexed manager, whose identity is not disclosed, has been appointed who will run this according to the MSCI world index.
“But we are progressing step-by-step here, as the moment we are investing only in Europe and using MSCI’s wider-based Europe index.”
One of the reasons, he adds, for choosing MSCI was that it allowed a building block approach. In addition, it enabled them to exclude Finland from the index. “We did not want the managers to go and buy more Finnish equities for us.
“Our aim is to look at adding North America, the Far East and other developed markets in the next few years.”
The decision will be taken then as to how the satellite portfolios will operate, but the fund is not in a rush here.
“In our view, our heavy overweighting in Finnish equities creates too much volatility for the portfolio, so we are happy just to achieve the index returns without the act-ive elements of satellite portfolios in ad-dition.”
Adapting to the euro was not a problem as the foundation can adjust its portfolio with the weight of new money coming in and adjust the portfolio by selling assets and reallocating them.
Sirvio says that a study was undertaken whether to base the European portfolio on just the in 11 countries or not.
“Our conclusion was that the broader index gave broad diversification, as the MSCI Europe had around 590 companies in it and goes deeply into mid-caps and even small caps area,” he says.
“We also like the ease of using the indexed approach, as it takes out the need of having to worry about custodianship.” A custodian is not required for the direct Finnish holdings. “If you hire an indexed manager as we did through a fund, all we have to do is to keep track of the value - so we only have one number to follow!”
On the performance side, Nokia participates in the HEX pension fund monitoring service, run by the Helsinki Stock Exchange. Each month, around 20 funds provide details of the value of the assets its holds. “In return we obtain a report, where we can see the returns and risks in our portfolio, compared with other funds. This is done anonymously, so we can look at how we are doing compared with the other funds. From that, we find we are at the higher end of the equities allocation for Finnish foundations.”
It is not often that the pension supervisory authorities win a bouquet from the funds they supervise, but Sirvio has praise for the new supervisory approach brought in last year for solvency requirements, which come fully into effect over the next few years. “It is based on the modern portfolio theory of finance. The system is very good and we were very happy to see it put in place.”
He is also someone who is happy to count and use the blessings of the foundation’s unusual position when contrasted with other pension funds in Europe. “We have the advantages in our situation, with good cash flows, a young work force, so we do not have to realise investments as we build our portfolio, which it so much easier.”
He adds: “We may be an old fund, but we are young in investment terms.”