United we stand
Judge’s comment: “Elo seems to be well back on track, with direct lending to corporates and a brave hedge fund focus paying off”
Elo Mutual Pension Insurance Company (Elo) began operating at the start of 2014 when the merger between Pension Fennia and Local Tapiola Pension was completed. It is already Finland’s third largest occupational pension company, managing the pension provision arrangements for almost 400,000 employees, nearly 90,000 self-employed workers and approximately 217,000 pensioners. The new pension company’s asset base topped €21bn in June 2015.
In the context of the Finnish pension industry, the merger that spawned Elo – the Finnish word for life – was remarkable in both its scale and conception. The overall return on investments for 2014 was 6.2%, a good achievement given the challenging operating environment. Uncertainty in the investment markets increased substantially, especially in the latter part of the year. Overall growth in the global economy in 2014 fell short of expectations, with the Finnish economy the source of particular concern.
In 2014, Elo’s investment operations focused strongly taking charge of the combined investment assets that the merged group inherited. The returns on Elo’s investments grew favourably and consistently in all asset classes throughout the year. Moreover, in some cases, results were excellent.
The fixed income portfolio was adjusted in early 2014 to bring it into line with Elo’s investment strategy. Key areas of activity during the year included diversifying government bonds to include regions outside the euro-zone and preparing for an increase in interest rates. The return on corporate bonds was again good in 2014, with Europe performing particularly well. This was attributable in part to investors’ growing confidence in the actions of the European Central Bank and to the improved economic circumstances of countries in southern Europe. In the second half of the year, the geopolitical tensions and plunging oil prices added to uncertainty and the returns on higher-risk corporate bonds suffered as a consequence. Overall, Elo’s return on fixed income investments in 2014, at 3.8%, was good in relation to expectations and the interest rate environment.
Elo also adjusted and improved its equity portfolio. An exceptional amount of trading was undertaken during the first quarter of the year. Starting in the spring, investments were increased in the US and emerging markets, while European equity investments were reduced. The year proved to be challenging for active portfolio management based on company selection, and Elo increased the proportion of index investments in its equities portfolio. The best returns among equity investments were from those made in the United States and in emerging Asian economies. The return on equity investments rose to 9.8%.
Hedge funds and private equity also fared well. Elo’s hedge fund focus was on aligning hedge fund strategies and manager styles with its own investment strategy, without neglecting the need for efficient diversification, and the portfolio recorded a 7.2% return. The private equity portfolio expanded with a total of ten fund investments to contribute to a record return of 18.9%, which was helped in part by the weakening of the euro against other major currencies.
Elo’s real estate investments also had a busy year. Procedures and processes were developed and a record number of leases were signed or renewed for commercial and office assets. A considerable number of construction projects were in progress while a lot of real estate investments were sold. The return on the direct portfolio totalled 4.7%.
Thanks to the merger, Elo’s corporate financing resources were significantly reinforced. Elo offers companies both equity and debt financing, with a new debt instrument developed for small and medium-sized companies. The loans returned 3.1%, while investments in unlisted companies returned 26%.
Elo Mutual Pension Insurance Company
Founded in 2014
Hybrid arrangement multi-employer pensions company
- active: 531,500
- retirees: 217,000
Performance as a percentage:
- one year: 6.2
- Third-largest Finnish pension scheme formed from merger of Fennia and Local Tapiola
- Innovative alignment of hedge fund investments
- Strong returns on all asset classes, with private equity leading the way with 18.9%
- Etera Mutual Pension Insurance Company