The Finnish Cultural Foundation (FCF), which makes grants to groups and individuals working in the arts and sciences, returned 10.5% on its investments over calendar 2014.

At end-2014, equities made up 62% of its €1.3bn portfolio, with 17% in fixed income, 15% in real estate and 6% in alternatives, primarily private equity.

Equities made a 13.6% return, slightly more than the 13% from the benchmark.

Equities are split equally between Finnish and global stocks.

However, a large part of the performance was due to the FCF’s legacy holding in Finnish packaging manufacturer Huhtamäki, which has annual sales of more than €2.2bn.

The holding, given to the FCF by the company’s founder in 1943, makes up 25% of FCF’s total portfolio, and 12% of Huhtamäki’s own share capital.

Over 2014, the shares surged in value by around 40%.

Ralf Sunell, CIO at FCF, said: “The company is a strong defensive stock with globally diversified sales – only 1% of revenues come from Finland. And management has done a good job in streamlining operations.”

FCF has reduced the Huhtamäki holding from 17% to 12% of the company’s share capital over the past two years as part of its portfolio risk management but has still not reinvested the cash.

Sunell said: “The market environment is very challenging, and it is very difficult to price assets.”

As a whole, he said, FCF’s domestic portfolio did well because of good stock selection.

However, the global equity portfolio underperformed because of its underweight position in the US.

Sunell said: “Our managers considered euro-zone equities to be cheaper than US stocks, and this has hurt us a bit. But we are not benchmark investors. Our managers have very concentrated portfolios of 30-50 stocks.”

Unlike pension funds with fixed liabilities, FCF can alter the level of grants it makes.

It tries to spend 3-4% of net asset value, which leads to a long-term target income of 3-4% plus inflation – effectively 5-6%.

“We can’t achieve that target over the long term without equities,” said Sunell.

“But we are a true long-term investor, so volatility is not a risk measure for us, more a default.

“It also means that when markets slump we try to have the firepower to step in – that’s where long-term returns are made.”

And over the short term, he said the euro may continue to weaken but that the global economy could pick up, benefiting local companies.

In its fixed income portfolio, FCF has for a couple of years not held government bonds, apart from some paper issued in emerging markets.

Sunell said: “Govies are a bubble market and very expensive. We have been hunting coupons in corporate bonds and especially so on the high-yield side.

“We have been investing in bonds with short durations. Coupons give us a decent cash flow.”

Corporate bonds are mostly Nordic issues, with some from emerging markets.

High yield comes from Europe and the US.

Sunell said it was a conscious decision not to invest in long-duration government bond markets, and also to run a large cash position, and that has hit performance.

He added: “Bonds, especially government bonds, are a very risky asset class when interest rates start to rise.” 

Meanwhile, FCF’s 2014 return on real estate was 7.1%, mostly from residential holdings, with the funds it invests in buying at good prices and growing value, said Sunell.

The portfolio also includes offices, mainly in Helsinki, which are held directly.

The foundation enjoys certain tax advantages in holding real estate directly in Finland – rental income is tax-free, for example.