Finns cross boundaries
This has been the year when asset liability management reasserted itself in Finland in the light of difficult markets and the need to meet tight solvency regulations.
While the investment trends that became apparent at the time of the euro introduction are still evident, the focus has clearly shifted to issues of risk management and budgeting.
On the fixed income side, the country’s pension foundations are still moving into Europe and seeking diversification through different sectors without exposing themselves to foreign currency risk.
Corporate bond investment, both in Europe and the US, is also figuring in the strategic outlook in a bid to boost returns.
In equities, domestic allocations continue to fall as money is directed into European and global mandates. These allocation shifts have been gradual, however. Domestic equity and fixed income markets continue to be the bedrock of institutional portfolios.
As does real estate, which still represents between 15%-20% of institutional assets and cash/money market instruments, which can garner upwards of 15% of a fund’s exposure.
The noise in alternative assets in 2001 may have been just that – noise, but private equity has appeared on the radar, with managers noting that some institutions are placing 3-4% in specialist venture vehicles. Hedge funds, nonetheless, have yet to make a real impression on the market, due to both the difficult markets and solvency and accounting constraints.
The signs are though that they could pick up interest going forward.
The annual Finnish institutional investment report by Scandinavian Financial Research (SFR), released in November, records that by the end of 2004, mutual funds, which account for 14% of Finnish pension foundation investment, will show significant rises in corporate bond and high yield. The same will apply to equity funds in Europe, the US and Asia.
The biggest rises though are predicted for index and hedge funds, which are expected to rise by around 30% and 40% respectively.
Nonetheless, it is strategic allocation/risk management issues that are stretching the foundations at present.
As Timo Leskinen at Opstock Asset Management, which manages around e5.5bn of Finnish institutional money, notes: “One of the biggest challenges for pension foundations at the moment is matching their assets with their liabilities under the current regulatory constraints, where the horizon is relatively short in terms of solvency margin. As a result there has been quite a lot of restructuring of mandates with a view to their cost effectiveness and focus. We have been deeply involved in this process.”
That it is the asset managers providing the bulk of this value-added advisory work remains an important factor in Finland. In a market where asset management fees have traditionally been tight, all the players in the market are pushing their advisory capabilities as the area where they can add value and, no doubt, generate fees. The consultants have yet to really break into this arena.
One reason is almost certainly the diminutive size of the country’s corporate pension foundations. The bulk of Finland’s pensions money is still run through the giant TEL insurance companies such as Varma Sampo and Ilmarinen, which control their assets in-house.
Therefore, asset managers are left to fight it out for the foundation assets. Bundling up services, including custody, remains the most logical marketing approach.
According to SFR just over 50% of the assets of pension foundations are currently managed in-house, with 28% run through segregated mandates, 14% through mutual funds and 4% using external consultation.
Expectations are that by 2004, self-managed funds will decrease, while all other outsourcing categories will see net gains.
Mauri Lavikainen, managing director at Carnegie Fund Management, sees no conflict with the adviser/manager role: “We have developed a pensions consulting business using internal expertise to consult with pension funds on risk and asset liability issues and find out what the needs of the fund are. We think it is perfectly OK to be an objective consultant and an asset manager at the same time.”
To this end, two years ago, Evli Asset Management set up its own pension fund covering all its employees – one of the first new pension funds to be set up for some time in Finland.
Timo Hovi, head of institutional sales at Evli, explains: “The expertise we have brought together for the pension fund can be transferred into external consultancy services as well.”
Timo Penttilä, head of quantitative research: “As a former consultant, I was hired to carry out activities such as ALM, manager searches, screening and strategic planning for Evli – the things that traditional consultants would do.
Penttilä believes that there is some interest today in external consulting: “A couple of years ago it was almost nil, but it’s coming up. I see a number of different groups doing the consulting work for pension funds though: service providers, actuaries, traditional investment consultants for manager searches, but I would also expect a number of asset managers to still do this independent work.
“One major issue is that you have to have local knowledge, particularly of the regulatory environment. It’s difficult for an international consultant to pick up this knowledge in a short time and there has to be some other business to support the consulting.”
According to the SFR survey, 13% of pension foundations say they intend to use a consultant for asset manager selection, 25% for mutual fund selection, 19% for investment panning and 38% for consolidation of reporting.
Away from the advisory work, the concept of investment management in Finland has also undergone a notable evolution. Today it is rare to hear a house in Helsinki that does not declare itself to be a ‘multi-manager’ - acting as intermediaries for a range of external mutual funds to complement their own domestic and European capabilities.
The open architecture structure has seen a number of different relationship tie-ups recently. Evli’s Hovi, says the firm has ‘multi-manager’ relationships with 12 partnership houses, including State Street and a fund of hedge fund range through RMF.
“Pension funds are trying to avoid the number of counter-parties they deal with and the multi-manager structure is the solution to this.”
At Opstock, Heskinen explains that the house manages Finnish and euro equities, European government and investment grade bonds itself.
“For everything else we need, we have establised a multi-access system at the product level which we can service to local customers with portfolio value-added services and knowledge. We have provider relationships with players such as JP Morgan Fleming, BGI, Schroders and Credit Agricole.”
Foreign managers then are tending to sell their products through the local investment banks. In Finland, a knowledge of local culture, regulation and market peers still rules when courting institutions.
Those non-Finnish players doing business in the market have not travelled far and their Scandinavian roots have served them well.
Gyllenberg AM has been part of Sweden’s SEB group for four years. Gyllenberg’s e5bn under management in Finland comprises 60% institutional money, with 50% of this portion run through mutual funds.
Martti Saikku, head of institutional sales, explains: “Already several years ago we decided on a multi-manager approach because we wanted to focus on our own expertise through SEB. “We outsourced mutual fund mandates to specialist houses like Muzinich & Co for high yield and Wellington for investment grade bonds.
“Where I feel we particularly add value in this chain is our screening process for mutual funds, both on a quantitative and qualitative basis.”
Lavikainen at Carnegie, which has been in the Finnish market since 1995 believes the firm is now a serious challenger in the market having specialised in the pensions area. “We started the multi-manager service about two to three years ago and now we have different partners including Merrill Lynch, Invesco and Barings.
“A selling point for us, I believe, is the experience of the team we have here – many with over 20 years experience of managing pension funds through all types of markets .”
For the 10 to 12 serious players in the market competition is tough. Differentiation through advisory services, investment styles and fund relationships characterise the quest for institutional money.
Few managers, however, are worried that the intense competition levels will lead to the disappearance of houses in the field. All cite certain institutional growth and a potentially radical change in Finnish regulation that could mean the very opposite.
The mooted liberalisation of the market between the TEL companies and the pension foundations is under government discussion. This could allow corporations to move money away from the TEL giants in the event of poor performance or servicing. At the moment there are restrictions on the capital that they can withdraw in such a scenario.
Few know what the outcome will be of that legislation, but it seems that companies will be able to transfer a portion of the risk capital to a new pension plan if the TEL companies have been negligent in the management of their assets. “This would change the market quite a bit. If there is going to be new corporate pension foundations then more money would flow into the market and there would be true competition for mandates. My estimate is that these foundations would outsource actuarial services and most of the asset management and administration on the lines of the Anglo Saxon pensions model. As a result, for different types of consultants and asset managers there would be more opportunities in Finland,” says Evli’s Hovi.