Finnish institutional investors are increasingly turning to international shares and bonds as the domestic market suffers from growing volatility. For the first three years of serious investment by pension funds, the Finnish technology market was expanding out of all recognition. Now that the peak has been reached the downward ride has not been very comfortable.
This has created new problems for investors as they attempt to figure out how to reflect the current situation. Many predicted the end of the boom and have made contingency plans.
In Finland the Euro-zone has been regarded for some time as the domestic market in terms of consolidating the new currency and adapting to the future. But some see Europe as too conservative, and as a result, despite its stability, a growing proportion of assets have been invested in other markets, mainly in North America and Japan. In Europe, Finnish investment is mainly in bonds, while outside Europe investors find shares more appealing.
Paavo Pitkänen, president and CEO at Varma-Sampo, Finland’s largest pension insurance company with e16bn in assets, working independently within the Sampo Group, sees the history of Finnish institutional investment as a three-stage development. “The Finnish market used to be quite closed and company premium back loans were a primary source of income for funds, until the economic recession of the early 1990s after which the markets opened,” Pitkänen says. “By the late 1990s investing in securities had become common practice for most pension funds.” Finnish pension insurance companies provide pension insurance for private sector employees under the TEL (Employees’ Pension) Act and the YEL (Self-Employed Persons’ Pension) Act .
Sampo-Leonia Fund Management, which last month changed from Leonia Fund Management, has started co-operation in Europe and the US with undisclosed financial institutions. Part of the Leonia Group, it is one of the largest institutional asset managers in Finland, based in Helsinki with FIM27bn (d4.5bn) in assets under management.
Susanna Miekk-oja, managing director of Sampo-Leonia Fund Management, says: “When we were planning whether to have a partner in London or Germany we chose Germany. Leonia sees Europe as an interesting and growing market, there is strength in it. It is not insignificant that the European Central Bank (ECB) is based in Germany.”
Further institutional moves are likely after the merger of Leonia Corporate Bank into Leonia Bank and the coinciding merger of parent Leonia and Sampo Insurance on 31 December 2000 to form the largest Finnish financial services group. Sampo Insurance, together with Varma-Sampo, the mutual pension insurance company, are the largest companies that form the Sampo-Varma Group.
Asset managers have different opinions on global investment. Some want a regional focus while others find sector-focused investing more appealing. Others still draw up matrices to combine the two approaches.
Jarkko Niemi, managing director at Helsinki-based Seligson & Co Fund Management, which has e313.4m in assets under management, sees the movement to new markets, such as Russia and the Far East, as an important step. As these markets are yet to stabilise, he believes that funds operating in these areas should be very active. This has been one of the company’s main criteria in choosing local investment experts as partners.
Tero Viherto, director at Evli Asset Management with FIM17bn in assets under management, sees Europe as the limit of the company’s expertise. However, there are certain technology sectors, such as telecommunications and network security, in which Viherto believes Evli has global knowledge. Evli wants to specialise in technology: “There are two trains really, the bulk train and the express train, we are on the latter, and that’s where we have expertise,” says Viherto. “If a small Finnish technology company expands to the global market, its value changes totally.”
Institutional asset management has transformed in the last three years as new funds and fund managers emerge. Around 60% of Finnish clients investing through funds are institutions, a figure that is likely to fall if retail investment speeds up, as it has in neighbouring Sweden. “Private investment in Finland is way behind,” says Miekk-oja of Leonia. “Some two-thirds of adults and 55% of children in Sweden have money in funds, while the figure is around 10% for Finnish families.”
Finnish asset management companies owned by retail banks can access a chain of branches throughout the country, often meaning they have a greater proportion of retail investors. But most of Leonia Fund Management’s customers remain institutional. There are, of course, smaller asset management companies that specialise in retail investors; having a large institution breathing down their necks might be a burden.
Share investment by institutions rose dramatically until 1998/1999 after which it has levelled to the current 25-30% of all investments, according to the Federation of Employment Pensions Institutions. In the last couple of years investment in bonds has risen both quantitatively and as a proportion of all investments.
In 1999, out of the total money invested abroad by the pension insurance companies, 62.6% (FIM23.6bn) was in bonds, while 33.2% (FIM12.5bn) was invested in shares. By the third quarter of 2000, the figures had changed somewhat: 75.9% (FIM71.1bn) was in foreign bonds while 22.9% (FIM21.5bn) had been allocated internationally in equities. The figures are even more pronounced within the Euro-zone, where close to 90% of Finnish investment is in bonds. Some 37% of current investments by pension insurance companies are in foreign bonds and shares.
The trend seems to be in the same direction in private pension foundations, which either provide TEL pensions or top-up private pensions for companies. Folke Bergström, general secretary at the Finnish Pension Foundation Association, believes that: “Investment in shares has levelled and the shift abroad has been gradual, though it is hard to say how widely this has happened in the foundations.” Some of the smaller pension foundations still use company back loaning as their main investment target.
One of the restricting factors in investment is legal. Most pension-reserve assets are independently invested by the pension institutions, yet the level of solvency of some of the foundations is not high enough to meet the legal requirement to allow investment in equity.
LEL is a Helsinki-based public authority pension fund for short-term contract employees, which has around 17% (FIM 3.65bn) of its assets currently in shares. Operating under the LEL (Temporary Employees’ Pensions) Act, it has an indifferent attitude towards investing in equity, as do most large institutions in Finland, according to Hannu Tarkkonen, investment director at the fund. A third of its shares are invested in the Nordic area and a quarter in Europe, with the rest allocated in foreign shares. It is a balance that Tarkkonen believes is a good basis for a Finnish pension fund. According to Tarkkonen, the difference in investment strategy between funds and foundations is that: “Top-up pension_foundations can take a higher risk if the contributor agrees to pay a higher contribution, which is a possibility that LEL does not have.”
Wider asset allocation in Finland, partly due to the narrow focus of the domestic market, is among the top
priorities of pension institutions. To guarantee a good profit from the assets, the institutions have to carefully consider how domestic they have to be in their investment strategies.