The CIO of Finland’s Etera has defended the pensions mutual’s 2013 results that saw investments return just 0.3%, arguing that inaccurate predictions of its tracking error left it focusing on volatility control.

Jari Puhakka, who joined the €5.5bn mutual in 2010, pointed out that, despite its low returns, Etera’s risk-balancing approach had been successful in keeping its portfolio volatility around 2% last year.

He told IPE that, where his investment team in 2011-12 had been able to benefit from greater market volatility to complete tactical deals in emerging market debt, attempts to replicate such deals last year incurred losses.

Etera subsequently began reassessing its investment strategy, he added, with changes being implemented from the autumn.

“The major problem was that our realised tracking error to the [Finnish pension] system was several times higher than forecast,” he said.

“This meant we had to focus more on beta control and analysis to make sure our return did not fluctuate too much compared with the system.

“We still want to have a very different allocation and much higher Sharpe ratio than on average, however.”

Explaining how the mutual would seek to improve its returns from risk premia, he said: “We will concentrate more on optimising our beta allocation, and we are more risk controlled in [pursuing] alpha seeking strategies.”

The mutual’s solvency ratio declined markedly over the course of 2013, falling 6.1 percentage points to 15.2% in 12 months.

This was a result of the way in which solvency ratios are calculated, last year requiring a nearly 5% return from participants to keep pace with liabilities.

The mutual has historically also pursued a lower exposure to equities than its rivals. As of September, it had invested 20% of its portfolio in listed stocks.

At the same time, Ilmarinen and LocalTapiola invested 30% in listed equity, and Pension Fennia 25% – all of which enjoyed stronger 2013 returns aided by stocks.

Etera’s declining solvency ratio has not gone unnoticed, last year leading to reports in Finnish newspapers that a merger with mutual Ilmarinen was in the cards.

However, the company’s managing director Hannu Tarkkonen at the time denied it was considering any plan to join with the €32bn rival.