Finland's Ilmarinen has left no stone unturned in its quest to return optimum benefit for its members with minimal risk. The €21.6bn multi-manager scheme is a leader in meeting the challenge of incorporating 21st century investment processes, such as generating alpha and beta, as well as diversifying into increasingly popular asset classes like commodities and emerging markets. Founded in 1961, Ilmarinen is a mutual pensions insurance company that now has 357,000 active members and 243,775 retirees. It is a hybrid defined benefit and defined contribution structure whose innovative and proactive approach to investment management places it in the elite of Europe's pensions schemes. Its willingness to explore fresh ideas and consider new risks is matched by few others.
Diversification of investments is important to pension schemes. It allows them to balance their overall risk budget. It means investments doing badly can be supported by those doing well. It opens up the full spectrum of investment classes and styles - and therefore return potential.
But diversifying well is an art. You need to understand the nature of the markets you invest in and the economic cycle that often drives them. Ilmarinen seems to have the art of diversifying down to a very fine point. It is certainly a key source of its strength and success.
Until last year, Ilmarinen concentrated on diversifying according to geography and sector. Now that it feels it has mastered this basic level of diversification, it has set its sights on diversifying within those areas. So emerging markets and the potential they offer from country to country and industry to industry have come to the fore. In Ilmarinen's view, the investment world is constantly expanding and there are always fresh opportunities to exploit.
Style-wise it is evaluating the merits of the so-called alpha generating products to see how it can actively manage its assets more efficiently to produce excess returns. This is another form of diversification, as it adds a new dimension to the way it makes its money work.
Ilmarinen also believes risk budgets can and should be diversified. It believes its carefully designed and implemented risk management process further enhances its advantage over its peers. Spreading the risk effectively over the entire portfolio and time horizons means it can identify where it excess returns are likely to crop up and allows it to make full use of derivatives and trading strategies - essential ingredients in today's liability matching obsessed pensions world.
Another major step forward is Ilmarinen's approach to hedge funds. It is also diversifying its investments here to move towards a hedge fund strategy based on direct investments in single manager funds instead of the traditional fund of funds approach. This is new ground for most pension schemes, but Ilmarinen is joining the likes of Dutch giant ABP, Europe's largest pension scheme, in exploring the merits of single manager investments. It's almost a question of out with old in with the new. Funds of funds are considered a safe option, and while there remains questionmarks over the level of risk single hedge funds carry, Ilmarinen is confident that, with the right due diligence analysis, it can sort the good from the bad. Aware of its limitations in this area, it has taken on a specialist hedge fund adviser to help it with the transition and set up appropriate monitoring.
Ilmarinen is also dusting down a few ‘hidden' investments and seeing if there is any benefit in increasing their allocations to them. In particular, it is reviewing its interest in so-called volatility and variance trades. These are a way of quoting options and futures contracts whereby bids and asks are quoted according to their implied volatilities rather than prices. A closer look at these has shown Ilmarinen that they would value to the portfolios in the shape of positive returns. Indeed, they are uncorrelated to the scheme's other investment classes.
It has also reshaped its impressive commodities portfolio and is exploring active management and extensive derivatives investments to enhance it yet further.
But it's not all about alternatives and fashionable investments. The good old equity portfolios, still the backbone of its investment strategy, have also been reviewed. As a consequence, Ilmarinen has increased its domestic equities management teams. This is because it holds shares in practically all the companies listed on the Helsinki stock exchange and it feels it is not exploiting that status to the full. The enlarged team can now take a more active approach to the way it manages Ilmarinen's Finnish stocks.