Ilmarinen Mutual Pension Insurance Company
Deputy CEO and head of investments
• Invested assets: €23bn
• Participants: Around 34,000 corporate sponsors, 513,000 insured and around 270,000 beneficiaries
• Date established: 1961
With 30% of the total portfolio invested in equities, Ilmarinen probably has the highest strategic equity rate among Finnish pension funds. Therefore, it is also likely that we have one of the highest weightings in emerging markets.
Finnish equities make up around 40% of our equity exposure, followed by a 25-30% allocation to European and a 10-15% allocation to US equities. Emerging markets come in at around 13%, which amounts to some 3-4% of the total asset allocation.
We decided to invest in emerging markets about five years ago. The main driver behind this development was that we were searching for more diversification.
Today we are invested across Asia and Latin America but also have exposure to Russia and some other East European countries. However, we have not made any direct investments in these regions - instead we are almost exclusively invested there via mutual funds.
For all our mutual fund investments we make use of external managers. None of the emerging market equity exposure is managed in-house, although generally most of our investments - with the exception of private equity, hedge funds and real estate trusts - are undertaken in-house for efficiency reasons.
We tend to opt for regional managers because of their first-hand knowledge of the local markets. But we apply the same due diligence-driven selection process to all of them. And if we are not satisfied with the performance, we do not shy away from making changes.
In the wake of the financial crisis last autumn we slightly reduced our equity and emerging market equity exposure - our total strategic equity exposure was temporarily reduced to 30% in December 2008 from 40%. However we did not pull out of a particular country or region. We chose to invest in these regions because we believe they will provide us with a higher return although admittedly higher volatility is also part and parcel of investments there.
Nevertheless, we are in it for the long run and plan to gradually increase our allocations to emerging markets, particularly in the regions in which we are already invested.
Blue Sky Group
• Invested assets: €10.6bn
• Fiduciary manager of several Dutch pension funds including that of KLM
• Date established: 1999
We will increase our strategic benchmark weight in emerging markets to 15% of our equity portfolio from 10%. Emerging market governments and companies are relatively under leveraged, which provides them with a cushion during this crisis; and many emerging economies have more solid external balances and better demographics than the developed world.
And while we are cautious on de-coupling, the IMF suggests emerging economies rely for only 20% of their GDP on exports to developed countries against 60% in the early 1990s. Based on several valuation ratios, emerging markets are currently trading at a slight discount or at par compared with developed markets, where perhaps a premium might be justified based on their growth prospects.
According to a study by the consultant Oliver Wyman, the average regional emerging market manager outperformed the average global emerging market manager in five of the seven years to end-2007. The study also shows that a composite fund consisting of above-average regional managers outperforms above-average global managers by 2% points while achieving a decrease in tracking error, assuming one can pick top quartile managers.
We have not decided to go down this route. You could consider a fund of fund approach, but this involves an additional layer of fees. We have also decided not to take this approach as two of our emerging market managers have local offices and expertise in several emerging market countries.
Our managers are selected and monitored by applying consultancy software that screens for skill and identifies performance consistency and the source of the performance. The analysis is used to determine where a manager’s strength lies and, where it claims a top-down approach, whether it indeed adds value in making country bets. The same analysis is used to test whether the outperformance is broad based or concentrated into a few sectors or countries.
We also verify whether managers remain consistent in terms of style. We look into value versus growth, small versus large cap and whether managers play momentum or have a more contrarian approach. We try to achieve a diversified manager mix in terms of qualitative versus quantitative and top down versus bottom up.
We leave decisions on the underlying regions to the managers. In terms of active country positioning the overlap has increased. Many are overweight Asia because of compelling valuations and Brazil is a popular overweight, while the Middle East and Russia have dropped because of a fall in the oil price and problems in their the financial sectors.
Pension Fund of the Hewlett-Packard Companies
Pension fund manager
• Invested assets: CHF850m (€563m)
• Participants: 1,830
• Hybrid - DC plus guaranteed minimum interest rate (cash balance)
• Date established: 1973 (DB until 2000)
Our exposure to equities accounts for 56.9% of our total portfolio, with the remainder being invested in fixed income and real estate. Of our equity allocation, 9.7% is invested in Swiss equities, 16.6% in other European equities, 13.8% in the US, 5.7% in Japan and 5.9% in equities in the Pacific region. Emerging markets make up 5.2% of our equities exposure.
Until last year we had an international equity mandate with our global manager and through that global mandate we already had a small, indirect 1-2% exposure to emerging markets.
However, we were not entirely happy with that mandate as a whole, and following an asset liability study we changed it to a separate emerging markets mandate in April 2008.
But because we liked the emerging markets experience and the performance of the global equities mandate we have continued to invest through the same fund and with the same global manager as before. The only difference is that we now view it as a new separate asset class.
And above all, we hope to achieve a higher return with emerging market equities than we expect to generate with the other equities. In the year to date, and despite the financial crisis, our emerging markets fund investments have more or less reflected the performance of their benchmark, the MSCI Emerging Markets index.
But our external emerging market equities manager is solely responsible for the selection of the countries and regions in which to invest.
While the financial crisis did affect the performance of our equity investments, we have not felt that we had to change our strategic asset allocation, either in emerging markets equities or in any other equities. And the decision to enter emerging markets equities as a new asset class was made more than a year before the start of the crisis. It just took some time to implement the process and to analyse where and how to make the investments.
However, we are not planning to increase their exposure for the moment.”