Varma, one of Finland’s two main pension insurance companies, reported a 5.7% loss on its investments in the first six months of this year, with its relatively high hedge fund weighting hampering its ability to stage a stronger recovery in the second quarter.
In its interim report published last week, Varma reported its investment portfolio shrank to €45.3bn at the end of June from €48.7bn at the end of 2019, with solvency ratio dipping to 123.5% from 130.8%.
The Helsinki-based pension fund said: “In the second quarter of the year, Varma’s investment returns recovered from the fall in share prices seen early in the year, but the gains were more moderate than the general development of the equity markets.”
A few days ago, Ilmarinen – the biggest of the four pension insurers which deliver Finland’s earnings-related pension system – reported a 2% loss on its investment portfolio in the first half, while the smallest of the group, Veritas, has reported a 4.2% H1 investment loss.
Varma CIO Reima Rytsölä told IPE the biggest reason the pension fund’s investments did not rebound as rapidly as equity markets in the second quarter was its hedge fund portfolio. This asset class ended the first half with a 7.9% investment loss, Varma reported.
At 20% of Varma’s portfolio, this allocation is around twice the size of other pension insurers’ hedge fund weightings, according to Rytsölä.
He told IPE that Varma’s hedge fund portfolio was not the kind of market-neutral allocation that hedge fund exposure is normally assumed to be, but rather it is more of an opportunist portfolio with exposure to structured credit and US housing.
As such, Varma’s hedge fund investments were weighed down in particular by the slow recovery of fixed income investments linked to the U.S. mortgage market.
However, Rytsölä said that returns for the market neutral part of the hedge fund portfolio were still positive at the end of the first half, and looking ahead, he said Varma was fairly confident the credit-exposed portion of the hedge fund portfolio would recover too.
Between January and June, real estate was Varma’s strongest-performing asset class generating a 1.6% return, while the return on equity investments was -8.4% and fixed income investments returned -1.3%, according to the interim report.
Commenting on the outlook for financial markets and the economy, Rytsölä said that as a consequence of the central banks’ and governments’ stimulus, the investment market and the real economy had been heading in different directions – which could not continue indefinitely.
“Either the handbrake that’s gripping the real economy due to the coronavirus must be released or the investment markets must make a downward correction of valuation levels,” he said.