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Impact Investing

IPE special report May 2018

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Nordic pension funds lament reporting impact on asset allocation

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  • Finland

Two Nordic pension funds have said regular reporting is impacting their ability to make effective asset allocation decisions designed for improving long-term performance.

Speaking at Fund Forum in Monaco, representatives from Finnish pension fund Ilmarinen and Sweden’s SEB Pension said the nature and necessity of regular market updates led them to account for such measures at the expense of better strategies.

Kerstin Lysholm, portfolio manager at SEB Pension, said that, despite investing for pension schemes with long-term horizons, competitors poaching clients using performance data hampered its ability to attract savers.

“Our competitors run around with peer comparisons that show one-year performance, sometimes three years – and to make it worse, it is updated in the media on a monthly basis,” she said.

“So, even though we believe we can do something very well, and clients have several economic cycles to go through, the likelihood is we do not get client money during these periods of underperformance.”

She said this had led the pension provider to make allocation decisions based on short-term risks.

“Short-term peer comparisons have a huge impact on our asset allocation decisions, and that is in tactical asset allocation and long-term strategies,” she said.

Ilmarinen, the €33bn pensions mutual insurer, which manages around 80% of its assets in-house, said it faced similar issues, despite not being a commercial manager.

“We publish results on quarterly basis, which is much too often for a pension fund,” said Staffan Sevon, head of tactical allocation at the mutual.

“Our solvency depends not only on our liabilities and also on the average solvency in the system. So, even if you have a good return, your liabilities increase because of this, which makes allocation decisions tricky.”

However, he said, internally, when asking questions about performance, the investment management arm said the guiding of expectations was essential.

“If you have investment decisions that seem like a good idea and you have good arguments for them, and you document these arguments, then you have a significantly longer time period – you can guide expectations,” he said.

“Even though it’s internal, it is a marketing issue.”

Sevon also said the fund’s decision to bring the hedge fund strategy in-house was motivated by cost and control issues.

The fund, as part of its 80% of internally managed assets, now only has a 1.3% exposure to external hedge funds.

He said Ilmarinen’s strategy was to run all assets from Finland whenever a local presence was not essential.

Readers' comments (1)

  • The issue goes beyond attracting clients. Statistics hint at a continuous deterioration in the liquidity of long-term capital markets. If government regulation systematically drives long-term investors towards a short-term investment horizon, the end result will be that governments must finance long-term infrastructure projects with short-term money. That result is counterproductive and in nobody's interest.

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