The investment chief of one of Finland’s four pension insurance companies, Veritas, has warned that since the pandemic started, investors have effectively lost the benefits of asset class diversification within their portfolios and must now be willing to change their core asset allocation beliefs.
Speaking at the virtual IPE Nordic Forum event this morning, Kari Vatanen, chief investment officer of Veritas, said: ”There are no all-weather portfolios in this kind of environment anymore when rates are rising, which means that defensive strategies might not work or defensive assets might not work.”
In his keynote address on asset allocation in the post-COVID-19 era, he went on to say that risky assets were quite volatile in this environment.
“The reason for that is we have seen a huge market manipulation by central banks, and when they are reducing the manipulation effect, that will cause volatility in markets,” he said.
Alternative risk premia and quantitative strategies could be used as a tool in portfolio construction, and could be extra sources of carry, as well as sources of diversification and hedging, though, Vatanen said.
“Like in any kind of market environment, I think what is needed once again is to be ready to challenge your investment beliefs,” the CIO said.
Because markets had been manipulated by central banks, market behaviour could change quite rapidly when the banks started to decrease their liquidity provision to the markets, he warned.
Asked how this new environment had affected Veritas’s asset allocation in practice, Vatanen outlined some action that had been taken, and said he was mostly worried about the interest-rate sensitivity – which was now not as high in the fixed-income allocation as it was in other parts of the portfolio.
“If I start with the fixed-income portfolio, we have reduced a lot of our interest rate sensitivity, meaning we’ve decreased duration and moved towards illiquidity and more complex structures that provide yield without being interest-rate sensitive towards developed markets like the US treasuries,” he said.
“But my biggest worry is interest-rate sensitivity in our equity portfolio or in our alternatives,” he said.
“If rates rose rapidly this year, maybe also next year, how much would it affect the valuations in our equities or real estate? Though maybe these [the real estate investments] are local and direct, so maybe there’s not that much risk there. But also in our other alternative illiquid alternatives there might be risks that rising rates will cause lower valuations,” he said.
Veritas had total investments of €4.2bn at the end of September, according to its interim report.