Reeta Paakkinen assesses Ilmarinen’s recent changes to its asset allocation

Ilmarinen, the €30.6bn Finnish mutual pension insurance company, is looking for new infrastructure investments in Finland and overseas to add to its portfolio over the medium term, according to deputy CEO and CIO, Timo Ritakallio. It is also seeking to raise its allocation to direct and indirect infrastructure and to private equity – from 4% to 6% of assets by 2015.

In infrastructure, Ilmarinen is looking for stable cash flows and good protection against inflation risk. The focus is on investments in Finland and the Nordic region, although other projects in the euro-zone may be considered.

“Our current investments in this sector are electricity grids, like the transmission system operator Fingrid and distribution system operator Elenia, and motorways like the E18 from Koskenkylä to Kotka. But, in principle, I would not exclude any potential new sectors,” says Ritakallio.

Ilmarinen’s portofolio returned 3% over the first half of 2013. Ritakallio says this was driven by sound equity performance of 6.3%, with returns on listed equities standing at 5.1%. “US and Japanese listed equities generated particularly high returns, while emerging market equities performed the weakest,” he comments.

The firm’s president and CEO, Harri Sailas, points to recent fears of an end to US stimulus measures and fears of weakening growth in China. “This dragged prices down and led to a hike in interest rates, which negatively affected the return on the portfolio,” he says.

Fixed-income investments returned 1.6%, “a fairly good achievement considering the market situation,” as Ritakallio puts it, and direct property investments 2.4%. Ilmarinen’s corporate credit portfolio continued to decline and demand for premium loans remained very low. “From our perspective, it seems that companies’ investment appetite is currently at a low level,” Ritakallio says.

Ilmarinen’s portfolio is currently invested in fixed income (46.1%), equities (32.3%), and property (11.6%). Private equity, hedge funds and other investments make up the remaining 10%.

Over the first half of 2013, the firm slightly reduced its exposure to domestic equities in favour of European. Finnish equities now make up some 31% of Ilmarinen’s equity portfolio, Nordic and European 33%, emerging market equities 18%, US equities 14% and Japanese 4%.

In September, one of the most famous Finnish listed firms, Nokia was sold to Microsoft. The move was widely analysed and partly also criticised in Finland, where many saw the mobile phone giant as one of the country’s key export companies. Ilmarinen does not comment on individual investments. “What we can say is that after the sale the value of our ownership in Nokia stocks went up by 70%. So the sale brought another €150m to our portfolio,” he says.

Staffan Sevon, who joined Ilmarinen in February from Veritas mutual pension insurance and who now heads the firm’s tactical allocation team, believes the situation in the euro-zone is still challenging on the macro level. But he also believes the euro system will remain intact because the economies of peripheral states are recovering.

“Government savings weaken the local economies, so after structural reforms are done, the only working solution will be to cut down on the debts by raising the growth rate of the economy. The euro will recover little by little,” he says. “Low interest rates are a notable risk for the financial system in a long-term system. But there is no reason to panic as euro-zone equity markets are still very cheap and so return potential is still quite good. US equities, on the other hand, are pricey and it is difficult to get healthy returns as interest rates in the US are rising.”

This year, Ilmarinen has also cut down slightly on its emerging market exposure from 21 to 18%, underweighting Russian and Latin American equities. Ritakallio thinks these markets will be interesting in the medium to long term: “Outside the BRIC countries the so-called N11 countries and China will offer most potential,” he notes.

Hedge funds continue to make a minor part of Ilmarinen’s portfolio at less than 1.5%, although they performed well after the financial crisis and returned 5.3% in the first half of 2013. Sevon notes the importance of thorough due diligence: “The legal side of investing in hedge funds is very demanding and it is impossible for an investor to verify everything independently,” he says. “We use consultants for part of the process, and believe that that’s unavoidable when being in this market. For large investors, hedge funds are a more cost-effective solution than funds of funds.”

Most of Ilmarinen’s hedge fund investments are international funds with the exception of a few domestic managers – most notably Ilmarinen’s substantial, internally managed hedge fund. Sevon notes that internal hedge funds require considerable in-house infrastructure, which most Finnish investors do not yet have. “We, as a major investor, must be sure everything is in place and in order, whether the investment-process is externalised or internalised,” Sevon concludes.