Elo, the merged mutual pension insurance company of Finland’s Pension Fennia and Local Tapiola, is set to reduce its number of external managers this year. The cut is a part of a wider post-merger action plan that aims to update Elo’s strategic allocation, strengthen in-house capabilities and enhance the effectiveness of its investment operations.
Pension Fennia and Local Tapiola merged on 1 January 2014. The two firms’ combined investment portfolio is worth €18.6bn – some €8.15bn from Pension Fennia, and a further €10.44bn from Local Tapiola. Today, 40% of Elo’s portfolio is made of fixed income, including credit. Equities make up around 30%, property 15%, hedge funds 10% and alternatives 5%.
Hanna Hiidenpalo, Elo’s chief investment officer, says it is focusing on making its investment operations more effective. At present, more than 60% of the firm’s assets are managed in-house. The company invests in hundreds of funds across asset classes from listed to private equities and real estate. Prior to the launch of Elo, Pension Fennia invested slightly more in external funds than Local Tapiola.
“We are now analysing our portfolio and evaluating all the funds Elo’s assets are invested in and checking how they match with our strategy. Our aim is to clarify the portfolio structure overall – and it is likely we will end up exiting some of the funds in the process,” Hiidenpalo says.
Prior to the establishment of Elo, the investment portfolios of Local Tapiola and Pension Fennia were similar in terms of asset allocation. The only notable difference was Pension Fennia’s slightly larger exposure to property – at 16.5%, while Local Tapiola’s exposure was 13.2%.
Despite their similar asset allocation, the two firms’ investment portfolios displayed different return profiles for 2013 because of the variation in the weightings. Local Tapiola Pension’s investment portfolio returned 5.4%, whereas Pension Fennia’s portfolio returned 9.4%. The first combined results were not available at the time of writing, and were expected to be published in the last week of April.
Hiidenpalo says that the main reason behind a four percentage point difference in annual returns is the divergence on returns in real estate investments, an asset class where Pension Fennia’s investments returned 16.2% last year. “In equity portfolios, the difference can be explained by the fact that Local Tapiola’s equity investment strategy had a strong emphasis on overall pricing and stock selection at reasonable prices,” she says. “Equity investments have had superior returns in the long run in the Finnish pension industry, but last year was challenging in this respect.”
Nearly 30% of Elo’s equities are invested in Finland. The rest of the portfolio is invested in European stock markets (a third), the USA (20%) and emerging markets (20%).
When asked about the potential impact of the Crimean crisis on Elo’s emerging market portfolio, Hiidenpalo notes that the fund’s investments in these markets are minimal.
She also notes that Elo’s primary target in using funds is to complement its own operations and strategy and investment policy. “Funds come into play in specific markets, industries and particularly challenging alternative strategies where our team of some 50 investment specialists do not have notable long-term expertise on. This year, we want to make our operations more effective and focus on our core operations of investing and analysis – to have one guiding principle. This is of utmost importance in a large organisation like Elo,” Hiidenpalo concludes.