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Finland finds no need to diversify

Like the huge ferries towering over Helsinki Harbour Finland’s old fashioned pension system seems to be taking a while to get moving.
The country has made some radical changes as a result of IMF and OECD pressure and the recognition that it is sitting on one the world’s worst demographic time-bombs.
But local and foreign asset managers feel frustrated at the tight accounting requirements which exclude certain asset classes and say further changes are needed before the insurance giants dominating pensions can be forced to open up to competition.
Recent years have seen a gradual shift in pension fund behaviour, most notably increased demand for ALM work and moves towards foreign securities and a core/ satellite approach.
Local fund managers all claim they are in the best position to exploit these trends.
Finnish pension funds made less changes to their portfolios than most during the downturn, partly because of their low equity weightings – around 25%.
Wealth is “very young” in Finland, says Carlo Eräkallio, managing director of Finland’s largest institutional manager Mandatum Asset Management. The country was forced by Russia to pay $300m (E255m) in reparations after the war without the amelioration of Marshall aid, he points out. And Finland was the only country to pay her reparations in full.
Funds set high allocation targets for equities back in the late 1990s and then lowered them during the downturn.
Their low weightings and bear market shrinkage mean many have never reached even the lower targets. Yet despite the upturn funds are in no hurry to rebuild equities, says Eräkallio. “Peoples’ view of the world has changed. They believe equities are more risky.”
Those who do want to move back are still constrained by capital adequacy requirements, he says.
But managers at Evli Investment Management say funds are gradually raising their equity levels.
The main beneficiaries of the equity reductions were bonds and real estate, with property accounting for between 15% and 20% of portfolios.
Funds also retained their adherence to money market instruments, with allocations staying at around 1%.
But funds have taken their time moving into less conventional asset classes.
Finland’s solvency regulations put alternative assets and many emerging market vehicles in the highest of seven risk categories, according to Jussi Louekoski, head of business development for Credit Agricole Asset Management in Finland.
The move, which effectively prohibited investment in these during the downturn, has “seriously limited diversification” in Finland, says Louekoski.
He feels frustrated at the limits on CAAM’s freedom to market its specialist asset classes.
Category seven includes “many very interesting absolute return products which are not considered hedge funds outside Finland. For instance, we have lots of demand here for global fixed income products, but some of the most interesting ones we manage are classified category seven”.
CAAM is in “regular contact with the regulatory bodies” on the issue With its three-man team working out of Credit Agricole Indosuez’s Helsinki office, CAAM has had a presence in the country since the mid-1990s.
“We are the only major institution which has a presence like this in Finland. Foreign companies came here and when times became tough they left,” says Louekoski
There has been some movement towards core/satellite structures, with a few funds committing entire portfolios and others a proportion of their money. But most mandates are still run on traditional lines.
There was much rejoicing in July when the government legislated to allow companies to remove their pension money from insurance firms and set up their own funds.
There were predictions of a flood of business to asset managers because pension funds and foundations outsource far more asset management than insurance giants.
But fund managers say it will be a little while yet before Finland starts looking more liberal.
Despite all the noise about freedom of choice “we have seen very little action in the way of companies forming their own funds”, says Louekoski.
But Eräkallio says some stock-quoted companies are considering the option.
“They have been very critical of the insurance companies’ poor performance and high costs,” he says.
But before insurance firms can be opened up to competition the government also needs to legislate to allow pension fund accounting to be carried out in one place, says Eräkallio.
Following such a change, “insurance companies will become only players in this market. That opens up opportunity for asset managers like us to become big service providers.
“This will be a long and sticky process. But in two years the market may look a little different.”
In the meantime fund managers are making the most of the move towards ALM and core/satellite.
Finland is not a good market for independent consultants, says Eräkallio.
“Finland is a very small country with an even smaller financial district. Everybody knows everybody. It would be very hard for a consultant to operate here. Most customers would know the fund managers better than the consultants did.”
He adds: “We use consultants all the time. We do it for the customer.”
Evli has a quant team which specialises in consulting. The bank has also set up its own staff pension fund, the first one to be established in ten to 15 years. This gives fund managers an excellent on-the-job perspective of running a scheme, says Timo Hovi, a partner at Evli.
He says the company was the first to launch a multi-manager product and has the best open-architecture approach. “We are an independent bank and not tied to any insurer.”
Evli’s E3bn in institutional assets is all client money, which is more than can be said by asset managers owned by insurance firms, he says.
The firm has partnership deals with 17 asset managers, the most recent being an agreement with Axa Rosenberg.
But Mandatum, which runs E17.5bn in mutual and institutional money, counters that being part of pensions insurance giant Sampo, puts it in a better, not a worse, position to create partnerships.
“We are not part of a Nordic or European bank and we don’t have to sell our own products all over the world,” says Eräkallio. “Outside our own core area we can choose the best players.”
He adds: “Our size makes us the number one choice if a foreign asset manager is looking for a counterparty in Finland.”
He adds that Mandatum, which has around ten partnerships, is the only firm with the reporting capability to allow customers to compare sub-managers effectively.
Over at the Oko building, Timo Leskinen, CIO of Opstock Asset Management, says his company’s strength is that it is not wedded to a core/satellite style. It takes a “professional” approach aimed at finding the best solution for the customer.
He says Opstock, which runs around E7.5bn in mutual and institutional money, was running passive portfolios alongside its active offerings before core/satellite was a twinkle in the jargon-happy fund manager’s eye.
The firm has four to six partnerships including such august names as JP Morgan, Schroders, BGI and Credit Agricole.
Despite all the banter between managers, there is one thing all will agree on. Their low fees and the experience they have gained in adapting to clients’ demands will make them fearsome competition for tomorrow’s de-regulated insurance companies.

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