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Despite a positive 2012, the country’s pension funds are allocating more investments beyond the troubled borders of the euro-zone as they seek to improve returns, says Reeta Paakkinen

The Finnish pensions industry, which manages assets worth €149.6bn, increasingly turned towards markets outside the euro-zone last year.

Analysis by the Finnish Pension Funds Alliance (TELA) shows that investments made by Finnish pension institutions to countries outside the euro-zone increased by €11.9bn over 2012.

Of this figure, €6.3bn came from new investments and the rest was due to improved market valuations. Some 54% of the new capital was invested in fixed income and the remaining 46% in equities. Emerging markets were one of the most significant destinations for these investments, while there was a clear reduction in euro-zone government and government-related bond portfolios.

Last year was also characterised by recovery – the Finnish pensions industry recorded a total return of 9.8%, a substantial improvement after a return of -2.7% in 2011.

Maria Rissanen, analyst at TELA, said the geographical shift in Finnish pension portfolios can be explained by the euro-zone debt crisis and very low interest rates. “These factors have led funds orienting more to markets where risk-return is more optimal. Especially emerging market countries have received new investments from Finnish pension funds as their growing economy provides better return potential for investors,” Rissanen comments.

He expects the challenging situation in the EU to continue in 2013. “There are calls for more support packages and the trend is towards increased regulation, stronger co-operation between member states on economic issues, as well as closer supervision of the banking sector,” she says.

“Some EU member states will also probably try to renegotiate their membership conditions or be exempted from some of the rules, which will create internal pressure within the EU.
However, the situation at financial markets looks much better than a year and a half ago,” Rissanen said.

At the €15.4bn State Pension Fund (VER), 2012 was a period of significant recovery as the fund’s investments yielded a return of 11.3% (-2.3% in 2011). Fixed income investments yielded 8.8% and listed equities 16.8%. VER’s performance improved notably from the negative return of -2.3% in 2011 mainly due to its allocation to bonds, which returned 8.8.%, as well as healthy equity markets.

No major changes took place within VER’s investment portfolio as such, with asset allocation remaining somewhat similar to that of 2011.

But like many other pension institutions, VER did increase its exposure to emerging markets within its bond and equity portfolios. Timo Löyttyniemi, managing director of VER, says the most important new action his fund took last year was increasing exposure to emerging market debt from 10% of the bond portfolio to 15%.

 “We also started making direct investments in emerging markets alongside investing in funds and slightly increased our exposure to hedge funds,” Löyttyniemi says.

“Interest rates have decreased so much that it has, in a way, pushed us to invest increasingly in riskier debt instruments, although these do yield better returns. Uncertainty in the euro-zone reflects at us from time to time as drops in equity prices.”

Ilmarinen, the second largest mutual pension insurance company in Finland, with assets of €29.5bn, has also increased its exposure to emerging markets. In the firm’s equity portfolio, allocation to emerging market stocks grew from 16% to 20% over 2012, while exposure to the US, Japanese and Finnish equities was reduced.

Ilmarinen’s returns also reflect the recovery from the global downturn. Its 2012 return stood at 7.5%, a notable improvement from the -4% in 2011. Of all the investment classes, private equity performed best with a return of 15.4%. Listed equities yielded 9.5%. Return from fixed income investments was also healthy at 6.9%. Direct property investments brought in 5.6%.

Timo Ritakallio, deputy CEO and CIO at Ilmarinen, said that risk appetite among local pension investors is clearly growing as the situation in the euro-zone unfolds.

“The growth rates in various economies vary between downturn to 8% growth,” he says.
“These differences are also reflected in pension investments and the focal points of our investment strategy.

“The growth of risk appetite is apparent in the increasing interest in equities and shares. With a couple of bad decades behind them, I expect 2010 onwards will be a positive decade for equity investors. The global economy can be expected to return to its pre-financial crisis growth path following 2014, but the focal points in investment markets are, however, continuing to shift,” Ritakallio continues.

Over 2012, equity markets developed strongly worldwide. The OMX Helsinki portfolio index increased by 15.5% and MSCI World by 14.7% in euro terms. The gradual recovery from the global economic downturn was reflected in European equities in particular – the MSCI Europe index increased by 18.1%.

In 2013, Ilmarinen plans to increase exposure to property, private equity and infrastructure funds. “We will increase exposure to private equity from 4% to 6% of all assets by 2015 and are also increasing exposure to property, both direct and indirect,” Ritakallio said.

In 2013, VER will evaluate the pros and cons of investing in private credit funds and slightly increase its exposure to private equity. At the end of 2012, the share of other investments in the VER portfolio was 7% and the fund made new investments in 12 new funds.

The highest returns in the other investment portfolio came from private equity funds, which pulled in 7.6%.

“The weakest returns were in real estate fund investments, not sufficient at 0.2%. This was, to some extent, caused by the poor development of some funds prior to the financial crisis. Because of this we will be very careful in choosing funds this year,” Löyttyniemi said.

At Ilmarinen the amount of corporate credit reduced by some 16%, and at the end of the year loan receivables made up 8% of all investment assets. “Finnish companies’ interest towards [pension lending] declined notably as banks restored their normal financing capacity following the financial crisis,” Ritakallio says.

The trend was visible throughout the local mutual pension insurance market, Rissanen added. “The amount of new investment and pension fund loans has clearly returned to more normal levels – some €1bn a year - during 2011 and 2012 compared to years 2008-10 when the amount stood at €2-4bn annually.

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