The Nordic Region: Finland Gradual decline
Reeta Paakkinen outlines the local investment trend in Finnish pension investors' portfolios
Investments in domestic assets among Finland's pension funds and mutual pension insurance companies have started to decline in 2010 - coming down from a peak of 43.3% of the average portfolio in December 2009, to 42.1% in the end of June 2010. According to the Finnish Pensions Alliance (TELA), investments in domestic assets by the country's six mutual pension insurance companies experienced a minor drop over the current year, from 27% of the total average portfolio in March to 24.7% in the end of June 2010.
Altogether, TELA's members had invested some €42.1bn in Finnish equities, bonds and property at the end of June. Of this sum, equity holdings by mutual pension insurance companies made €33.1bn. Finnish pension assets totalled approximately €129bn in June 2010.
While some mutual pension companies, like the €25.2bn Ilmarinen, have taken a decision at board level to increase exposure to the home market, others, like the €1.95bn Veritas, have not been given special status to domestic assets in the company's overall asset management strategy.
Staffan Sevon, chief investment officer of Veritas says his fund prioritises long-term return potential of any stock rather than its country of origin. "Our approach is to screen for companies with the best long-term potential whatever the country of origin of the stock. Of course, supporting Finnish companies and the domestic labour market is important. But we are not interested in funding unprofitable companies simply because they are Finnish. Domestic companies certainly play a central role in our strategy, but only when they can be argued to have return potential," Sevon says.
Half of Veritas equity portfolio of €661m is invested in Finland. On the bond side, 15% of the portfolio, totalling €806m, is invested in domestic fixed income. In addition, the firm has invested €353.5m, equivalent to 18.3% of the portfolio, in domestic property. Over the first half of 2010 Veritas' portfolio pulled in a total return of 3.8%.
Many of the insurance companies and pension funds prefer to invest in Finnish companies which operate abroad in order to diversify the portfolio and reduce risk created by substantial exposure to single market.
Ilmarinen's chief investment officer Timo Ritakallio notes that Ilmarinen aims to diversify risk in its domestic equity portfolio by investing in globally active Finnish firms such as Nokia, Metso and Kone. Some 41% of Ilmarinen's equity portfolio - an equivalent of €3.2bn - is invested in Finland while 10% of its fixed income holdings, some €890m, are domestic. The firm also has a domestic property portfolio worth €2.6bn.
"In fact, by investing notably in Helsinki-listed firms that are globally active reduces our risk exposure to Finland. Many of the Finnish firms we invest in have 25% of their business turnover tied to Finland, and 33% in Asia, for instance. We are actively investigating which companies benefit from the development in BRIC countries most and which pay the best dividends," Ritakallio says.
Sevon agrees that Finnish multinationals are a good way to diversify overseas. On the other hand, he points out the limited size of the Finnish stock market. "Diversification to different companies and sectors is quite challenging here because there are not that many sectors to begin with, and the number of companies in each existing sector is very limited," he says. "For example, in the energy sector there are not that many alternatives to invest in the listed universe. The same holds true for utilities. You could say that prudent risk management and sector diversification would force our hand, were we only to invest domestically."
At the Finnish State Pension Fund (VER), domestic holdings make some 14% of the whole portfolio. However, Timo Löyttyniemi, managing director, says fund's risk exposure to Finnish assets is actually much lower. "Although our exposure to Finnish equities stands at 21% formally, the fact that most investment targets are international companies means the risk exposure is much less, at some 5%," he says.
Finnish pension fund portfolios invested in Finland tend to be also relatively settled. At Varma, the biggest mutual pension insurance company in Finland with assets of €30.9bn, domestic investments take a lion's share of the investment portfolio (40%) consisting of listed stocks, property and private equity.
Risto Murto, the firm's chief investment officer notes that Varma is keen to preserve its status as the biggest single private sector investor in Finland.
"We have a stable domestic portfolio, the composition of which we are unlikely to change in any radical way in the near future. Compared to the earlier years we have taken diversification pretty far. Our portfolio structure in the domestic market is now so mature we don't see any major changes taking place next year," Murto says.
Varma's domestic equity portfolio yielded a healthy return of 5.9% over the first six month of 2010. The firm increased its equity exposure by 7% during the first half of this year.
Pension funds, and providers like Varma, prefer to run their domestic portfolios in-house, while investments outside the euro-zone areas are done mainly through funds or index linked products. Veritas has given some 30 mandates to mainly foreign asset managers. "Finnish equities is something we must have in-house expertise in, as we have the benefit of knowing more and getting better informed so that can make use of the added value the asset class offers," Sevon says.