There's no bias like home

Hanna Hiidenpalo
Tapiola Mutual Pension
Insurance Company

• Assets: €9bn
• Members: 380,000
• Solvency position: 3 (three times higher than the solvency capital ratio)
• Defined benefit
• Date established: 1962

We consider Finland as our only domestic market. Other Nordic markets are followed very closely but because their currency is not the euro, they are not regarded as domestic investments.

At the moment, approximately one-third of our total assets are invested in Finland. If we look at all the asset classes combined, investments in the Nordic region will provide a further one-tenth of the total exposure. Of that tenth, about half stems from equity market exposure to the Nordic region.

The proportion of domestic investments is lowest in fixed income - around 25% of our total fixed income investments are Finnish. However, about 90% of our real estate investments are invested directly in the domestic market. On the equity side, slightly less than one third is allocated to Finnish equities. Alternatives are mostly non-domestic.

The key reason for our approach to domestic investments is the access to information we have when it comes to equity investments and the understanding of the business models. We have hardly changed our allocation to domestic bonds, equities and real estate in recent years. Our investment portfolio has always been tilted towards domestic markets and companies for a good reason. We know them best and are able to value them well.

Finnish companies are global players and by investing in Finnish companies investors get a good global presence on various continents and regions, especially in emerging markets: they are present in many Asian markets and countries. According to the latest estimates, only about one-fifth of Finnish listed companies' turnover is generated from the domestic market.

We believe our domestic exposure has positively influenced our returns. In fact, our equity and fixed income investments in the domestic market in particular have outperformed other markets.

Nonetheless, we plan to increase our global exposure, including our allocation to emerging markets. This is partly based on our positive cash flow in the coming years and partly on an operational fact - the size of the domestic market is rather small compared with the rest of the world.

The exposure to the domestic market has always played an important role for Finnish pension companies, and is notably higher than benchmarks, although the amount invested varies.

Christoph Ryter

• Assets: CHF16.4bn (€12.2bn)
• Members: 54,590 active, 26,901 retired - total around 81,500
• Defined benefit
• Funding level: 104% (Dec 2009)
• Date established: 1934

The pension fund has a significant home bias - approximately 72% of the overall portfolio is invested in Swiss assets.

Around 9% of our liquidity asset class is domestic, 9.4% of the 28% invested in equities is in the Swiss market and 27.7% of the overall 44.6% bond exposure is domestic. In the real estate portfolio, the domestic exposure is even more significant, with 25.7% of the total 27.4% property portfolio being invested in Swiss real estate.

The reasons for this strong home bias are historical. In the past and as late as the 1980s, the entire asset allocation consisted of local investments. In the 1990s, international diversification was introduced, first among equities and later also in the fixed income space. Over the last 10 years the trend to diversification extended to alternative asset classes such as real estate, private equity and commodities.

The advantage of home bias is that we know the domestic market well, which is particularly important in illiquid asset classes such as the real estate portfolio. However, the general trend has been to reduce domestic assets, especially Swiss equities, in order to achieve international diversification. Six Swiss companies make up around 60% of the Swiss index. If one of these had a major problem, it would have a big negative impact on our total return.

International diversification has also taken place in the bond portfolio. However, we also decided to remove the currency risks from the foreign bonds and hedge everything against Swiss francs. The expected returns are now similar to those from Swiss bonds, but we are diversified more broadly with regard to the risks. Unless the currency risks increase significantly we do not plan to alter the asset allocation of the bond portfolio. But in the equity portfolio the trend to include more foreign stocks will continue, although we will maintain a home bias. As we have to pay our liabilities in Swiss francs, Swiss assets will always remain important.

In fact, the strong performance of the Swiss franc against other currencies has meant that our Swiss investments - in bonds as well as equities - have outperformed their international counterparts.

Other Swiss pension funds have also been diversifying and reducing their home biases over the years. However, we are probably slightly more conservatively positioned with fewer equities than the average Swiss pension fund.

Howard Pearce
Head of environmental finance and pension fund management
Environment Agency Pension Fund

• Assets: £1.6bn (€1.8bn)
• Participants/members: 21,595
• Funding level: 94% (Mar 2010)
• Final salary DB scheme
• Date established: 1989

As our liabilities are denominated and paid in pounds sterling, more than half of our current asset allocation - 58% - has a domestic exposure. Of that, 25% is invested in UK government and corporate bonds, 23% in UK equities and 10% in alternatives - such as UK property and private equity - and cash. This compares to an overseas allocation of 35% public equity, 5% private equity and 2% bonds.

However, we benchmark all of our domestic equity allocation to the leading UK equity indices and these may include companies that, while they are listed on the London Stock Exchange (LSE), have their main operations abroad and often largely derive their revenues from overseas economies. Comparatively few LSE-listed companies only derive revenues from the UK domestic market.

Our domestic asset allocation has varied by around 5% in recent years; sometimes our exposure to UK assets has been higher, sometimes lower. We have not discussed UK equity markets recently but we are going to review our strategic asset allocation in 2011. It is likely that we will increase our overseas exposure. However this depends again on you how you define UK and overseas; whether by where companies are headquartered, where they are listed, have most of their operational sites or derive most of their revenues. The latter is more relevant to an investor.

Our exposure to domestic assets is probably lower than other UK local government funds- there is, I think, quite a large range reflecting different investment and risk strategies.

Our domestic investments, and overseas, are covered by our ESG policy. We first integrated ESG into our strategy in 2002 but have been doing it more intensively and rigorously since 2005. We implement ESG through our manager selection process and our mandates - it spans across 100% of our fund and all of the asset classes we invest in. We prefer positive and best-in-class stock selection in our fund managers' investments. We also feel that a good way to improve companies' environmental performance is through active engagement with companies, proxy voting on green resolutions and environmental foot-printing. For a shareholder it is easier to engage with UK companies than ones in emerging markets due to differences in corporate governance laws.