Brendan Maton spoke with Staffan Sevón, chief investment officer at Veritas, about his fund's hands-on approach to investing
In these uncertain times, the staff at Veritas, based in Turku, Finland, seem as well off as anyone else in Europe.
True, the Finns loathe to give more money to bail out poorer peers in the euro-zone.
True, the country's flagship company, mobile phone manufacturer, Nokia, is a weak listing.
But, Veritas has owners with a long-term view. This is vital when both politicians and financial market practitioners seem lost as to know what to do.
The majority of Finland's occupational pension provision comes from seven insurers, and the majority rests with the large mutuals, Ilmarinen and Varma.
Veritas is comparatively small, with just €2.1bn in assets under management, saved by 26.000 retirees, 12,000 active individual entrepreneurs and 7,500 employer companies.
But, unlike its competitors, the Turku-based insurer is not owned by its policyholders. Veritas has shareholders. These are typically foundations, such as Åbo Akademi (the Swedish-language University in Turku).
According to Staffan Sevón, chief investment officer at Veritas, these foundations are not concerned with the yearly, or quarterly, return of the portfolio.
"Our owners' primary interest is that Veritas continues with its business in a profitable manner for as long as possible," he says.
Of course, Veritas itself is a financial market practitioner in these uncertain times, and Sevón remembers the dangers of the rather cosy Finnish system in the 1980s, when insurers were part of a nationalistic economy in which pensions money was lent out to Finnish companies on the assumption that this would benefit all. When such a system works efficiently, it serves a purpose but there is a lack of diversification should the economy take a turn for the worse. Sevón also questions whether the loans were made at the right price to the right businesses.
That system has not been abolished. Alongside the dangers, there are many advantages to making local rather than international loans, notably lower intermediates' fees and familiarity. Veritas, however, makes fewer loans to its client companies than most - just 1.7% of its entire portfolio.
There is much greater exposure to corporate bonds generally: they comprise one-quarter of the total portfolio, more than twice the exposure to sovereign government debt. Schroder Investment Management has a mandate for European investment-grade corporate debt. London-based BlueBay covers global high-yield.
But all the direct real estate is Finnish, as is roughly one-third of listed equity. The latter is not a fixed allocation, according to Sevón. One gets the impression that the former is not entirely perfect, but perhaps unlikely to be reformulated in the near future. From a securities manager's perspective, the best adjective for real estate is ‘lumpy'. Sevón does not seem to like all the bargaining that goes on among real estate professionals, which is not as transparent or frequent as listed equities, but appreciates the attraction of stable rental income stream.
As for many other investment areas, he cites a lack of resources as the reason why the hefty real estate portfolio, with its large exposure to rented commercial offices, is unlikely to be altered soon.
The domestic bias in equities is more curious. With a few notable exceptions - the Norwegian Government Pension Fund Global and PensionsDanmark - it is a common trait among Nordic investors. The usual reason is that the greater familiarity with these companies gives an advantage to local pension funds and insurers. Sevón argues this in the case of Nokia, in which his team has been tactically trading as the mobile phone giant's value has halved over the past 12 months.
He backs his team because he believes they have experience in analysing the telecoms sector and in trading.
This brings us to Sevón's philosophy. A programmer by training, he moved to the Helsinki School of Economics (HSE) as a student and lecturer in the mid-1980s.
Sevón retains the wit of an effective educator. At the HSE, he learned enough to know that asset management is "a stupid, inefficient, cyclical industry". Yet he has persisted in both awarding active mandates externally and nurturing active management internally. Perhaps the best example would be at Finland's local government pension scheme, Keva, where he was head of equities until 2006. There Sevón encouraged the five in-house managers to pick their best stocks across Europe while running the majority of the portfolio on a passive basis. In other words, it was a long-short fund with the appeal of low trading costs and in-house decision-making.
Sevón has brought the backing of in-house managers with him to Veritas although, as ever, he is at pains to point out that it is a small fish in the investment world without the muscle to intimidate large providers. "Size limits our bargaining power," he admits. Likewise, the ‘home-made' long-short strategy of Keva has not been reproduced yet in any of the classes run in-house, namely domestic equities, government bonds, unlisted and private equity, because Veritas is not big enough.
He believes that whether external or internal, an active manager has to have some convictions about the world and be given the time to let them come to fruition. "We don't want to pay high fees for closet-indexers." At the same time, he admits to having had to eat ‘humble pie' after initial reservations on the fees charged by some big asset managers. Since appointment, their performance has justified the cost.
Sevón, however, is too pragmatic to boast. He acknowledges that some decisions have been good; others have been bad.
The difficulty for the portfolio manager, and the manager selector, is holding those convictions even when they are subtracting rather than adding value. Here he takes comfort from the stability of the shareholders and the absence of demands for losses to be repaired hastily.
Of course, this philosophy has to be maintained in mandated houses. Every manager promises such consistency but many do not practise it. Examples of commercial managers employed by Veritas include East Capital for East European equities; Aberdeen for Asian equities. Other houses have introduced confidentiality clauses and cannot be named.
To help make such selections, Veritas uses Mercer's Global Investment Manager Database (GIMD) for preliminary research. Sevón describes GIMD as a practical, labour-saving device. He sees a temptation, however, to rely on the data all the way through decision-making to appointment. This would be wrong not least because the asset managers responsible for supplying information are likely to seek to ameliorate their entries where possible.
Areas where Veritas gets closer to the real economy are private and unlisted equities. In the last four years, it has joined a consortium that leases aircraft and railway stock. Another potential diversifier is insurance-linked securities, which equate to reinsurance. Roughly 1% of assets are exposed to this type of product via an alternatives provider.
It is significant that when announcing the news, Sevón emphasises that understanding the underlying proposition dictated the decision; in other words, the investment team had to get comfortable with what they were buying. He abides by the Buffett-inspired wisdom that people should really invest in areas they know. ("Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful").
This confidence is evident in the largest allocated blocks of the Veritas portfolio, notably the underweighting in loans to corporate clients and the conversant overweighting to general corporate debt. Down the road, Sevón sees possible risks in the latter category should interest rates rise. But this is not a problem for the next couple of years; hence the big bet.
"Risk premiums on investment-grade and high-yield are starting to look attractive to a longer-term investor," he says. "Especially if as seems probable, we have a multi-year period of low growth and high volatility before us."
On equities, the bias is towards developing rather than mature economies: "Things look grim for the Western world, but equities are almost as cheap in Asia with less debt and better demographics. Of course, Asian equities will be hit if Europe becomes the new Third World, but we feel Asia won't be hit as hard as its longer-term economic growth is set to be better."
The real estate portfolio is not rising in value, as Sevón sees prices determined indirectly mostly by interest rate levels. He seems resigned to the advantage of the stable cashflows from rent while disregarding the burden of such a large allocation within the overall portfolio.
If the Helsinki-based investment team is prepared to trade, rather than merely buy and own Nokia, it will also do some tactical asset allocation. Deutsche Bank's db X-trackers ETFs are employed for this purpose. As with hedge funds, however, Sevón seems cautious about the efficacy of TAA. Perhaps it is a practice for occasional use only.
So what of the results? Over 15 years, Veritas is the market leader by investment performance in Finland. A former senior figure at Varma recalls that Veritas was the toughest competitor in the league tables. "Veritas as a small company can act quickly in the market and turn around the portfolio fast if they want to," he says.
Evidently there are benefits to being small. The question for Sevón is whether he is happy in such a setting. He worked as a private banker prior to joining Keva and left to head Nordea's operations in Finland. It seems unlikely that Veritas will expand its internal investment operations.
So the clients of the Turku-based insurer may benefit from its owners' stability but investment chiefs have a habit of moving on.