To win an award of such high standing as the IPE Gold Award for Best European Pension Fund requires excellence across the board, not just in one particular aspect of a scheme’s set-up. For the award acknowledges not just past and present performance but the way the scheme view its future and how it sets out its stall to maintain its reputation as an industry leader. Forward planning is essential for a pension scheme. There are several levels of risk to control, layers of governance to consider, and a diverse range of investments to manage. It could be quite easy to slip into reactive mode. Not so Finland’s Ilmarinen whose level of innovation and willingness to break down barriers puts many more established and larger schemes in the shade. This award caps an incredibly successful year at the IPE Awards. The €21.6bn multi-employer scheme won two themed awards - for portfolio construction and commodities - before working its way up the precious metals ladder. First it grabbed silver in the best industry-wide category before the ultimate accolade of gold for best European pension fund.
So what makes Ilmarinen special? Let’s begin with its approach to commodities. Traditionally touted as a volatile asset class that provides little meaningful value for a pension scheme, only now are analysts tentatively claiming commodities have achieved a certain level of stability to sustain their growing reputation. Ilmarinen already knew this: it has held a portfolio of commodities for almost four years now. But Ilmarinen decided last year to dismantle its commodities portfolio because yields were becoming negative. However, there was no intention to abandon the asset class but to see how it could be made to work more positively.
Initially, Ilmarinen took an understandably cautious approach to commodities investing by opting for a passive management style that moved in line with indices. It gradually split its exposure to benefit from different sectors and individual types of commodity. This implied a more active approach so Ilmarinen introduced more alpha-driven vehicles and relative value bets.
So the commodities investment have expanded to make full use of distinct thematic bets on events in the energy sector and a structural contango, which concerns the futures market and describes the situation where and by how much the price of a commodity for future delivery exceeds its spot price.
Mapping a way through the many opportunities and pitfalls commodities present is not easy. Looking pragmatically at how to generate extra income from commodities, Ilmarinen began rolling out its futures investments to work which would return more by being sold early. It used its extensive balance sheet reserves and large numbers of counterparties to finance and identify the best deals.
But commodities remain a small part of Ilmarinen’s investments. Hedge funds are another alternative that came under the spotlight. Ilmarinen has begun to feel the limits of investing in hedge funds through funds of funds. Instead, it has got together with Albourne, a hedge fund consultancy, to explore the benefits of investing in specific types of hedge funds directly. This has now become the mainstay of its hedge fund investment strategy. Commissioning Albourne to check the credentials of each hedge fund manager running the fund that tempts it, Ilmarinen is confident it is taking no more risk in real terms than in its funds of hedge funds investments.
On the subject of risk, Ilmarinen is more than aware that any investment review or change to operations means the risk budgets will evolve as a consequence. Taking all assumptions, investments and timeframes into account, Ilmarinen’s risk management is efficiently spread to all parts of its investments and operations. This enables to generate excess returns from investments far in the future using derivatives and trading strategies. In addition, the long-term nature of its investments and risk controls allow it to factor in and withstand volatility and market shocks. But its approach is not haphazard. It reviews its risk management consistently and employs tracking errors to ensure it can be efficiently and adequately controlled.
Ilmarinen is aware of its status as a major investor in its home market. It holds shares in the majority of companies quoted on the Helsinki Stock Exchange. Recognising the power and flexibility this allows it when investing in Finland, it has decided that a passive approach is restrictive. Increasing the personnel in its domestic equities teams has enabled it to take a more active approach and search the best deals to add maximum value.
The list could go on. There is to be more invested in variance trades. Despite looking at alpha, it is not neglecting beta - excess returns from passively managed assets. It is keen to expand the areas it invests in and cut back on those that are less rewarding. Whichever way you look at it, when you bring it altogether, given the number of areas where Ilmarinen displays leadership and innovation, it could have entered many other categories and walked away with more than ‘just’ four IPE Awards.