FINLAND - Final year figures from Varma and Tapiola have highlighted the impact of investment strategies, in particular the use of hedge funds, in 2008.

Varma Mutual Pension Insurance Company, the largest pension fund in Finland, revealed in the final 2008 figures that although they also cut their equity exposure from over 39% at the beginning of 2008 to less than 10% by the end of the year, it still reported a loss of 15.2%.

The pension company revealed the value of its assets fell to €24.6bn as "plunging rates and a lack of confidence and liquidity in money markets results in a situation where only fixed-income and direct real estate investments produced positive returns".

Figures showed the best performing asset class as a whole was fixed-income, with a total return of 3.1% as money market instruments produced an 8.1% yield, while loans achieved a 36% return and bonds produced 1.9%.

Real estate also produced an overall return of 2.5%, although this was primarily from direct real estate investments, which achieved 7.5%, as the allocation to real estate investment funds returned -29.8% - the second worst performing investment.

Equities produced al return of -36.6%, although listed equities - which now accounts for just 4.4% of the fund's portfolio - returned -39.1%, while private equity investments, equivalent to 5.3% of the assets, achieved -24.4%.

That said, this was a better result than the 14.4% share allocated to alternative investments, comprising primarily of hedge funds with 0.7% in commodities, which returned -25.6% overall while hedge fund investments contributed -26.3%, the third worst asset class in the portfolio.

Matti Vuoria, president and chief executive of Varma, said: "Economic growth and changes in both the business sector and society are reflected in Varma's operations. The financial crisis also puts a dent in pension investment, without, however, endangering pensions. Massive fluctuations on the investment market emphasise the importance of risk management."

Meanwhile Tapiola Pension, part of the Tapiola Group that also has insurance, asset management and real estate arms, reported an annual investment return of -8.3%, or a loss of €631.4m, to €7.3bn in assets under management.

However the firm, which reported total assets of €7.87bn in December 2007, said the losses were limited by a 10.1% increase in premium income to €1.4bn, while the poor investment returns were offset, according to officials, by the pension fund's decision to reduce equities and not to invest in hedge funds.

Satu Huber, managing director of Tapiola Pension, said: "Tapiola Pension's return on investments in 2008 was by far the best in the industry."

Tapiola Pension stated at the end of 2008, equities accounted for 14.6% of total investments, while more than 70% was allocated in bonds, with the remaining 12.9% invested in property.

Figures showed equities remained the worst performing asset class with a return of -39.2%, while property also produced a negative yield of 1.9%, although all the bond asset classes, comprising loan receivables, bonds and other money market instruments, reported positive returns of 1.4%, 4.6% and 6.4% respectively.

Hanna Hiidenpalo, investment director at Tapiola Pension, stated in the preliminary results published in January, "hedge funds have never played a significant role in Tapiola Pension's investment allocation. The liquidity problems and non-transparent pricing of hedge funds have become particularly evident this year". (See earlier IPE article: Tapiola Pension limits losses through equity cull)

However both pension companies reported steady solvency levels, with Tapiola Pension at 2.9 times the legal requirement, while Varma reported a level 2.8 times the minimum level, following government changes to the solvency regulations designed to stop insurers being forced to sell investments to maintain solvency positions.

Meanwhile Tapiola's realeEstate arm increased turnover to €6.7m, as it reported a 43.2% return on investment and a 82.3% return on equity in 2008, while the market value of its real estate investments increased to €2.17bn.

It stated despite the tough market situation it carried out real estate investments of €360.2m and real estate sales of €266m for its customers, with the largest transaction consisting of the sale of 30 real estate assets owned by Tapiola Group's insurance companies, worth €216m, to a fund managed by the Carlyle Group.

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