The investments of the €1.05bn VR Pension Fund, which covers employees of the Finnish State Railways, yielded a return of almost 10 per cent in 2006 – during what was a challenging year for investors. Hannu Hokka, managing director of the fund, told nrpn that the 9.3 per cent return was the result of VR’s modest and long-term investment strategy, which prioritises diversification and risk management. “Our policy is to avoid overly risky investments. Our portfolio should move the funds steadily like a train,” Mr Hokka says. “We are a pension fund, not a trading desk. We keep our risks limited and focus on long-term asset allocation.”

VR’s alternative portfolio also consists of investment vehicles that have a moderate risk rating. “At present, 12 per cent of our portfolio is invested in hedge funds and 1 per cent is in private equity. Our hedge fund and private equity investments have a modest risk profile.”

Playing it safe

But the lion’s share (42 per cent) of VR’s portfolio is invested in bonds while equities make up approximately 27 per cent of the portfolio. Property investments make up 9 per cent, money markets 9 per cent and alternative asset classes 13 per cent.

In 2006, equities yielded the strongest returns of all asset classes at 22 per cent with property coming in second best at 7.3 per cent. Money markets yielded a return of 3 per cent. Hedge funds also yielded a healthy return of 6 per cent but, overall, alternatives pulled in just 4 per cent. “Our alternatives portfolio yielded a comparatively low return because of the weaker performance of commodities,” says Mr Hokka.

VR’s fixed income exposure pulled in 4.5 per cent, only slightly better than its alternatives investments but better than several of its Finnish peers. The fund’s bond portfolio consists partly of direct government bonds, which were issued in 1995 when the fund was established.

According to Mr Hokka, VR is facing several challenges related to the current market environment. “One of these challenges is related to increasing our equity exposure. A number of Finnish pension insurance companies have taken significant exposure to equities especially after the government reforms came into force in January. But we have consciously decided to increase our exposure very carefully,” he explains.

Breaking down barriers

In January, Finnish pension institutions were able to gradually increase their equity investments from 25 to 35 per cent. However, VR is not planning to radically boost its equity investments over the next 12 months. “We are going to observe the situation as well as the development of the global equity markets,” says Mr Hokka. “When interest rates are as low as they are you have to think long and hard about building a portfolio in the most reasonable and diverse way.”

At present VR’s equity portfolio has a clear emphasis on European stocks, which make up 30 per cent of the fund’s equity holdings. Finnish equities come next with a ratio of 12 per cent. VR also invests in US stocks (10 per cent), Asian equities (8 per cent) and emerging market stocks (12 per cent). In early 2007 the fund increased its allocation to emerging markets. “We increased our exposure in order to get additional value in our portfolio and improve our returns,” says Mr Hokka. “Currently, our emerging market portfolio includes funds investing in Eastern Europe, Latin America and Asia. We have also invested in global index loans,” he adds.

Over the next few years VR plans to revamp its alternatives holdings. Although the fund has invested only 1 per cent of its portfolio in private equity, it has made a commitment to allocate 6 per cent to the asset class. “In fact, over the next two years we aim to have an exposure of 4 to 5 per cent to private equity,” says Mr Hokka. Last year, VR’s 1 per cent allocation to the asset class pulled in 7 per cent. The fund is also in the process of reorganising its property portfolio. At present, it has 7 per cent invested in direct property and 2 per cent in property funds.

Stepping into SRI

In September VR made its first SRI investment by allocating ?15m to Al Gore’s Generation Investment and is planning to continue the trend this autumn. “We decided that the time was right to go for a pure SRI investment vehicle,” says Mr Hokka.

Approximately 75 per cent of VR’s portfolio is outsourced to external managers. In mid-2006 the fund cut down on its number of managers from 20 to five. “Our plan now is to observe how the five remaining managers run our portfolio. We will see the real impact the reduced number of managers has had on our investments but only after letting the situation develop for a while more.”

VR does not use external consultants but has partnered with firms when preparing risk management reports. In late August, Pasi Strömberg became VR’s chief investment officer. Mr Strömberg joined the fund from the Insurance Supervisory Authority where he was head of its investment unit. “The growth of our assets, which in recent years has been notable, means that our responsibilities have increased and created a need for a second person to focus on running the fund,” Mr Hokka says.

VR PENSION FUND

Location: Helsinki, Finland

Assets: €1.05bn

Members: 12,500

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