Following its disappointing returns of only 1.8 per cent in 2007, Valtion Eläkerahasto (VER), the €12.1bn Finnish State Pension Fund, is continuing to boost its alternatives but still does not see any need for a major shift in strategy. The fund was severely hit by last year’s turbulent market and only delivered figures of 0.7 per cent from its equity portfolio.

“Our returns last year were not very high, but it also depends on the comparison. We have a very different portfolio construction compared to other funds. If you look beyond the numbers, we have investment restrictions others haven’t. For example, we’re not allowed to invest in direct real estate and also have other restrictions,” says Timo Löyttyniemi, managing director of the fund.

The fund, which has its investment regulations decided by the ministry of finance, is required to have a minimum of 45 per cent invested in bonds and maximum of 45 per cent allocated to equities. It also has a 12 per cent cap on alternatives.

“We are more sensitive than other funds when the market is volatile, since our assets are quite concentrated into just two asset classes: fixed income and equities. As a pension fund manager, I of course want more possibilities to diversify the portfolio, but we try to make the best out of what we have,” says Mr Löyttyniemi.

Its fixed income investments returned 1.8 per cent, but its equity portfolio had a particularly disappointing year and pulled in 0.7 per cent, compared to 2006 returns of 17.4 per cent. Its worst returns came from Japanese equities at -10 per cent. The Japanese portfolio, which also had a negative effect on returns in 2006, was restructured last year to have less exposure to small caps.

“There are several explanations for our low equity returns. We had less invested in the domestic market than our peers – a market that performed very well last year. Instead, we had 12 per cent allocated to the Swedish market and that was hurt by its lousy development,” says Mr Löyttyniemi.

VER is also not hedging its currencies or using derivatives, which Mr Löyttyniemi believes is an additional reason for its hampered performance.

The fund is, however, in the process of doubling its exposure to emerging markets at the expense of European equities although that was already decided upon at the end of 2007.

Despite last year’s low returns, Mr Löyttyniemi is confident about the fund’s current equity strategy and plans no dramatic changes. It has, however, already decreased its equity exposure from 41 per cent to 37 per cent over the last six months in favour of bonds.

“Market turbulence has led us to reduce our allocation to equities, but that is just a temporary measure,” he says.

Its long-term strategy, however, is still to have more than 40 per cent of assets allocated to equities. Its average returns over the last five years have also been more than satisfactory, reaching 8.1 per cent on average.

But, despite its restrictions, the fund has become more and more diversified. In fact, as late as 2000, 100 per cent of its assets were invested in bonds. In November last year, the ministry of finance decided to further increase its limits for alternative asset investment from 10 per cent to 12 per cent and the fund is currently revising its strategy for alternative investments.

“We are looking at how to use our new limit for alternative investments the most efficiently and are evaluating which other asset classes to include. But it is too early to say exactly what we will do,” says Mr Löyttyniemi. The results of its review are expected in May.

In brief

• Valtion Eläkerahasto, the Finnish State Pension Fund, only pulled in returns of 1.8 per cent last year. Its equity portfolio performed particularly badly and returned 0.7 per cent.
  
  
• Despite a disappointing year, the fund does not see any need to change its current strategy and has only temporarily decreased its equity allocation.
  
  
• However, following more generous investment guidelines, the fund is revising its strategy for alternatives and is looking into which other alternative asset classes to include. The ministry of finance, which sets its regulations, is slowly opening up to more diversification and has increased the fund’s limit for alternative assets from 10 per cent to 12 per cent. Including commitments, the fund has 8 per cent dedicated to property, private equity, infrastructure and hedge funds. More than 6 per cent has already been invested.

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