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Finnish fund slashes equities in wake of Eurozone crisis

The Finnish Ilmarinen Mutual Pension Insurance Company has slashed its allocation to equities, reporting that the Eurozone crisis hit its performance leading to a 5.2 per cent loss for the third quarter of 2011.

Ilmarinen’s deputy chief executive officer and the head of the fund’s investment team Timo Ritakallio says midway through the year the fund decreased its allocation to listed equities from more than 32 per cent to 24 per cent of its investment portfolio.

“We are now seeing the impacts of the debt crisis on our bottom line. Naturally we are not pleased with the negative return on investments – even though we succeeded in averting even greater losses,” Ritakallio says.

The €27.1 billion ($35.32) fund that provides pension cover for 850,000 people has also allocated more to real estate.

Ilmarinen owns more than 4,500 dwellings and about 100 commercial, office, warehouse properties. A significant number of these properties are located in Helsinki’s metropolitan area.

The insurer’s most recent reported asset allocation was:

  • Fixed-income investments: 44.7 per cent
  • Equities and shares: 38.7 per cent
  • Real estate investments: 11.7 per cent
  • Other: 5 per cent

 

Ritakallio says the fund’s decision to reduce its exposure to equities avoided greater losses in the previous quarter.

“Decreasing the share weight was a major and unavoidable change. Without these measures our investment returns would have been much worse,” Ritakallio says.

Ilmarinen’s equity portfolio lost 19 per cent driven by a sharp fall in the domestic stock market over the European summer and early autumn.

More than 41 per cent of Ilmarinen’s equity holdings are in domestic equities. Its total equity portfolio accounted for approximately €10.5 billion of its total investment assets.

Ritakallio says the local bourse has been hit by international investors withdrawing from geographical peripheries such as Finland during periods of uncertainty.

The fund is still looking to quality, with Ritakillio saying there are still attractive opportunities to gain exposure to strong companies at good prices.

“We have not, however, given up on our Finnish equities and shares, as we continue to have faith in the long-term success of Finnish companies,” he says.

“Quite the contrary, in fact, as during the early autumn Ilmarinen invested in the shares of promising Finnish companies at a very reasonable price.”

Due to the small domestic market, Finnish companies are typically export focused and have been used by Finnish investors as a way of accessing the growth in emerging markets.

Ilmarinen reports a long-term real average return of 3.6 per cent secures pensions, which it says ensures it will not need to raise contributions from employers.

Investments aim to target a long-term expected return of 6 per cent with an expected standard deviation of the return of 8 per cent.

Its recent investment losses also do not affect the solvency provisions of the fund, says Ritakillio.

Ilmarinen reports at the end of September, the solvency capital used to measure the company’s solvency was €4.8 billion, or 21.3 per cent of the technical provisions – twice the minimum amount required under Finnish law.

Ritakallio says that Ilmarinen’s good solvency means the company does not have to make hasty investment decisions, even during weak economic cycles.

“We haven’t, for example, had to sell our Finnish equities and shares at reduced prices,” he says.

Ritakallio says that the pension assets are overall nearly 10 per cent greater than pre-financial crisis levels.

“Pension assets are nearly 10 per cent greater than, for example, before the financial crisis of 2008,” says Ritakallio.