Finland’s Elo: Larger equity allocations promise new media scrutiny

Elo, Finland’s €34 billion ($38 billion) pension insurance group, is preparing to increase its listed equity allocation by 10-15 per cent to around 65 per cent by 2028, in line with government reforms that require the country’s pension funds to significantly boost their risk allocations. It’s a first leg on a longer journey where equity could be as much as 85 per cent of assets under management at the fund in the future.

Amidst the many impacts of the larger equity allocation, one potential consequence will take Finnish investors into new territory. The likelihood of bigger drawdowns and more volatility in investment returns, coupled with industry requirements that pension funds publish results quarterly will bring a new level of stakeholder scrutiny and exposure to media reporting.

“There will be more volatility in Finnish pension funds’ returns and we will have to see how the media reacts. It is a huge change to Elo’s own asset allocation and the whole Finnish industry. Our risk level will be one of the highest globally,” says Elo’s chief investment officer Jonna Ryhänen in conversation with Top1000funds.com from the fund’s Espoo headquarters.

Strict governance around communication and risk management will be more crucial than ever. But the implications around diversification and portfolio construction are also front of mind, especially given Elo’s allocations to real estate and hedge funds, as well as credit investments in fixed income, which can correlate with equities in a crisis.

Pushing into equities is also coming at a time of heightened investment risk: the conflict in the Middle East remains unresolved and markets have underestimated the risk of inflation, warns Ryhänen.  

Until now, Elo’s portfolio has always hovered around a 60/40 liquid/alternative balance comprising a 50 per cent allocation to equity divided between listed and private equity (around 15 per cent). Fixed income accounts for 20-25 per cent and the remaining allocation to real assets includes a 10 per cent allocation to hedge funds.

Ryhänen says the strategy will remain the same in the enlarged equity allocation. Elo manages and executes the portfolio internally, only using external funds, including ETFs, when the team cannot invest itself in a cost-effective and value-added way – in emerging markets, Elo relies on external funds to achieve the most efficient implementation, for example. Over 80 per cent of the listed equity allocation is in ESG benchmarks and active risk comes via factor exposures and derivatives.

The larger equity allocation means Elo will reduce its allocation to fixed income, but will do so slowly in a three-step process that also uses derivatives to maintain exposure. The hedge fund allocation will fall marginally and will remain one of the most crucial parts of the portfolio as a source of diversifying equity risk. Elo selects managers with market-neutral strategies, spanning volatility, macro and equity long short in an allocation that boasts 10-year returns of around 7 per cent.

She says the (13 per cent) allocation to private equity, part of the wider equity allocation, and (5 per cent) allocation to private credit will remain stable for now. But the team have adopted a deliberately cautious pacing model to ensure they stay within target in a strategy that focuses on European and US buyouts alongside more selective investments in growth and opportunistic strategies and co-investments – a seam she particularly wants to grow in deeper partnerships.

Her cautious approach to private equity is also rooted in the challenging market now characterised by slow exits and longer holding periods which she says has put even greater emphasis on the importance of long-term planning and liquidity management in the allocation. The challenges in private equity have also shone a light on the value of careful manager selection, and Elo’s priority to select managers with a proven ability to navigate markets and cycles, and actively create value.

Even though Elo’s internal team will now manage more of the portfolio themselves, it won’t reduce the importance of manager relationships. In fact, Ryhänen says the increased risk exposure will make manager relationships, and the role of individual managers and their products supporting the portfolio, even more important.

She seeks managers Elo can collaborate with in open and ongoing dialogue focused on its changing and specific needs as the portfolio develops, as well as partners with which to share perspectives on tariffs, market dynamics and strategic topics. “We appreciate managers who can act as sparring partners,” she says. “Relationships must be built on alignment, transparency, trust, and straightforward, honest communication.” 

In one example of portfolio evolution, Elo has recently developed a new tactical and opportunistic seam in anticipation of the larger allocation to equity.

The team has integrated AI based on big data sets to improve risk management analysis, modelling and stress testing. It’s a capability that will directly feed into Elo’s ability to meet solvency requirements alongside the higher allocation to risk, says Ryhänen who explains that regulation requires continuous (often daily) internal tracking of solvency and liquidity positions.

“The tactical allocation is helping us to quantify the risks and identify emerging risk cycles and changes that we can execute on,” she says.

Diversification and liquidity must also be navigated in the context of Elo’ 23 per cent allocation to Finnish assets spread across listed equity, real estate and fixed income. The fund also has a growing allocation to Finnish growth companies via private equity.

Elo’s allocation to Finnish growth companies approaches the €1 billion ($1.1 billion) mark, corresponding to approximately 3 per cent of its investment portfolio.