Finnish pension insurer Varma saw assets under management reach above €60bn for the first time in its history as investments returned 3.6% for the first quarter of 2024.
Equities (5.3%) and particularly US equities boosted performance during the period, returning 11.4%. Risto Murto, chief executive officer, said equities already started performing favourably five months ago at the end of last year.
He also said that equities have performed well over the last few years despite risk factors in the last three-plus years whether it was the hit to the European economy as a result of the war in Ukraine or inflation and rising interest-rates. He again pointed to the US as the positive driver as well as private equities, equities and hedge funds.
The alternatives such as hedge funds (3.9%) and private equities (3%) were also driving performance in Q1 as was fixed income (1%). Real estate continued to underperform (-0.8%).
Murto said Varma’s property portfolio is eternally evaluated twice a year with the next one at the end of June, which will get a fuller picture of the valuation development of its direct real estate portfolio, mainly invested in Finland.
Markus Aho, chief investment officer, said the equity weight in its portfolio has increased (55%) and the positive returns in the asset class have further boosted Varma’s solvency position. The solvency ratio was 132.2% at the end of March, compared to 130.4% on 1 January, with solvency capital 1.6 times the solvecy limit giving Varma solency capital of €15.1bn.
The positive news was hampered by domestic woes with the high interest rates hampering growth and consumer appetite. Murto said the underperformance of Finnish stocks is beginning to become significant which ‘hurts a pension investor which for decades has great experiences and returns from Finnish investments’. Currently some 19%, or €12bn, of Varma’s assets are invested domestically.
Finnish stocks have performed well in the past, justifying investments in domestic companies which are well run and could compete internationally, he said. Looking at the past five years the situation is very different, Murto said. He futher added that the challenge or indeed the problem is that if this continues, its allocation to Finnish investments will wither away.
He noted that unfortunately there has been no change for the better in the Helsinki stock exchange during Q1 but as interest rates are expected to fall within the euro zone this would also eventually bring relief to the Finnish economy, bringing it out of recession.
The problems the Finnish industry faces are not unique as competitiveness and subsidies are a Europe-wide dilemma. Murto pointed to the long-discussed European Capital Market Union. Despite the slow progress it remains on the agenda. He added: ”The European Union needs more investments because we are losing to the US.”
Finland has so far been positive to this type of union, he said, but noted that its western neighbour Sweden is increasingly questioning the viability and usefulness of such a union and perhaps it would be wise of Finland to pay attention to why Sweden is now more cautious.
He said that the crux of the matter is that there is a lack of capital in central Europe.
“That might sound absurd but the fact is that if you look at where investors into Finnish equities come from and where capital flows come from, where are the largest pension assets, i.e. the most natural equity risk carriers? This capital comes from countries such as the UK, the Netherlands and the Nordics,” he said, adding that pension assets and capital is not present in central Europe.
Murto said the Swedes, with arguably one of the best functioning capital markets and private equity businesses, are questioning why they should relinquish more power to Brussels, creating a capital union with countries without any capital.
Ilmarinen reports a 3.2% Q1 return, while Keva posts 3.7%
Meanwhile, Ilmarinen – Varma’s closest peer – reported a 3.2% return on its investments from January to March today, and said its total assets had risen to €60.5bn.
Among its asset classes, listed equities returned 7.5%, hedge funds generated 3.0%, while fixed-income assets and real estate produced narrow gains of 0.9% and 0.5% respectively, the report showed.
Ilmarinen’s CEO Jouko Pölönen commented on the ongoing pension reform in Finland, which is being negotiated between the government and labour-market organisations this year. He reiterated previous calls for the solvency framework for pension providers to be reshaped “so as to enable pension companies to seek better long-term returns”.
On the public sector side of the pensions system, municipal pensions giant Keva – FInland’s largest pension fund – turned in a somewhat higher Q1 return of 3.7%, while warning about the potential for negative news for markets later this year.
Listed equities returned 6.5% for the pension fund in the period, hedge funds generated 5.1%, fixed income investments returned 1.0% and property produced a gain of just 0.2%, the figures showed.
Keva’s total assets increased over the quarter to €67.7bn from €65.7bn.
Ari Huotari, Keva’s CIO, said that although central banks were likely to cut interest rate cuts in the course of this year, monetary policy setters had their eyes firmly on the inflation trend.
“In addition, changes in the geopolitical situation can potentially cause big surprises in the capital market situation as well,” he said.
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