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Finnish fund selector on finding opportunity in adversity

Lassi Kallio, fund selector at Sp-Fund Management

The formative experience of Lassi Kallio’s youth was the depression that ravaged Finland’s economy in the early 1990s. A banking crisis was compounded by the collapse of the Soviet Union, which represented one-fifth of foreign trade. “It had a big impact on how I looked at things,” Kallio recalls. “It was a very tough time.”

During high school, he played guitar in a heavy metal band. “I was 12 or 13 when the recession happened, and it led me to ask a lot of questions.” The fallout from the crisis, which devastated many industries and caused unemployment to soar, influenced the subjects he chose to study. “At university, I signed up for a course in economics. I realised this was where I would find all the answers I had been trying to figure out.”

Kallio’s interest in economics led to a career in finance. Almost three decades on, he selects funds for Sp-Fund Management, the asset management arm of Finland’s Savings Bank Group, one of the few domestic lenders to survive the crisis.

Drilling down

Sp-Fund Management looks after more than €3bn, split between internal funds and discretionary mandates.

Kallio helps run two funds of funds, Säästöpankki Maailma, divided between debt and long-only equity, and Säästöpankki Korkosalkku, a go-anywhere fixed-income fund (see figures 1 and 2).

After extensive screening to narrow down the fund universe, Kallio insists on sitting down with the manager. He often tries to get them off-script or catch them off-guard. “I always try to ask them a question that might surprise them a bit, so their answer is unprepared,” Kallio says.

“I might say something a bit illogical or highlight how one part of the presentation doesn’t match with another. I may ask them to explain the performance of a specific stock in their portfolio. It could be anything.

If the process of figuring out and answering the question excites them, that is when you start to see who they really are.

“I like fund managers that are curious, always trying to find new angles to look at things and willing to learn. They have to be smart, of course. But maybe the most important thing is that they are passionate about what they’re doing,” Kallio continues.

“They must have a clear investment philosophy based on financial market theory that makes sense. It needs to be robust. “I need to be convinced that the data supports the story behind the manager’s strategy, and if they’re actually doing what they say they’re doing; if not we just move the next one.”

Active appeal

The vast majority of the funds Sp-Fund Management invests in are active. Low-cost index trackers now make up about 15% of the European market and continue to grow rapidly in popularity. But Kallio says “indiscriminately buying the whole market” does not generally fit with the group’s approach.

Moreover, he argues, as central banks withdraw quantitative easing, active management will regain some of its appeal. “Last year was quite difficult for active managers to justify some of the fees they charge but this year should be different.”

SP-Fund Management has been invested in the Morgan Stanley Global Opportunity Fund, a long-only large cap international equities fund, since it launched in 2010 (see figure 3).

“Typically, we don’t go about seeding new funds but this was different. It wasn’t a new strategy, they just cut the Asian equities’ allocation out of their global equities strategy to create this fund and it’s done very well.”

On the mid-cap equity side, Kallio likes the Axa WF Framlington Europe Small Cap Fund (figure 4). “It’s not magic. They find good businesses in Europe that are growing and when they make a mistake, they exit early and move on to other opportunities.”

An investment Kallio is less enthusiastic about is the T Rowe Price European High Yield Bond Fund (figure 5). “We put in a significant amount of capital and it went well for a while. But the fund had a big position in a firm that almost went bankrupt and there was a difficult restructuring. It took a big hit on the performance.

“They also had a couple of other poor investments,” he says. “I partly blame myself as well as the manager, who was transparent about the situation.

“I didn’t fully understand it was a high-beta strategy, with more risk and greater volatility. I should have begun scaling it down earlier when I started to see hiccups in the market. It took me too long to realise that high beta doesn’t work in your favour when the market turns sour, combined with some bad credit selection by the manager.”

According to Kallio, Sp-Fund Management still invests in high yield, but now adopts a more defensive strategy, in light of the recent rise in market volatility and the slowdown in global economies.

Be prepared

Slowing growth in many regions of the world has, of course, fuelled concerns that the economic cycle is drawing to a close and a global recession could be around the corner.

“It’s something I’m worried about,” Kallio admits. “But the truth is that it’s hard to know when the cycle will end. You don’t want to go too defensive, too early. It’s not easy to predict.

“Our strategies have become more defensive, but we are not chasing the last dollar. I need a bit of duration in the portfolio but not too much, because the end of the cycle could be anything from half a year to five years away, so you can’t go overly negative.

“If you go too defensive, too early, then you’re likely to lose your job. Your timing needs to be spot on.”

Kallio returns to his adolescence in 1990s Finland when the collapse of the banking system left the country’s economy hanging by a thread. “When you live through an experience like that you’re always reminded that the party can’t last forever,” he says.

“In the early 1990s depression there was so much I didn’t understand. These days I always keep a close eye on how the financial climate might be changing. You’ve always got to be prepared.

“I like to buy quality assets when they’re cheap. When things collapse that’s often the best time to do great trades – if you don’t panic and have done your homework. It’s not something I hope for but if there’s anything my experiences have taught me it’s that if opportunity arises, be ready.”

David Robinson

David Robinson is the editor of Expert Investor. He has 18 years’ experience as a business journalist and editor. In the past he has written for the Guardian newspaper and The Telegraph, and worked as...

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