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market insight 2010 Q4 Finland

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On top of the mutual funds, the pension assets are currently estimated at €132bn, with the life insurance sector managing a further €30bn. The PIIGS crisis at the beginning of 2010 meant investors wanted to avoid the volatility of the markets.

Recent statistics underline continued inflows into bond and asset allocation funds, while money market funds are suffering from significant outflows. It is highlighted that 55% of mutual funds have an international ownership, while 45% are domestically-owned.

News Roundup
• Finnish Banks do well: Despite low interest rates and a tricky environment, a recent review showed that Finnish banks have done well. Meanwhile fund and insurance groups profited from the general recovery
• Legislating for risk: The Finnish government wants to extend a piece of legislation that allowed pension funds to increase their risk exposure in the aftermath of the 2008 collapse. The scheme allowed institutions to benefit more fully when the recovery came.

Hot Topics
What everyone is talking about
• Open architecture: The search for freedom of choice
• Active managers vs passives: Is hunting alpha a waste of time?
• Hedge Funds: What does UCITs III offer
• Equities: A rising tide?
• Private Equity: a return to greatness
• Property: When is the right time to invest?
• ETFs: How to choose and use them

Key points of the four biggest interviews

Head of manager research, discretionary and consultative portfolio manager
• Strong trends to ETF and passive managed funds
• Risk is to source specialist fund managers to achieve the alpha
• Change to fund managers with more than one area of expertise
• ESG & SRI are important
Portfolio manager, open architecture, asset manager
• Hedge funds are interesting, but only followed with “one eye”
• Interested in active managers – ETFs for access of certain areas
• What’s better: higher risk manager or truly value add manager?
Head of asset allocation, institutional asset manager
• Long-term view is that economy is going up
• Growth in Asia
• Cautious on public equities (euro and western world perform too much zigzag)
Head of institutional portfolio solutions, institutional and HNW asset manager
• Further interest in emerging markets, both equities and debt, local and hard currency
• Skeptical about government bonds

Portfolio construction

Open architecture
Interviewees during our recent research in the Finnish market were generally in favour of open architecture platforms. Investors enjoy the “one-stop-shop” opportunity of choosing the managers they like. The ability to construct individual exposure and risk profiles adds to the perceived advantages from these platforms.

Risk & active v passive
Some of the Finnish investors we talked to claim to be moderate risk takers and have compared their domestic investment industry to emerging markets, both for the size of the market as well as the volatility.

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This attitude to risk explains why a significant majority of investors we spoke to are seeking active managers, with some using up to 90% active managers.

However, as the industry is recovering, other investors are also getting back to their favoured investment style: long-only, traditional and conservative, but opportunistic. Exchange Traded Funds are a recognized product, but they seem to remain in the background.

Our interviewees use these funds, however only to access certain areas, such as industry sector-specific indexes and commodities.

 

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Asset classes

Hedge Funds
Investors in Finland are keen to find out more about the future of hedge funds. The financial crisis and the lack of transparency caused uncertainty leading to out – flows in this asset class. According to our research, liquidity issues were a major driver. Instead, high yield bonds were used.

UCITs III-compliant funds with hedge fund strategies (Newcits) are now getting more attention again. In particular the future of active managers is being questioned. However, investors still wonder if regulation for these new funds will improve.

Equities
Investors believe that the global economic upswing will allow for more gains to come. Most importantly, interviewees are keen to find the right geographical area and industry sector as the markets continue to improve.

Private equity & property
Traditionally, Nordic investors have been keen on private equity, real estate and property. During the interviews it was mentioned how the majority is expecting these areas to pick up globally.

Exposure to each of the asset classes is expected to go up, but it seems the markets have not yet convinced the Finnish investor it is the right time.

Future challenges

Concentration of pension fund assets
The financial crisis in 2008 prompted a significant trend in Finland. The regulating authority allows pension funds to move as – sets cheaply, in order to get them out of the balance sheet.

The opportunity creates a difficulty for the asset management community, as the majority of these as – sets continue to accumulate at the largest pension insurers: Varma and Ilmarinen. Consequently the number of investors in the market is reducing.

In light of the financial turmoil, investments need restructuring. However, the opportunities this development usually provides for asset managers, are limited. Overall investors are expecting the industry to face tougher times.

tom@ybc.tv

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