“You never know what will happen during the remaining weeks of the year but if we close the year at the current level, this has been a surprisingly good investment year. But what makes it different compared to some other years is that the good returns come from surprisingly few sub-asset classes. By far the biggest positive driver behind our 7.4 per cent returns at the end of September was listed equities and within that portfolio, especially US equities. That has also been the trend during the ongoing quarter, especially after the US election. The S&P 500 is pushing record levels all the time and at the same time, the US dollar has been appreciating strongly. So the more you’ve had of US listed equities and the more you’ve had of open US dollar risk, the better your portfolio has performed. At the same time, the performance of European listed equities in the ongoing quarter hasn’t been that good. European equities are down a little bit and Finnish equities are down quite a lot from the end of September levels.”
WHAT ELSE HAS BEEN SOME OF THE MORE UNEXPECTED DEVELOPMENTS DURING THE YEAR?
“At the beginning of the year, there was a pretty strong consensus that interest rates would come down. But what we saw during the first six months was that interest rates, especially in the US but also in Europe, moved slightly higher. So that was a big surprise to the market. And what it caused to our portfolio was that when we reported the six months results, our bond portfolio was not performing at all. The returns were zero for the first six months. Then at the end of July and the beginning of August, everybody got worried about growth and got convinced that inflation would come down, which resulted in interest rates both in the US and Europe finally coming down. And for portfolios like ours, the third quarter was very good for bond and credit investments. At the end of September, the returns from our fixed income portfolio were 4.6 per cent.”
WHICH PARTS OF THE PORTFOLIO HAS BEEN STRUGGLING DURING IN 2024?
“The reported returns of all our main asset classes at the end of September were on the positive side. The only sub-asset class where we didn’t report positive return numbers was real estate. We’ve seen the negative influence of higher interest rates for the real estate market but so far, it looks to me that even though short-term interest rates have come down because of central banks cutting their rates, this hasn’t had a positive impact for the real estate market yet. It will happen at some stage, but it hasn’t happened so far. In Finland, we haven’t seen a rebound happening in the same way as in Sweden, for example. Prices in Finland appear to have stabilised at the low levels and the transaction activity in the real estate market is extremely low.”
WHAT ARE SOME OF THE MAIN THINGS ON YOUR MIND WHEN LOOKING INTO 2025?
“From an asset allocation perspective, by far the biggest thing is the changes to the solvency capital framework for Finnish pension insurance companies. Of course, it’s dependent on the outcome. At this stage, we can just make sophisticated guesstimates. The main target is to increase the long-term expected returns at the pension system level. The simplest way to do that would be to increase the risk levels of the portfolios, so my guesstimate is that they will push up the equity allocation, probably 10 percentage points to an equity allocation of about 60 per cent at the system level. That will require some changes to the solvency capital framework because that’s what guides us to a certain risk level. If and when the equity allocation goes up 10 percentage points, we of course need to take that money out from somewhere. The asset classes that are at risk if this change happens are government bonds and lower yielding investment grade credit. Within hedge fund portfolios, there are also some strategies with lower expected returns and those are also at risk. Then there are asset classes like real estate, but that’s of course highly illiquid so taking out money out from real estate will take years.”
HOW ARE YOUR PREPARING FOR THESE POSSIBLE CHANGES?
“The end of January 2025 is the deadline for the negotiating parties set by the government of Finland. So that’s the hard deadline for the negotiators, representing employee and employer unions. After that, there will be some legislative changes needed, so the earliest point when these changes could be implemented is at the beginning of 2026. But since we’re long-term investors and some of the asset classes in our portfolio are extremely illiquid, already now we need to consider what kind of a change is needed in our portfolios because of the solvency capital framework changes. We’re probably not able to increase the illiquidity of our total portfolio from the current level, because we’re expecting to see these kinds of changes.”
WHAT ELSE WILL YOU BE KEEPING A CLOSE EYE ON OVER THE NEAR TERM?
“From a more tactical perspective, the big question is what the inflation level in the US will be after Trump’s election. If and when there are going to be these tariffs, what influence will they have on the inflation level – especially in the US but also for the European inflation? And if the US inflation stays higher, is it so that the Fed is not able to cut the rates as much as the market was expecting, especially before the election? And will the interest rate difference between Europe and the US widen and lead to the euro being on a weakening trend against the US dollar? At the moment, it looks as if Europe will have growth challenges also going forward. Then, there’s the question of how this will affect the asset allocation. If you believe in this story that the US will be growing faster because of the new government, you should add to your US allocation. You should have more open US dollar risk in your portfolio and you should have more US equities, both private equity and listed equities.”
HAVE YOU ALREADY PREVIOUSLY HAD MUCH OF A US BIAS IN THE PORTFOLIO?
“Over the last five years, we’ve taken money out of Europe and added to the US listed equity market. At the end of September, already 40 per cent of our listed equity portfolio was in US listed equities. So that has been an ongoing trend for us. But at some stage, the valuation difference between the European listed equity market and the US listed equity market may start to become too big and the US equity market will start to look too expensive compared to Europe. That’s what we need to see in order for investors like us to add to our European listed equity allocation. One of the many big questions is whether it ever will be Europe’s turn to be the outperformer. At the same time, US listed companies have been able to report faster earnings growth than the market has expected, so there are some fundamental reasons why the US equity market has been performing well.”
This article will be published in Nordic Fund Selection Journal, issue 06, 2024
<strong>WHAT HAVE BEEN SOME OF THE MAIN SURPRISES WHEN IT COMES TO MARKETS AND INVESTMENT IN 2024?
“You never know what will happen during the remaining weeks of the year but if we close the year at the current level, this has been a surprisingly good investment year. But what makes it different compared to some other years is that the good returns come from surprisingly few sub-asset classes. By far the biggest positive driver behind our 7.4 per cent returns at the end of September was listed equities and within that portfolio, especially US equities. That has also been the trend during the ongoing quarter, especially after the US election. The S&P 500 is pushing recordIf you’re new to Tell Media Group, create an account.
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