What are your main responsibilities within the company?
I am a co-founder of Esko Advisors and carry the title of CEO, which in a small startup company means I do whatever is needed. In army terms, I am the frontline soldier heading for the unknown with a tiny but dedicated specialist team. Fiduciary management might already be well known in the US, but in Finland we are pioneering the concept.
Moreover, our main business activity, which is related to establishing new corporate pension funds, goes against the international trend. Our studies have shown that, in Finland, the smaller pension players have massively outperformed in terms of assets and liabilities. Currently, we spend a lot of our time on number-crunching research. Doing it without sponsors makes it easy for us to claim independence.
How has Esko Advisors changed since its foundation? Who are your main clients?
Our clients are businesses that want to set up a new corporate pension fund. For that, you need 300-plus employees. However, due to strange local rules, these corporations are not equally well placed to set up new funds. We have to act as detectives in the first place to figure out the basic info, such as the extent of pension liabilities, before we know if our idea is worth implementing.
Over the years, the pensions system has become so opaque that almost every corporation is unaware of the costs and requirements. Now, after almost two years, our business is gradually transforming from a research entity into a fiduciary business with more normal implementation issues.
What regulatory challenges are you facing?
Our specific challenges relate to out-of-date legislation and a paper-pushing mentality in the setup phase. But we are a good candidate for the Guinness world record for paper-pushing. Hopefully, the legal changes in 2017 will clarify things and provide at least a fraction of legal protection to corporates who are willing to seek more efficient implementation of their pension arrangements outside the mutually owned large pension insurance entities.
How is regulation affecting your asset allocation?
Asset allocation is relatively free in Finland. Our risk-based solvency ideology has been relatively advanced for a long time. The risk buffers in the system are sufficient and give us a lot of freedom when creating asset allocation plans. Illiquid assets are severely penalised, since the system is still biased about myopic risk-thinking with long-term, ambitious return objectives.
Regulatory reporting is facing EU-wide euphoria almost immediately after the financial crisis. This, of course, will be great for new report accumulation businesses. The risk reports themselves may face changes to the second or third numbers after the decimal point, but, fortunately for the struggling Finnish economy, the workload for generating these reports will multiply.
How are Finnish institutional investors faring?
The main challenges for Finnish institutions are the same as elsewhere in the world. When rates are close to zero, equity and real estate values are hovering at historical highs and the economy is struggling, it is not usually a good time to start investing. The local economy desperately needs credible growth actions. With public sector GDP at 60%, our welfare ecosystem is seriously in danger.
Is ESG growing in Northern Europe? What about investments in renewable energy?
In the past, I have owned asset management businesses with ESG-biased products. It was not a smart move financially, so I am still cynical about the ESG theme growing within institutions. Things may change more quickly on the retail front. There are already signs of this, especially within products related to renewable energy. In my view, institutions will continue to pay lip service to this theme for the time being, but I hope I am wrong.
Petri Kuusisto’s 3 Key AllocationsHedge Funds
Residential real estate, especially in the Nordics, makes no sense in terms of valuation levels. Offices are vacant and will remain partially empty until the economy returns to growth. High yield does not go well with above-average equity valuations that may be on a downward curve.
However, we still find interesting speciality implementations within hedge funds, especially in the areas where illiquid credit is paying substantially better than traditional fixed income alternatives. Direct lending, trade financing and factoring are all interesting ways to invest money.
We try not to move up the risk curve when chasing yield. Selective hedge funds can be one way to do it. We also like multi-asset solutions.Em Equities
Equity markets also provide opportunities. Currently, emerging markets, excluding China, offer more appealing valuations than the US. We have no obligation, nor will, to allocate on the basis of world market capitalisation. You can find countries and industries, especially in the Far East, where valuations on both equity and currency are historically very low despite reasonably good growth.
Russia and Brazil are much more speculative and time-dependent opportunities. Value-based companies are more interesting than growth companies. We find it difficult to invest in newly listed companies with no earnings. In many ways, there a lot of similarities between today’s technological ventures and those in the late 1990s.Agriculture
Real assets tend to offer some possibilities for investment, and biological growth is a good diversifier in traditional allocations. In particular, agriculture offers appealing valuations at present. Forestry and related bioenergy products are a good, stable cashflow producer for most portfolios.
My colleague comes from a family who own a saw mill; they entered bioenergy more than a decade ago. Our combined knowledge on real assets should make us very competitive.
We also find infrastructure- and utilities-based cash streams appealing, although there are not many external managers to choose from. That said, institutions in these fields are starting to pool assets.