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Stepping up the pace: the fast-changing portfolio of Ilmarinen's CIO

Stepping up the pace: the fast-changing portfolio of Ilmarinen's CIO

This article first appeared in Modern Investor magazine. Register for free here.

The Helsinki of Finnish film director Aki Kaurismäki is a foreboding, unromantic place – a place that compels many of the characters in his films to leave in search of adventure and meaning in the likes of Estonia, Mexico and the US. But Ilmarinen CIO and Kaurismäki fan Mikko Mursula hasn’t felt the urge to leave his country, despite having worked there for more than 15 years. Instead, from his Finnish base, he is able to go out into the wider world with his €36 billion pension fund.

Appointed CIO of the company – Finland’s oldest pension and insurance group – last April, Mursula now heads an 80-strong team that invests globally across many asset classes. But Mursula is not new to Ilmarinen. Indeed, he previously spent 10 years at the company, leaving to become managing director and later CEO at FIM Asset Management.

‘I joined Ilmarinen in 2000 during the tech bubble. And guess what? I was responsible for picking tech, media and telecommunication stocks,’ he tells Modern Investor.

Despite the tumultuous environment once the bubble burst, Mursula went on to become head of equities at the company in 2003 and head of listed securities in 2007, responsible for the multi-asset global portfolio as well as the tactical asset allocation. ‘After my first 10 years, I felt the need to head a whole business, and that’s when FIM Asset Management came in.’

Mursula says that working for an asset manager taught him to look at things from the ‘sell’ side, not just from the ‘buy’ perspective. ‘You learn everything about how to structure a product and how regulation is changing companies’ offerings.’

Re-joining Ilmarinen in 2015 after five years at FIM has thrown up some pleasant surprises. ‘I see concretely how Ilmarinen has kept on diversifying its portfolio. One of the biggest changes I see is in real estate, where we’ve got a much more global approach than 10 years ago.’

Bring it all back home

In September, Modern Investor talked to Barry Kenneth, CIO of the Pension Protection Fund, who said the UK fund has started to take a more hands-on role in investment decisions. The same is true at Ilmarinen. Over the past 10 years, the scheme has insourced part of its investment activities, rather than outsourcing them to external managers. Currently, only 20% of investment activities are outsourced.

‘There are several reasons behind this decision,’ says Mursula. ‘We think insourcing will help us to take more more transparent and costeffective decisions. Also, the investment world is more correlated than ever. Having enough resources in-house allows you to screen all the asset classes and shape your market convictions better.’

The increasing complexity of the market environment is one of Mursula’s biggest concerns. In April, Esko Torsti, Ilmarinen’s head of non-listed investments, told Modern Investor that there is no easy way to get around the general yield enhancement problem. According to Torsti, the solution may lie in dynamic risk adjustment – you must be ready to react to changes in market sentiment. At best, this is difficult.

Mursula agrees with Torsti – ‘we need to do our analysis quicker’ – and adds how challenging the current low yield level is for an institutional investor such as Ilmarinen. ‘In 2003, equities were trading at their lowest level, but German bunds were yielding around 3% to 4%. This is to say that, during the equity turmoil, fixed income was protecting the portfolio,’ he says. ‘This is not the case any more. We need to find alternatives and be more active in our tactical asset allocation.’

Hand in hand

Ilmarinen’s equity and fixed income investments go hand in hand, according to Mursula. By 2020, the scheme aims to have less than 30% invested in bonds and closer to 40% in listed equities, adjusted from around 40% and 26%, respectively, at present. The plan, therefore, is to increase the fund’s equity holdings globally while moving away from fixed income. ‘We will invest more into equities, because the 2017 pension reforms in Finland will raise the equity-linked proportion of the return requirement from 10% to 20%.’

Currently, 30% of his equity investments are in Finland, while the other 70% are diversified across the globe. Within this second category, the scheme is underweight the US and overweight Europe versus the MSCI World index. ‘We have a home-market bias, and we prefer the eurozone over the US, since it allows us not to carry any FX risk,’ he says.

Mursula points out that many Finnish companies owned by Ilmarinen are listed in Finland but export globally. Most of his equity positions – 70% – are direct investments: the fund allocates capital directly into Finnish and European companies, rather than via funds.

The other 30% is accessed through mutual or passive funds. ‘We use external managers in the US, Japan and emerging markets, since we don’t have direct expertise there. Fifty per cent of stocks we access through third parties are passive investments,’ he says.

According to Ilmarinen data, among the biggest holdings in the portfolios are large-cap Finnish companies such as insurance firm Sampo, telecoms firm Nokia and machinery company Kone.

With regard to fixed income, Mursula doesn’t expect to see significant changes in the near future. 'We’ll keep slowly decreasing our exposure to the asset class, which we manage mainly in-house. We use external managers only for high yield and emerging market bonds. We’ll keep our duration short as well.’

Safe trip

The biggest investment change Mursula plans to embrace is real estate. Currently accounting for almost 10% of the portfolio, property investment will grow to 15% in 2020, with a strong focus on global opportunities.

‘We have 85% of our real estate holdings in Finland, and more than 90% of our Finnish property portfolio is in the Helsinki metropolitan area. The biggest portion of our new investments will be outside the country,’ he says.

He intends to pursue direct co-investments with other like-minded institutional investors and keep the focus on Europe, the Nordics and, selectively, the US. ‘We favour offices in Europe, because of the low vacancy rates, although interesting residential opportunities may emerge in the future,’ he says. ‘In the US, we like residential and offices.’

Ilmarinen is not only a real estate investor, but also a selective property developer: it owns 4,700 flats and approximately 100 business offices and warehouses. Property investments, according to the company, complement the securities portfolios and improve its risk-return ratio.

The scheme’s objective is to increase direct Finnish real estate holdings by €150 million and global property investments by €200 million every year over the next five years. Current domestic projects include the REDI shopping centre in Helsinki and the Stockmann logistics centre in Tuusula, on the outskirts of the capital.

Still within real assets, Ilmarinen’s portfolio is exposed to infrastructure and forestry, too. ‘We allocated some capital into infrastructure over recent years in order to find new ways to achieve good returns. The challenge in infrastructure is that it is a crowded space, so return expectations need to be high enough to justify an investment.

‘The same can be said about agriculture assets, where selection is very important.’

Hedge funds and private equity

The biggest portion in Ilmarinen’s hedge fund allocation has been taken in house, Mursula says. The scheme still has a small position with external hedge fund managers, less than 2%, but it is increasingly focusing on the internal management of these strategies.

‘There are cheaper and more transparent ways to replicate hedge fund strategies. We might grow our allocation, but we won’t see any dramatic shifts.’

Quizzed on the future of the asset class, the CIO says it will depend on the strategies chosen by investors.
‘I can’t say that hedge funds as a whole will fully recover their role as diversifiers. Some managers will be able to produce alpha, but others will drastically underperform.’

On the other hand, Mursula is very positive on private equity; he says he will continue to increase co investments together with Ilmarinen’s core private equity managers.

Growth conundrum

Mursula shares the markets’ scepticism about global growth and believes a slow economy may have a negative effect on companies’ margins and sales. ‘The slowdown in China is weighing on global growth as a whole. A weak global economy might have several bad consequences on corporates’ profitability.’

Growth, according to the CIO, is also hampered by the huge amount of leverage all over the world. ‘Debt levels are at historical heights. Emerging markets have increased their debt burden since 2008 and might be the biggest victims of the US Federal Reserve’s hike of interest rates.’

Investors will need to cope with increased volatility, too. ‘The geopolitical situation is tense, and we are monitoring very closely what’s happening in the Middle East. We are living in an uncertain environment, which will spur more volatility in the future.

‘Unfortunately, I have the feeling the horrible things that happened in Paris will be with us in the foreseeable future.’

With regard to Finland, 2015 has been the fourth consecutive year of negative GDP growth. ‘We still find opportunities, since several Finnish firms are exporters and don’t suffer from the domestic environment.’


Mursula is a long-time fan of Aki Kaurismäki, arguably the most famous Finnish movie director and screenwriter.

His most acclaimed film, The Man Without a Past, won the Grand Prix and the Prize of the Ecumenical Jury at the 2002 Cannes film festival and was nominated for the 2003 Academy Award for best foreign-language film.
‘I’ve watched all his movies. My favourites are Shadows in Paradise and Drifting Clouds,’ Mursula says. He also loves Quentin Tarantino’s movies. ‘They are my favourites. Uma Thurman, Samuel L Jackson, Harvey Keitel and Michael Madsen are all great.’

The CIO is also a voracious reader. His favourite authors are Ernest Hemingway, Raymond Chandler, Dashiell Hammett and John Steinbeck.

Mikko Mursula

2015-present: CIO, Ilmarinen
2013-15: CEO, FIM Group
2010-13: Managing director, FIM Asset Management
2007-10: Head of listed securities, Ilmarinen
2000-02: Portfolio manager, Ilmarinen

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