Finland's Ilmarinen dumps liquidity to cope with no-return world

One of the Nordic region’s biggest pension funds is busy reducing its stash of government bonds as it hunts for far less liquid assets in the hope of generating higher returns.

Ilmarinen's Cheif Investment Officer Mikko Mursula: "You need to be innovative and able to accept more, in some cases a lot more, illiquidity in your portfolio than before.” | Photo: PR / Ilmarinen

Ilmarinen Mutual Pension Insurance Co., which oversees about EUR 48bn from its office in Helsinki, is trying to figure out how best to operate in a world in which large chunks of the debt market trade at negative yields.

The Cheif Investment Officer Mikko Mursula says that “the answer is, you need to be innovative and able to accept more, in some cases a lot more, illiquidity in your portfolio than before.”

The stockpile of negative-yielding debt globally is at around USD17tn, with the risk that the number may grow amid expectations the European Central Bank is set to deliver more monetary stimulus. That’s putting pension funds in an unprecedented position as they struggle to find securities that yield enough to cover their liabilities.

At llmarinen, Mursula says he needs to get more than 3 percent to cover the growth in the fund’s liabilities. Mursula says it’s now “unrealistic” to expect good returns in the fixed-income market. So Ilmarinen has been relying more on alternative assets to boost its performance. Mursula says the best opportunities are in real estate, as well as in the least liquid corners of the fixed-income market, such as private debt.

He’s also looking at private equity. “Every time we find opportunities there, we take money out mostly from our government bond portfolio,” he said in an interview in the Finnish capital. While it’s easy to offload government bonds, it can be challenging to find alternative assets to invest in, according to Mursula.

Even so, he targets increasing Ilmarinen’s portfolio of real estate assets to as much as 20 percent of the total, from roughly 13 percent at the end of June. Doing so will help the fund get access to yields of about 4 percent - 6 percent.

Mursula says that even corporate credit markets are starting to look expensive. “It is difficult to find investment opportunities from the listed credit market,” he said. “Which is why private credit has been growing in size in our asset allocations.’’ He also says he’s relying on external managers to
help him find the right private debt assets.

There are “extremely good” asset managers out there, Mursula said. “When the environment gets challenging, good managers still perform well.’’ “Within the private debt markets, there are products and managers, and investment opportunities that’ll provide you a 2 percent - 3 percent return,” Mursula said. “Then if you go to the riskier part of the market we are starting to see return levels of 10 percent - 12 percent.

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