Talk about risk appetite. Since taking over as CIO at Varma Mutual Pension Insurance Co. at the start of last year, Reima Rytsölä has been ramping up diversification at Finland’s largest pension provider in response to the decline in interest rates, which have fallen below zero on many Finnish government bonds. Varma has expanded its hedge fund exposure to 17 percent of its €40 billion ($42 billion) portfolio from 13 percent in 2013. The hedge fund portfolio, with more than 90 investments that include sizable allocations to Blackstone Alternative Asset Management, Elliot Management Corp. and Third Point, returned 7.8 percent in 2014. The Helsinki-based pension insurer has had some success with funds that participate in the direct loan market and is investigating whether to expand its direct lending footprint, says Rytsölä, “especially if banks are divesting big chunks of their loan portfolios.”
Earlier this year, Rytsölä shook things up by splitting his capital markets department into listed and unlisted investments. Rytsölä says the change has sharpened the firm’s focus on alternatives and shortened “the distance between me and all of the asset classes.” Now, Varma is devoting more management resources to unlisted investments because of the growing prominence of hedge funds, corporate lending and private and unlisted equity investments in the portfolio. Returns on unlisted equities, which make up 3 percent of the portfolio, hit a whopping 19.7 percent in 2014, while private equity returned 13.5 percent, up from 12.1 percent in 2013. Some of Varma’s notable private equity managers include Blackstone, Hamilton Lane and Warburg Pincus.
Varma has also strengthened its strategic allocation team, which Rytsölä calls a test lab for new investment strategies. He is considering hiring additional people for the allocation team, as it now has more authority and takes a bigger role in the allocation process. The latest experiments include growing use of risk premia, or smart-beta, strategies for a variety of asset classes including equities, fixed income, currencies and commodities. The approach, which aims to capture excess returns under various market conditions, is designed “to make sure that if the world and the investment environment change a lot, then we have a different kind of foothold,” says Rytsölä, 46, who spent nearly 20 years working in capital markets, mainly at Finland’s Pohjola Bank, formerly known as OKO Bank, before joining Varma. So far, the formula is working: The firm’s portfolio returned 7.1 percent in 2014, outpacing the country’s four other pension insurers: Elo, Etera, Ilmarinen and Veritas.
This profile is one of 12 written for our 2015 European Investment Management Awards, which honors some of the best investors in the business. See also profiles of Lifetime Achievement Award winner Henrik Gade Jepsen, Centrica’s Chetan Ghosh and Lancashire County Pension Fund’s Michael Jensen. Check back next week to read about CERN’s Elena Manola-Bonthond, ERAFP’s Philippe Desfosses, Linde’s Christoph Schlegel, Inarcassa’s Alfredo Granata, VBV’s Gunther Schiendl and PKO’s Wojciech Rostworowski.
Follow Jess Delaney on Twitter at @jdelaney_NYC.