FINLAND - The e20bn Local Government Pensions Institution (KEVA) will put forward plans to its board of trustees to restructure its asset portfolio on the back of consistently low interest rates.
The fund currently allocates 45% to equities, 40-42% to fixed income and the remainder to private equity and alternatives. According to Jarri Sokka, executive director of KEVA, allocation to equities will jump 15%, with more invested in private equity (5%) and hedge funds.
In addition, investments in indirect real estate will also increase from 7% to 9%.
If the proposal is accepted by the board, KEVA’s exposure to fixed income will reduce to about 32%. According to Sokka, the key driver behind this dramatic shift has been the country’s consistently low interest rates.
“’The changes boil down to our return targets. We have a 4% real return target but that has to be achieved with a probability of 90% or higher,” Sokka said.
“When we model these things to the future it seems rapidly impossible the target within that probability will succeed with a heavy fixed income allocation. With interest rates so low it is driving us to make changes.”
Sokka also said the fund is unlikely to increase its investment in Finnish equities despite possible changes proposed to lift the current equity cap to 35%. He said he intended to keep a close eye on the far east and emerging markets equities as a method for diversifying the portfolio. The fund currently has less than 1% exposure to Finnish equities.
Sokka was keen to stress that the current plans to restructure, which could be established as early as May, formed part of a longer term strategy to rejig the portfolio.
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