Positive returns through successful diversification – an era of lower returns ahead

Elo Interim Report 1 January–30 September 2018:

Positive returns through successful diversification – an era of lower returns ahead

Elo Mutual Pension Insurance Company’s return on investments in January–September was 2.2% (6.1%). The market value of Elo’s investments was EUR 23.7 billion at the end of September (EUR 22.9 billion). The solvency ratio was 123.6% and solvency capital was 1.8 times the solvency limit.

“Despite great uncertainty in the investment market and the generally low level of returns, Elo’s return on investment was positive thanks to successful diversification. Long-term returns are at a good level. In addition, the current transfer year has been by far the best in Elo’s history,” says Elo’s CEO Satu Huber.

The average 5-year nominal return was 5.7 per cent and the average 10-year nominal return was 5.8 per cent. The average 5-year real return was 5.1 per cent and the average 10-year real return was 4.7 per cent.

Successful customer work continued

Employment pension insurance transfer periods of the year increased Elo’s TyEL premiums written by more than EUR 43 (2.7) million. Policyholders are free to transfer their pension cover to another pension insurance company on four dates each year, provided they have waited one year from the previous transfer.

“Successful customer acquisition shows that Elo’s development actions and good cooperation with partners produce concrete results,” notes Huber.

Customer satisfaction in pension insurance operations has developed positively. For instance, 85 per cent of the customers gave an excellent grade for the service in connection with the processing of their pension. For instance, customers highlighted easy-to-reach and personal customer service in their feedback.

Insurance services have invested strongly in system development and automation, which can be seen in the speed of insurance application processing, for instance. The total number of self-employed persons and employees insured by Elo at the end of the reporting period was almost half a million. Approximately 236,700 pensioners were paid their pensions by Elo at the end of September.

In addition to equity investments, private equity and real estate investments generated the highest returns

At the end of September, the value of Elo’s investments was EUR 23.7 billion (EUR 22.9 billion). Return on investments was 2.2 per cent (6.1 per cent).

“The years after the financial crisis have mainly generated good returns, thanks to the stimulating monetary policy. Now, it is good to be prepared for clearly lower returns,” says Elo’s Chief Investment Officer Hanna Hiidenpalo. 

During the first nine months of the year, private equity fund investments generated the highest return, with a return of 11.8 per cent from the beginning of the year. The return on real estate investments remained stable and was 4.7 per cent from the beginning of the year. The development of the return on hedge fund investments during the period under review was positive, with the return being 3.4 per cent. Listed equities generated a return of 2.4 per cent and the return on fixed income investments was –0.7 per cent.

“During the period under review, returns on nearly all the main asset classes were positive. Unlisted private equity and real estate investments supported returns in the uncertain investment environment. Private equity investments generated once again the highest return, in addition to equity investments,” Hiidenpalo adds. 

Exercising influence at the core of responsible investing

At the end of August, Elo decided to join CDP’s (Carbon Disclosure Project) Investor Action Request, which provides investors with greater visibility into how the companies in their portfolio manage carbon emissions and energy efficiency. CDP has collected the most comprehensive database in the world containing, for instance, environmental information reported by companies and states. Elo also participated in The Investor Agenda, which has been developed for the global investor community to accelerate and expand the actions that are critical to combatting climate change.

Together with the global investor community, we work to combat climate change. PRI ranks almost all Elo´s asset classes into the best categories.

Our goal is that, by 2025, more than half of our direct equity and corporate bond investments will have a measurable positive impact on the environment or society. During the period under review, we made an analysis of Finnish companies’ positive impact on the environment and society. Half of companies in Elo’s portfolio that were included in the analysis were considered to have a positive environmental and/or social impact through their products or services. More than a third of the companies have a positive environmental impact and roughly a fifth have a positive social impact.

Economy is growing – but growth has slowed down and inflation outlook must be monitored closely

There is an exceptional amount of uncertainty related to international economic development, and it is currently reflected in the investment markets. Economy is growing, but growth has slowed down and is taking divergent paths in different countries. Continued global economic growth now largely depends on the United States. The US Federal Reserve has continued to tighten its monetary policy moderately and economy-stimulating financial policy has replaced monetary policy as the growth driver in the United States. The US inflation development must be monitored closely in the future. The consensus estimate of global economic growth in 2018 remains at 3.8 per cent, which is slightly higher than last year.

Growth in the euro zone seems to be slowing down from last year’s 2.4 per cent to approximately 2 per cent this year. In the near future, economic development in Finland seems to be declining slightly but still remaining at a moderate level. During the remainder of the year, the economic growth rate would seem to be approximately 2 per cent.

“Thanks to the expansive monetary policy, a great deal of money has post- financial crisis flowed into different asset classes, and the expected return of risk-bearing asset classes appear to be lower. Considering the development during the past few years, it is good to be prepared for clearly lower returns in the coming years,” notes Hiidenpalo.

After the period under review, a clear change has taken place in market sentiment. Share prices have declined and market volatility has grown as political risks have increased and market liquidity has decreased. The current earnings season plays a key role for market sentiment.

Elo's Interim Report 1 January - 30 September 2018 (pdf)

Elo's Interim Report Presentation 1 January - 30 September 2018 (pdf) 

Further information:
CEO Satu Huber, tel. +358 20 703 5811
CIO Hanna Hiidenpalo, tel. +358 20 703 5668
CFO Sarianne Kirvesmäki, tel. +358 20 703 5134