Finland’s Varma is one of several large Nordic asset owners that has been moving towards a more holistic view of the portfolio – some time before a total portfolio approach turned into a much-hyped concept. Varma’s deputy CEO and CIO Markus Aho says that while the € 71.4 billion Finnish pension company tries to stay clear of labels, he sees its investment framework as a semi-total portfolio approach with elements of a more traditional strategic asset allocation. 

“We’ve already been very far in the TPA-type of thinking and I believe we will continue to have some kind of hybrid model,” Aho says. “While we think and set the strategy like in the TPA, we still have an annual allocation as we need to have a way to allocate our capital and we need to be mindful of the solvency framework.”

“We’ve already been very far in the TPA-type of thinking and I believe we will continue to have some kind of hybrid model.”

Markus Aho, deputy CEO and CIO at Varma.

He observes that there are different strategies for managing the portfolio. “One is to have racehorses racing against each other and then you feed them based on the performance. We’ve decided that’s not the way for us. We’re one team and everyone’s committed to making decisions that optimise the overall result. That might mean that some need to sacrifice their own result to achieve a better result for the total portfolio,” he says.

“We’re one team and everyone’s committed to making decisions that optimise the overall result. That might mean that some need to sacrifice their own result to achieve a better result for the total portfolio.”

Markus Aho, deputy CEO and CIO at Varma.

From an organisational perspective, this has required adaptations. “We’ve tried to make the responsibilities of the teams sufficiently wide and not have people working across very narrow, specific asset classes,” he says. Furthermore, Aho emphasises the need for a clear structure. “The larger and the more regulated you are, the more you need structure. At any given time, the team needs to have a clear mandate and clear responsibilities. I believe the organisation should be able to develop and evolve with the portfolio and the strategy that we want. I think it’s the wrong way round if the organisation dictates the portfolio,” he comments. 

This more holistic portfolio view is reflected in how Varma is approaching the increase in equity risk, which is the main objective of the current Finnish pension reform. The first stage of the reform came into force this summer, with the new regulation to be fully implemented by next summer. “At the moment, we think about equities quite holistically,” Aho notes. “We do believe we can have a portfolio that’s way more diversified than just going all in on public equities. Within equity risk, we also include private equity and real assets, such as equity-type infrastructure investments and opportunistic global real estate. We’re trying to optimise for having as diversified of a portfolio as possible without sacrificing the return expectations.”

The responsibilities on the private market side have also changed over time. Infrastructure started out as an asset class within private equity but later merged with real estate to allow the team to identify the best opportunities across both asset classes. “Now, we’ve brought infrastructure and global real estate back together with private equity to have a broader team with quite a big mandate to invest across that spectrum,” he says.

“We’ve brought infrastructure and global real estate back together with private equity to have a broader team with quite a big mandate to invest across that spectrum.”

Markus Aho, deputy CEO and CIO at Varma.

Varma has for some time encouraged internal rotation of its investment staff across asset classes. At the same time, Aho notes that there needs to be some balance as the execution within each asset class obviously requires special expertise. More recently, some staff members have moved from the traditional fixed income team to work with hedge funds focused on alternative credit, as the pension reform has reduced the need for lower-returning fixed income investments. “We continue to maintain quite a large hedge fund allocation. I think those returns can be competitive with what can be expected of the equity markets,” he says. 

“We continue to maintain quite a large hedge fund allocation. I think those returns can be competitive with what can be expected of the equity markets.”

Markus Aho, deputy CEO and CIO at Varma.

Having a manageable team size and working from the same location are other aspects that he believes can make it easier to keep a total portfolio perspective. “We basically sit in the same room and can talk to each other at any time. The decision-making chain is also very shallow and very nimble and the investment organisation has a lot of authority to make decisions. The board is very well up to date on what we do, but the organisation has a lot of freedom. Those are some of the things that make it possible for us, whereas it would be much more difficult for a larger organisation with hundreds or thousands of people working in different offices across the world,” he says. Varma has an investment department in Helsinki of around 80 to 90 staff members.

The pension company has also a remuneration policy that is aligned with a total portfolio view. “We don’t disclose the exact kind of compensation models that we have, but we do have variable compensation for everyone in the investment organisation, which is based on one single compensation pool. If we’re not performing well as a whole, the compensationwill be lower,” he says. 

Aho observes that the shift towards a more holistic thinking of the portfolio has been a gradual evolvement over time, but not necessarily a given direction for a portfolio that has been increasing in size and sophistication. “Looking over a very long period, the portfolio has grown and become more diversified, more complex and more professional. As organisations grow and specialise more, there’s a tendency to become more siloed and I think you need to fight that all the time. There was a point in time when we were a bit more siloed within the investment organisation, but the way we invested was different and the market and the world was different,” he says. 

“Looking over a very long period, the portfolio has grown and become more diversified, more complex and more professional.”

Markus Aho, deputy CEO and CIO at Varma.

He notes that when he joined Varma in 2014 to work within its private equity team, the asset class was much more sidelined. “Back then, private equity wasn’t considered the same asset class as we consider it today,” he recalls. “It was more like a black box in the corner. You produced good returns, so everyone was happy, but it wasn’t integrated. The listed side was obviously more mature and more transparent. Over time, there has been an evolution of the portfolio and our thinking. We now view all asset classes similarly and we try to manage the underlying portfolio regardless of the asset class. We want to understand the portfolio we have, whether that’s public or private or direct or indirect.”

This article is part of HedgeNordic’s “Rethinking the 60/40 Portfolio” publication.