One of the Nordic region's biggest asset managers is adjusting its portfolio to reflect a lack of confidence in Europe and a growing faith in the prospects of a U.S. boom.
Ilmarinen, a Finnish pension fund that oversees about €36 billion ($38 billion) in assets, plans to adjust its investments so it's no longer underweight the U.S., according to CEO Timo Ritakallio.
The reallocation primarily affects “fixed-income instruments and real assets. Also equities, but to a lesser degree. But overall, the weighting toward U.S. assets will increase,” Mr. Ritakallio said in an interview in Helsinki. “We're monitoring the geographic dynamic and are putting more focus on the U.S. market, and moving away from the eurozone.”
Investors are starting to lose their nerve as Europe embarks on a series of elections that risk being shaped by voter anger after years of austerity, and on the back of a migrant crisis fed by the war in Syria.
While Austrian voters refused to give power to a populist, a weekend plebiscite in one of the eurozone's biggest economies has rocked the region. Italian Prime Minister Matteo Renzi quit in the early hours of Monday after losing a referendum he'd called to push through constitutional changes. The outcome threatens to trigger a new wave of political and financial chaos for Europe.
In Europe, the issue is the “very poor outlook for the whole economy, because this 1-1.5% growth rate will continue for a long time,” Mr. Ritakallio said. “It has a very negative impact.”
In contrast, Mr. Ritakallio expects the dollar to continue appreciating next year, if the economic plans of President-elect Donald Trump pan out. Mr. Trump has talked of a spending spree that has the potential to put American growth into turbo mode after years of Democratic measures generated GDP rates in excess of 2% and brought unemployment below 5%. All in all, Mr. Trump's policies spell both faster inflation and greater instability, short term, Mr. Ritakallio said.
Pension funds like Ilmarinen are growing desperate for returns after years of ultra-low interest rates. Given the environment, outsourcing investment decisions to hedge funds is considerably less appealing than it once was, Mr. Ritakallio said.
“It's more and more important to look at the cost level of different investment instruments,” he said. “Specifically, I mean very expensive asset managers like hedge funds. We only have 2% of our total assets in hedge funds.”
“In my view, the hedge fund industry probably will struggle next year again because their current cost structure is too high, from an investor's point of view, given the low-return environment,” Mr. Ritakallio said.