Riskier emerging market equity is still a better investment at the moment than European equities, says Timo Loyttyniemi, managing director of Valtion Elakerahasto (VER), the Finnish state pension scheme, when speaking to Pension Funds Insider this week.

The scheme announced it will increase its emerging market equity exposure in the coming year and is also thinking of increasing its exposure to emerging market debt.

"In equities, we currently have 15% in emerging markets and when it comes to emerging market debt we have about 10%. In the long-term, over the next year, we will increase this," said Loyttyniemi. The fund will invest indirectly in the main, and says its investments will be very diversified in terms of size and region.

"Of course, emerging markets are also risky and have a lower credit quality than the evolved markets, but still due to the European circumstances it makes it more attractive to invest outside of Europe."

Loyttyniemi explained that the scheme had been reasonably stable in its returns were it not for the -19% on their equity investments in the third quarter (the corresponding figure for the whole of 2010 was 23.6%).

"In total we are looking at -5.9% for the fund during the first 9 months of this year, so of course, the crisis is affecting us but that is mainly due to the equities downfall."

The market value of VER's investments was €13.2bn at the end of September.

Though VER's investment strategy might seem like a necessary step, concerns have been raised lately that an emerging market bubble will be next on the list of disasters to hit institutional investors. After all, the fund is not the only one which is currently looking to take its equity investments outside of the current crisis area. Is this not something Loyttyniemi is concerned about?

"Yes certainly," he says, "currently it is crowded in that market space as many investors are putting their money there. We will probably see some changes and have to watch closely how this will develop in the future. The popularity can cause some tremblers but overall we still think that this is what we have to do."

At the end of 2010, Valtion Elakerahasto had the following split for its equity portfolio:
Europe 35%, Nordics 30%, North America 15%, Emerging Markets 20%.

First published 03.11.2011

azeevalkink@wilmington.co.uk