ASPECTS OF INVESTING IN AN UNUSUAL INTEREST RATE ENVIRONMENT GIC / BoF 6.6.2016 CEO Timo Viherkenttä 1
The State Pension Fund of Finland (VER) • VER is a buffer fund helping the state to finance the future pensions of government employees • The state pension system is only partly funded, i.e.19 %, with a funding ratio target of 25 % • VER manages and invests the funded part • The market value of VER’s assets (end 2015) is 17.9 billion €
Future
A longer perspective on interest rates
Source: Andrew Haldane, Bank of England 2015.
3
Negative-Rate Bonds (April 2016) 243
181 131
836
5,171 864
Japan Germany France Netherlands Belgium Austria
In billions of dollars Source: Bloomberg 4
CONFIDENTIAL
Unprecedented Growth of Credit Markets Over the last ten years, EM corporate credit has grown over 600% and European HY has grown over 400%. Asset Class Growth Over the Last 10 Years EM Corp/Quasi-sovereign Europe HY US Treasury EM Government US HY Europe Corporate US Corporate Europe Government Europe ABS/MBS US ABS/MBS 0%
100%
200%
300%
400%
500%
600%
Source: “Emerging Markets Corporate Credit,” Barclays, June 8, 2015.
KING STREET®
5
Performance of assets after rate rises and rate falls 10
9.3 8.2
8 6.2
6.2
6 3.6
4 2.3
2.5 2.5 2.5
2.2
1.7
2 0.3
1.0
0.6
0 -0.3
-2
-1.1
-1.7
UK
USA
-4 Real equity USA: 1913-2015 UK: 1930-2015
Real bonds
All periods
Currency
Real equity
After rate falls
Real bonds
-2.3 Currency
After rate rises
Source: Credit Suisse Global Investment Yearbook 2015 (Dimson, Marsh and Staunton) 8
Impact of rate changes on real asset returns Annualised return in the 2 years following rate cuts vs. the 2 years after rate hikes (%)
7.0 6.0
6.0 4.9
5.0 4.0 3.2
3.0
2.6 2.0
2.0
1.5 1.2
1.0 0.3
0.0 Stamps
UK houses
Violins
US houses
Wine
Art
Gold
Diamonds
Source: Credit Suisse Global Investment Yearbook 2015 (Dimson, Marsh and Staunton) 9