Mandatum Life Allocation portfolio management – December
ML Allocation basket returns were between +0.83% and +2.94% in December.
The worsening of the coronavirus epidemic increases short-term risks. In the longer term, vaccinating the population will likely enable the gradual lifting of restrictions and the opening of economies, which will strengthen the economic growth prospects. At the moment, it appears that the investment markets are looking past the negative news and focusing on the improvement of growth prospects as a result of vaccinations. The acceleration of inflation expectations has raised speculations that the central banks would have to reduce stimulus earlier than expected to rein in inflation. Reducing stimulus would likely entail a moderate rise in interest rates, which would also put indirect pressure on the prices of asset classes other than fixed income investments.
As we see it, sector allocation is currently the main consideration from the equity investment perspective. As economic growth prospects improve, cyclical sectors offer a better return potential, but the shift between sectors should be made one small step at a time. In November, we started shifting the equity position in a more cyclical direction and we are prepared to continue along that path if the prospect of a turn strengthens. Equity investment performance was good last year. Especially increasing the weight of small and mid caps in summer was a success. Focusing on the Nordics also brought additional returns last year.
We have allowed the weight of cash and equivalent money market investments to increase moderately, as the number of attractive fixed income investment opportunities is limited. In fixed income investments, the focus is on our domestic market, on Nordic companies, which we know well and in which we see good return potential, in relative terms. We do not invest in euro-zone government bonds due to the low return level, and government bonds account for a very small proportion of our fixed income investments. We have maintained a moderate interest rate risk because, in our view, the compensation for bearing extra interest rate risk is currently meagre. In recent months, focusing on corporate bonds has been a success with a positive impact on performance.
In alternative investments, we focus on private debt investments, real estate development projects and high-cash-flow assets. In real estate investments, we invest with portfolio managers specialised in property development, who are good buyers and have the ability to refine properties through active measures. Diversification across various types of real estate is all the more important in the current environment. In private equity investments, we are selectively active, looking for individual projects that are not debt-driven.