The University of Helsinki Research Foundation (hereafter “Foundation”) promotes and supports the research work of young scholars from the University of Helsinki (hereafter “University”) by funding their employment in designated doctoral student positions. The Foundation’s assets origin largely from donations from more than 200 companies and public sector organizations, and currently amount to approximately 35 million Euros.
The primary purpose of this document is to lay out an Investment Plan for our securities portfolio investment management two years ahead. The development of the economy and financial markets is however inherently uncertain, whereby execution must continuously be adapted to new information and conditions. Hence, another important function of this document is to present the underlying ideas that govern any future adaptations of the Investment Plan.
Our approach to investments builds on the central values that guide the University of Helsinki overall; truth, bildung, freedom and inclusivity. To us, truth and bildung mean accepting scientific findings from financial economics, as well as other sciences (e.g. CO2-emmissions leading to global warming). Freedom and inclusivity are reflected primarily by our ambition to support equality and social development with our investments.
Market efficiency is one of the most thoroughly tested hypotheses in financial economics. Countless peer-reviewed scientific publications have examined it from different perspectives, including active investment management performance. In summary, the performance of indices has been better than that of active investment management on average.
We acknowledge and accept the concept of market efficiency. To be more precise, we believe in the concept of equilibrium market efficiency, which states that markets cannot be fully informationally efficient, as active investors need an incentive to perform costly information gathering. Index investors become active when expected rewards exceed information costs – and vice versa – whereby market efficiency is an equilibrium of disequilibria.
Within the framework of equilibrium market efficiency, the empirical evidence implies that the market has been “overly” efficient – or that too much capital has been managed actively. While past (under)performance is no guarantee for future (under)performance, we hence prefer index investment management – given that we have no information advantage or other special preference.
Finally, we recognize our exposure to environmental, social and governance (ESG) related uncertainty. Consequently, we seek to manage these uncertainties for ourselves, our partners, society, and sustainable development at large. For example, we strive to achieve a carbon neutral portfolio by the year 2030, honor the principle of public access to information by reporting about our progress, and seek positive impact (primarily) through our unlisted investments.
In summary, cost-efficient index funds that mitigate ESG uncertainty are the bedrock of our investments.
Change is perhaps the only thing we can safely assume about the future. While shocks might set us back over the shorter term, development will hopefully propel us forward over the long run. As we have a practically perpetual investment horizon, we should hence perhaps invest solely into equity shares of value-creating companies. However, we still maintain a reasonable allocation to government bonds, to reduce shorter-term volatility and enable a steady spending policy.
Currently, our exchange listed stock weight stands at approximately 77 %, and we are required to maintain it between 60-80 %. Our benchmark for listed stocks is the global MSCI ACWI Index, which covers approximately 85% of the free float-adjusted market capitalization in both developed and emerging markets.
As we have relatively recently reallocated capital to our current equity funds, and they are long-term investments, we plan to continue engaging with them in 2023-24. As one of our goals is a carbon neutral securities portfolio by 2030, we have excluded fossil fuel producing companies, and will continue focusing on this topic.
Our listed bond allocation is currently circa 23 %. Our fixed income comparison index is the Bloomberg Barclays Global-Aggregate Total Return Index hedged to Euros. It reflects global treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging local currency markets. As we primarily seek pure interest rate risk through listed bonds – not corporate risk – we have allocated approximately half into global government bonds. However, we have also allocated half into high environmental impact green bonds. In the next two years, our plan is to continue monitoring the fixed income market conditions and look for opportunities.
We control external governance uncertainties by limiting each counterparty to 25 % of the portfolio. However, we simultaneously strive to invest a meaningful sum with each fund manager, in order to achieve competitive management fees and other terms. We manage liquidity uncertainty by investing primarily into relatively large investment funds that invest in liquid listed stocks and bonds. We furthermore diversify our counterparty exposure geographically. We leave currency risk open for stocks – where it represents a smaller fraction of total risk – but primarily hedge it for bonds. Finally, we manage ESG uncertainty through monitoring, exclusions, engagement and impact investments.
The expected annual volatility of the portfolio returns is below 20 %. The estimate is conditional on both method and timeframe, and includes considerable uncertainty. Assuming a 20 % annual volatility, one year Value at Risk 97.5 % is approximately -35 %. Hence, we expect such an annual drawdown – or worse – in one year out of forty. Accounting for historically fat-tailed return distributions, or kurtosis, the actual Value at Risk is probably larger. An inconvenient fact is that we do not and cannot know how much larger beforehand, as it is connected to uncertainty – sometimes referred to as Black Swans.
We manage internal governance uncertainty by following a segregated operating model, which separates investment research, decisions, and monitoring: