Research Foundation investment plan

University of Helsinki research foundation investment plan 2021-2022.

University of Helsinki Research Foundation Investment Plan 2021-2022

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 a plan for the Foundation’s 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 principles that govern any future adaptations of the plan.

The Foundation is a constituent of the University of Helsinki Group (hereafter “we”), which includes the University of Helsinki Funds, in addition to the University itself. We have developed our investment management actively in recent years. For instance, we renewed our Principles of Investments and Spending in 2018, and introduced entirely new Principles of Responsible Investment Activities in 2019. The Foundation begun aligning its investment management with us in 2020 – however taking into account its characteristics.

Principles – Accepting the scientific evidence

The starting point for our principles are the central values that guide us overall; truth, bildung, freedom and inclusivity. In the context of investments, 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.

We acknowledge the concept of market efficiency, which states that security prices reflect all information that is available in an efficient market. To be more precise, we believe in the concept of equilibrium market efficiency. It 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.

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. Within the framework of equilibrium market efficiency, this implies that the market has been “overly” efficient – or that too much capital has been managed actively. While past performance is no guarantee for future performance, we 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) risks. We simultaneously need to manage these risks for the Foundation, our partners, society, and sustainable development at large. For example, we strive to achieve a carbon neutral portfolio by the year 2030, and honor the principle of public access to information by reporting about our progress.

Allocation – Value creation through unleashing human potential

During the lifetime of the University, the society has transformed multiple times, mostly as a function of scientific, technological and economic development. The driving force behind this profound change is however constant – in the words of Warren Buffett – unleashing human potential.

Human potential will surely continue yielding innovations that enhance our quality of life and create economic prosperity. The Foundation is equipped financially and philosophically to endure short-term fluctuations along the way. In concrete, as the variation of the average return (SEM) declines inversely proportionally to the square root of the investment horizon, the variation of e.g. the 100-year average return is only one tenth of the annual return. Time is on its side, at least from a statistical perspective.

As the Foundation has a practically perpetual investment horizon, it should perhaps invest solely into equity shares of value-creating companies. At the time of writing, it allocates approximately 70 % into shares of companies, and the rest mostly into fixed income (with very low business risk). This level of risk should provide it with returns sufficient for supporting doctoral students, as well as accumulating capital over the long run, while limiting negative interim outcomes to a tolerable level.

Investments – Efficiency and responsibility

During 2020, the Foundation focused on ESG index execution only investments. In this process, it particularly stressed cost control, transparency, and risk management – including environmental risks.

Currently, the Foundation’s exchange listed stock investment weight stands at approximately 70 %, and is required be 60-80 %. The benchmark is the global MSCI ACWI Index, which covers approximately 85% of the free float-adjusted market capitalization in 23 developed and 26 emerging markets. As Foundation has recently reallocated capital to equity index funds, and they are long-term investments, it plans to engage with them actively in 2021-2022. Furthermore, the Foundation plans to continue developing diversification. As one of the Foundation’s goals is a carbon neutral investment portfolio by 2030, it will stress this topic by searching for new low-carbon or carbon offsetting investments opportunities.

The Foundation’s listed bond allocation is currently circa 27 %. Its fixed income comparison index is the Bloomberg Barclays Global-Aggregate Total Return Index hedged to Euros, which reflects global treasury, government-related, corporate and securitized fixed-rate bonds from 24 developed and emerging local currency markets. The Foundation furthermore underlines ESG risk management, including excluding of fossil fuel production. The Foundation primarily seeks interest rate risk through listed bonds. It has so far reallocated approximately 1/2 into high-impact green bonds. In 2021, the Foundation’s plan is to continue developing the fixed income allocation e.g. by reallocating capital to government bonds.

The Foundation will divest its remaining other investments in 2021, which now constitute less than 4 % of its portfolio.

Risks – Volatility and black swans

The Foundation manages liquidity risks by investing primarily into relatively large investment funds that invest in liquid listed stocks and bonds. The Foundation leaves currency risk open for stocks – where it represents a smaller fraction of total risk – but primarily hedges it for bonds. Furthermore, The Foundation manages ESG risks through monitoring, exclusions, engagement and impact investments. Finally, The Foundation develops its external reporting in order to enhance our risk management, including ESG risks.

The ex-ante estimated annual volatility of the Foundation’s portfolio returns is in the range of 10-20 %. This estimate is obviously conditional on both method and timeframe, and includes considerable uncertainty. Assuming a 15 % annual volatility, the one year Value at Risk 97.5 % is -30%, or currently approximately 10 million Euros for the Foundation. Hence, the Foundation expects such an annual drawdown – or worse – in one year out of forty. Accounting for historically fat-tailed return distributions, or large kurtosis, the actual Value at Risk is probably larger. An inconvenient fact is that it is unknown how much larger, as it is connected to uncertainty, popularly referred to as Black Swans.

The Foundation manages internal governance risks by following a segregated operating model, which separates investment research, decisions, execution, and monitoring:

Operating model