Timo viherkentta

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