By Hamlin Lovell, NordicInvestor

Nordic Investor interviewed Tapio Koivu, Portfolio Manager at Veritas Pension Insurance Company, to discuss the firm’s well diversified equities exposure, and its ESG approach, which unusually does not have an exclusion list. Veritas manages EUR 3.6 billion as of September 2020, for employers and entrepreneurs in Finland and the Aland Islands. The interim report shows 42.4% allocated to equity investments, of which 33% was in listed equities, as of September 2020.

Veritas Insurance manages some equities in house, mainly in local Finnish equities, and some European equities. Outside Finland, equities are predominantly managed externally, with some European equities – and all US and emerging market equities – run by outside managers. The external mandates are carved up along regional lines, such as US, Europe, Japan and emerging markets, rather than being based on industrial sector specialists.

Mainly active, discretionary management

In general, we want active management, but there is a diversity of approaches”, says Koivu. Therefore, the styles of management run the gamut from passive index tracking, to fully active management, and also include enhanced index, smart beta and factor oriented, and ESG approaches, in between these extremes;

We are driven by market opportunity, but apply the same overall philosophy of active management….”

Veritas assesses how active managers are based on a range of metrics, which could include tracking error and active share, but these alone are not sufficient to determine how active a managers’ approach is. “It partly depends on the manager’s style because some approaches are by their nature more active”, explains Koivu.

The degree of active management is also one consideration influencing fee levels and structures. “We have a range of fee structures, driven partly by potential alpha generation. There is no simple formula to determine the right fee structure, but managers who are very close to an index cannot charge much fees”, he points out.

Quantitative and systematic management is a growing trend in general but this has not yet made much difference to Veritas’s equity allocations;

Most of the equity strategies are run on a discretionary basis, because we generally find more equity managers with a discretionary approach. But we have no preference between discretionary and quantitative….”

Factor and style risk

Individual managers can have biases to certain styles such as growth, value, or quality, but the overall portfolio is quite diversified by style and factor risk, with one possible exception: “there is a natural bias to small caps because even all cap managers find it hard to be overweight of large cap and mega cap stocks, especially in the US equity market”. In any case, Veritas also has the ability to use an overlay at the firm level to make adjustments to factor exposures present in its internal or external allocations.

Manager sizes

“We judge track records on a case-by-case basis. We would not invest in a start up with no track record, but there are no hard or strict minimums for asset levels”, points out Koivu. The fact that Veritas does not want to become too large a part of an individual fund does in practice set some minimum, which will vary with the size of the ticket. He adds;

here are also no hard maximums for manager assets, but we are sensitive to the liquidity of different equity markets….

ESG and exclusion lists

Accountability and responsibility for responsible investment and climate-related issues at Veritas applies all the way from investment analysts and portfolio managers, up to the CEO, CIO, COO and Investment Committee.

Veritas belongs to the local FINSIF (Finland Sustainable Investment Forum), is a signatory of the UNPRI, and has also signed the “Fiduciary Duty in the 21st Century” initiative put forward by the UNPRI and UNEP Finance Initiative, which has been supported by former US Vice President Al Gore’s Generation Foundation. This initiative argues that ESG is part of fiduciary duty, amongst other things.

Veritas’ UNPRI transparency report shows it incorporates ESG into its investment process to all asset classes bar money market instruments. The Veritas ESG policy takes into account the differences between asset classes. For equities, we develop our own dialogue with companies and managers on proxy voting

We do not give external managers exact guidelines for voting proxies, but do want to ensure that policies are aligned….”

Whereas many large allocators in the Nordic countries apply “negative screening” with exclusion lists, often ranging from about 30 companies for the AP funds in Sweden, to about 160 for Norges Bank Investment Management in Norway, to over 300 for some Danish pension funds, Veritas is somewhat unusual in not having any explicit exclusion list. “In our ESG policy, we believe more in engagement than exclusion”, says Koivu. For instance, Veritas seeks managers who carry out long term fundamental analysis that includes ESG factors, according to its PRI report.

We also focus on areas such as carbon data reporting. We ask about climate policies and there are big differences between individual managers’ carbon reporting”. Veritas belongs to the CDP Community and to Climate Action 100+, and publishes a PRI Climate Transparency Report.

Though Veritas does not exclude companies nor industries, its PRI transparency report states that, “we minimize carbon intensive sectors in portfolio”. External managers who heed this might well be discouraged from having heavy weightings in the highest carbon emitters.

Sustainability standards, labels and reporting

Koivu welcomes the EU Sustainable Finance initiative, but cautions that it is at an early stage.

The initiatives are positive for transparency and reporting to evaluate how aligned companies are with different ESG metrics, but it is early days for the taxonomy classifications. The data availability has been improving, but it needs development. It is still difficult to understand the categories, and to reduce complex matters into these categories”.

Similarly, impact investing is becoming very fashionable, but it does not always cover the full range of equity strategies: “we do not necessarily find impact investing a useful label because it’s not a binary thing.

some managers can be very active and create positive impact even though they are not classifying themselves as impact investors. We look at strategies along a continuum of approaches….

Veritas has invested in wind farms, which are often classified as a form of impact investing.

There are aspirations amongst allocators to encourage more asset managers to report more extensively how their portfolio companies contribute towards meeting UN SDGs, but again this may not be realistic for all managers: “The UN SDGs are not always a useful reporting metric, because managers have different datasets that may not map onto the UN SDGs. The reporting varies by manager so it’s hard to compare managers’ alignment with these goals”.

Covid 19 and Due Diligence

In terms of internal ESG policies, Veritas has made its offices more energy efficient and has in 2020 been reducing its carbon footprint by travelling less: “we have been using video meetings instead of carrying out onsite visits, and this could have a lasting impact. We expect to do less face-to-face meetings with our existing managers going forward to make more efficient use of time. We have had to become flexible in being able to allocate to new managers without a site visit while travelling is restricted”, concludes Koivu.