18.03.2026
The global geopolitical situation has also had an impact on financial markets. We discussed with Vahur Vallistu, the Chairman of the Management Board of LHV Varahaldus, about how to keep calm, how the main strengths of active pension fund management are manifested in turbulent times, and why oversimplification is a slippery slope when describing the investment world.
The events in the world are causing anxiety. People are interested in the health of their pension assets even to those who have not closely followed the performance of their Pillar II portfolio in the past. What is your encouraging thought for people reading this interview?
To reassure you, markets are cyclical, and every downturn is usually followed by a new rise. However, the concerns of pension savers are understandable.
Today’s situation in the global economy and political arena is a good time for introspection. To assess past choices and ask whether the current fund selection is in line with one’s actual risk appetite. Certainly, many people have looked toward index funds and maximum equity risk against the backdrop of rising stock markets in recent years without thinking about risks more broadly. In LHV’s larger funds, we believe that good returns are also brought by investments in real estate or non-listed (often local) companies that do not directly depend on the US stock market, the triumph of tech stocks or the possible closure of the Strait of Hormuz. It is important to understand that Pillar II is designed for long-term investing, and it is not worth making fundamental decisions on the basis of short-term surges or sharp drops.
Anything else in addition to self-analysis?
I will stretch the timeline further and recall what we have seen over the last five years. The pension reform certainly brought the whole issue of Pillar II closer to the people. It made them more aware. I hope it also brought a greater understanding of personal responsibility. In recent years, we have seen very high inflation, and people sense how difficult it is to save from their salary. Additionally, for years, a main theme alongside geopolitics has been how the state lacks the resources for various things. Meanwhile, the demographic situation is worsening.
The fact is, the hope for pensions to rise forever is not relevant. Estonian pensions are already among the lowest in the European Union. It is time to let go of the mentality that it is okay to be poor in old age and that the state will take care of me. If this mindset persists, it is clear that coping in retirement will be difficult.
You mentioned that index funds tend to be hit harder during uncertain times. What does the current period mean, by contrast, for the actively managed funds that LHV is known for?
LHV’s approach to active management is completely different from that of other market players. In the actively managed funds of our competitors, the active component is almost non-existent.
For LHV, active management means, above all, a broad-based selection of asset classes. For example, with our largest pension fund, Ettevõtlik, we want about 60% of assets to be outside the stock markets. The clients’ expectation for our investment team is that they find the best places to invest money within different asset classes. This means daily analysis and in-depth knowledge of what is happening in, for example, the real estate, bond, private equity or stock markets.
Speaking specifically about current turbulence, LHV’s advantage is precisely this broad-based allocation. We have large positions outside the stock markets that ensure a stable cash flow, and regardless of what is happening around us, we will hopefully achieve our returns in any case. The strength of such a strategy was well-confirmed last year, when the best-performing funds in both Pillar II and III were LHV’s actively managed funds.
What value does active management create for investors?
If a person has chosen LHV’s active management to increase their future security, as a fund manager we need to create added value for them. This cannot be obtained from index funds or funds that invest exactly like index funds but package it as active management. My message is simple: objectively speaking, the worst choice for a client is a competing fund that charges an active management fee but moves in line with index funds. This is extremely unfair to the client.
When a person thinks about active management, they must clearly understand what they are paying for. In the case of LHV, it is easy. We say very openly that while stock markets are important to us, the majority of our clients’ assets are invested in other asset classes that do not always move in the same direction or at the same pace as stock markets and may follow a completely different logic. Yes, investing in them is somewhat more expensive, but that is the price of significantly better diversification. We do not want to depend so heavily solely on what happens in the stock markets. Moreover, our return expectation for all asset classes in the long term is higher than in the stock markets. For example, LHV pension funds do not invest in real estate where the long-term return expectation is less than 8%, or private equity where it is below 12%. All in all, we want to reduce dependence on stock markets without making compromises in long-term returns.
It seems that people’s risk appetite has grown, but the risks associated with investing have been discussed less in recent years. How does LHV view this?
It is clear that there is no return without taking risks. The ABC of investing says that if you put bonds and shares in the same picture, and this is very dangerous given all the simplifications, you can say that bonds are safe and stocks are risky. The expected return of a bond is lower and a stock’s is higher. Real life is much more interesting. LHV says that by taking stocks and adding private and venture capital, local bonds, and real estate to the mix, you do not have to compromise on returns, but the risk of short-term fluctuations is significantly lower. This is because not all these risk assets move in the same direction all the time. Our active management refutes the scale that low risk equals low return and vice versa.
When we talk about local bonds, real estate or private equity funds, we like them because we are able to actively manage and control the risks ourselves here. Together with local companies, we discuss the terms of the bond, guarantees, repayment schedules, interest rates, etc. We can manage risks much better without compromising returns when we bring investments closer to home. In a sense, through our actions, we can really influence how a specific company is managed.
It is the same with real estate, where we make direct investments to have full control. We are the masters of our own destiny. We can look for tenants ourselves, negotiate lease terms, and also only blame ourselves if everything does not go as expected. We like a hands-on approach. In difficult situations, we do not throw our hands up and say sadly that it is a pity. Instead, we can put our finger on the problem and say that it went poorly for one specific reason or another. At the same time, this means we can actively change things and resolve the situation ourselves.
Finally, what message do you have for people who are worried or uncertain about the current situation?
From the perspective of general wealth and coping, life in Estonia has never been as good as it is now. However, if the frenzy of pension funds is making one anxious, LHV has many good options to help them sleep well. However, even more important than a specific fund choice is saving, investing, and the consistent accumulation of capital in general.
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