LHV Pensionifond L

Active Management

10%

-10%

10%

10 year net yield

Risk level

30.94%

100%

Invests into Estonia

61100

Fund investors

Suitable if

you have more than 10 years left until retirement,
you have average risk tolerance,
your aim is the long-term growth of your pension savings.

Choose this fund

Strategy

The assets of the Fund are invested in various asset classes in both local and foreign markets. The Fund's assets may be invested extensively in unquoted instruments, which are primarily used for investing in securities issued by companies domiciled in the home market. The long-term preferred asset class of the fund is private equity investments.

Performance

From beginning

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Current year

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Current month

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Net asset value

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The Fund's return is expressed as the net yield after deduction of all fees.

Biggest investments

The data is presented as at 31.01.2023

Biggest investments
German Treasury Bill 22/03/23	4.16%
France Government 25/03/23	4.16%
ZKB Gold ETF	4.00%
iShares Gold Producers UCITS ETF	3.80%
EfTEN Kinnisvarafond	3.06%
Riigi Kinnisvara 1.61% 09/06/27	3.02%
German Treasury Bill 22/02/23	2.69%
East Capital Baltic Property Fund III	2.22%
Investindustrial VII L.P.	2.12%
SG Capital Partners Fund 1	2.05%

Biggest investments in Estonia

Biggest investments in Estonia
EfTEN Kinnisvarafond	3.06%
Riigi Kinnisvara 1.61% 09/06/27	3.02%
East Capital Baltic Property Fund III	2.22%

Asset Classes

The data is presented as at 31.01.2023.

Information about the fund

Information about the fund
Volume of the fund (as of 28.02.2023)	852,805,458.30 €
Management company	LHV Varahaldus
Equity in the fund	2 000 000 units
Rate of the depository’s charge	0.0420% (paid by LHV)
Depository	AS SEB Pank

Entry fee: 0%

Exit fee: 0%

Management fee: 0,6240%

Success fee: Performance fee is 20% of the positive difference between the fund's performance and the benchmark, maximum of 2% per annum of the fund's volume. Performance fee for 2021 0,24%.

Ongoing charges (inc management fee): 1,95%

The ongoing charges figure is an estimate based on the current management fee and the 2022 level of all other recognized costs. Ongoing charges may vary from year to year.

Terms and Conditions

Terms and conditions (in Estonian)

Prospectus

Reports

February 2023: We do not take high risks in stock markets

Kristo Oidermaa and Romet Enok, Fund Managers

In February, stock markets moved in different directions. The MSCI World Index lost 0.1% of its value in euros, while the leading US stock indices were mostly on the minus side: the S&P 500 index fell 2.6% and Nasdaq fell 1.1% in dollars.

European markets, however, continued the rise that started in January, with the Euro Stoxx 50 index ending the month with an increase of 1.9%. The performance of emerging markets, however, was weaker. The MSCI Emerging Markets Index fell 6.5% over the month, driven by the markets in China and Brazil. The Baltic stock markets ended February in positive territory.

In February, the merger of two real estate funds managed by EfTEN Capital was given final approval by investors and EfTEN Kinnisvarafond merged with the publicly traded EfTEN Real Estate Fund III. LHV pension funds have invested in EfTEN Kinnisvarafond since March 2011 and it has been one of the largest investments in our portfolio for many years. Since its inception in 2008, EfTEN Kinnisvarafond has offered investors an average annual return of 14.4%. Although we have sold about a third of our positions over the past year, we continue to be the largest investor in the merged fund, also after being listed on the Tallinn stock exchange.

In February, the fund’s equity investments were most affected by a 10% fall in equity positions in precious metals. Equity positions in the energy sector moved in different directions and did not have a major impact on returns. Shares of European banks benefiting from interest rate hikes yielded positive results.

We continue to keep the fund’s equity exposure at low levels to avoid potential losses in an environment of rising interest rates and a downturn on the stock market. The fund’s current equity investments focus primarily on sectors related to mineral resources, where we expect long-term undersupply.

January 2023: We expanded the portfolio of over-the-counter investments

Kristo Oidermaa and Romet Enok, Fund Managers

In January, we saw a rising tide in the stock markets. Measured in euros, the global MSCI World index, the US S&P 500 index and the Nasdaq Composite index, which tracks listed companies in the US technology sector, rose by 5.2%, 4.7%, and 9.1%, respectively. Japan’s Nikkei index and Europe’s Euro Stoxx 50 index moved in the same direction, increasing their value in euros by 3.9% and 9.9%, respectively.

The MSCI Emerging Markets index rose by 6.3%, measured in euros. The Baltic markets were no exception: the Tallinn, Riga, and Vilnius stock markets rose by 6.5%, 3.6%, and 3.5%, respectively.

We added two new investments to the fund’s over-the-counter portfolio. The fund manager of these investments is the asset management company Quilvest. Founded in 1972, the firm manages over 5 billion US dollars worth of assets.

The private equity fund Quilvest Buyout Fund III will invest in mid-sized European and US companies operating in the business services, technology, and consumer sectors. The private equity fund of funds Quilvest Global Mid-Market Opportunities II will invest in private equity funds worldwide, aiming to place 50% of the fund’s assets in the US, 25% in Europe and 25% in Asia. Both private equity funds are follow-on funds to Quilvest’s existing funds, in which our pension fund is already an investor, and they are just starting their investment activities.

In January, the fund’s largest equity investments continued to rise. Gold prices were supported by purchases by central banks. For the first time in a long time, China’s central bank has begun to shift its reserves from the dollar to gold. The physical gold-backed investment held by the fund increased by 3%, and shares of gold mining companies increased by 7 to 12%.

The increase in economic activity in China also supported the prices of industrial metals. The shares of copper mining companies acquired by the fund rose by 15–16%, measured in euros. We saw weakness in energy prices, which the fund’s equity investments withstood relatively well.

Generally, equity markets have recovered remarkably well from the downturn over the past six months and, in this environment, we have reduced equity exposure in the fund. We expect equity markets to continue to adjust to a higher interest rate environment, which will bring volatility and good buys to the markets.

In the bond markets, the expectation remains that the European Central Bank will continue raising interest rates, causing the Euribor to rise with them. This is good news for pension investors. For example, the interest on one of our most significant bond investments, the security in Eastnine, a company that focuses on commercial real estate in Vilnius and Riga, has already exceeded the 7% level with the rise of the Euribor. The price of money is likely to continue to go up, causing the expected interest earned by the fund to increase even further.

December 2022: We reduced equity positions in the energy and banking sectors

Kristo Oidermaa and Romet Enok, Fund Managers

In December, world stock markets mostly fell. Measured in euros, the MSCI World index fell by 7.6%, the US S&P 500 index fell by 9.4%, and the Nasdaq Composite index, which tracks the US technology sector, fell as much as 12.1%. The Japanese Nikkei index fell 4.4%, the European Euro Stoxx 50 index 4.3% and the MSCI Emerging Markets index 5.3%, measured in euros. The Baltic stock markets stood out last month: the Tallinn, Riga, and Vilnius stock markets rose by 0.4%, 3.4% and 0.1%, respectively.

In our portfolio of over-the-counter investments, BaltCap’s two funds had news in December. The Adoro company in BaltCap Private Equity Fund III is acquiring the social welfare centre Dzīves Ābece in Latvia. The centre was established in 2018 and currently has 97 beds. The BaltCap Infrastructure Fund announced having reached an agreement to build a new police department worth 21.9 million euros in Šiauliai, Lithuania. The development should be completed in three years, after which the company belonging to the fund will also provide administrative services for the building for a period of 12 years. The approximately 5,200 sq m building will have four floors for 245 employees and a car park for 270 cars.

Our investments in listed stocks depreciated at the end of the year, driven by profit-taking in positions related to the energy sector. Stock investments related to precious metals escaped the general decline of the markets.

At the beginning of the month, we reduced our equity positions in the US energy sector and European banks, which had offered good returns in the short term. With these sales, we increased the buffer that can be used for new investments in the near future.

In the bond portfolio, Coop Pank called its subordinated bonds ahead of schedule, but as planned. The bonds were issued directly to LHV pension funds in 2017 and earned a total return of approximately 35%. LHV funds were the first institutional investor in the new bank. The company has developed rapidly and now involves capital through the stock exchange.

European bond markets remained clearly in the red in December, showing once again the value of financing Estonian companies, both in developing the local economy and in achieving a higher return on pension assets.

The year 2022 was particularly difficult for the public bond markets: for example, the European market offered an average return of –17%, and Estonian government bonds fell as much as 21%. Fearing risks, we have avoided public bonds in recent years, but the new year may start offering new opportunities in this area.

Recession: a likely cost of lower inflation
Andres Viisemann, Head of LHV Pension Funds

The year started powerfully on the securities markets: the MSCI World index rose by 5.2% measured in euros in January. The S&P 500 index, which tracks the shares of 500 large US companies, added 4.7% to its value, and the Nasdaq index, which reflects the US technology sector, rose as much as 9.1% after last year’s big decline. The Japanese Nikkei index and the Euro Stoxx 50 index also increased by 3.9% and 9.9%, respectively.

Central banks still have a long way to go and headwinds are strong

Stock markets have been in an upward trend since last October. Investors seem to believe that, by mid-2023, central banks will be able to break the backbone of inflation and return to the old pattern of behaviour, where every setback in the economy and markets was treated by cutting interest rates.

I, too, believe that the rate of inflation peaked in the second half of last year for this economic cycle, and that the rate of price growth will decline to 4% or 5% by mid-2023. However, central banks aim to achieve price stability, which is defined as 2% price growth.

This is not an easy task, as politics have become more populist around the world. In economic policy, this is manifest in, for example, often fighting inflation with measures that actually accelerate inflation.

An excellent example of this is the Inflation Reduction Act pushed through last year by Joe Biden’s administration in the US. Economists with different worldviews have an unprecedented consensus that the new law is likely to lead to exactly the opposite. These kinds of legal regulations and measures do not make it any easier for central banks to fight inflation. Instead, they force interest rates to be raised more than would be necessary without government intervention.

We all remember the extraordinary measures central bankers were willing to use over the past 14 years to push up inflation when it fell 0.1% or 0.2% below the 2% target. I am sure that central banks will also show a fighting spirit now that there is a need to bring inflation down.

Several inflationary trends are currently apparent, including increasing government intervention, rising (likely permanently) higher defence expenditure, the transition to greener energy, and the restructuring of supply chains for greater resilience. These trends work against central banks’ efforts to curb price growth. Therefore, it is difficult to calibrate monetary policy and there is a risk that central banks can overtighten the monetary policy screw.

Investors expect interest rates to drop in the second half of the year

Bond markets are already expressing investors’ faith that central banks will beat the inflation rate. Ten-year German government bonds offered a yield of 2.56% at the start of January, which shrunk to 2.29% by the end of the month. At the same time, the 6-month Euribor rose from 2.73% at the beginning of January to 2.988% at the end of the month.

The European Central Bank deposit interest rate remained at 2% throughout January. Investors expect that after raising the interest rate by 50 basis points at the 2 February meeting, it will be raised again by 0.5 percentage points in March. The interest rate will then reach 3%.

Short-term interest rates are, therefore, already higher – and in an upward trend at that – than long-term interest rates, which are in a downward trend. The inverted yield curve, as it is known, has almost always indicated an imminent deterioration of the economic environment.

It must be admitted that central banks have become the largest investors in the last couple of decades by acting very aggressively in the money markets. Bond prices do not reflect as much information about investor expectations as they did in the past, but an inverted yield curve still sends a message.

As mentioned, the stock markets have been in an uptrend since October. After all, many investors expect that, in the second half of the year, central banks will be forced to lower interest rates because the economic environment will cool down and also bring down the pace of inflation.

The excessively long a period of cheap money has now lead to a situation where investors are more interested in the monetary policy of central banks than in the economic results of companies. When the economic environment deteriorates, investors often cheer, as the positive impact of lower interest rates on stocks and real estate outweighs the negative impact of lower profits and rents. Such an attitude is perverse and unproductive. It encourages speculation with existing assets and discourages investment in the future and the creation of new value.

I suspect the recession will be more severe than many investors think. Should inflation remain well above the target set by the central banks, they will not care how much the markets fall this time, but will raise interest rates until they reach the target set by law.

In our investing decisions, LHV pension funds have always prioritised the profit and cash flow to be earned by companies and projects in the future. We have always looked for projects that are intrinsically sound, do not use borrowed money too aggressively, and can do without government support. The projects must be viable even if interest rates rise above the historical average and remain at that level for a longer period of time.

Estonia has become a big spender and borrower

Estonia’s debt burden has been one of the smallest in Europe, and this has been one of the reasons why we at LHV have liked Estonia as an investment environment. However, for some time now, Estonia has been one of the biggest spenders in Europe. There are politicians who would like to loosen the purse strings even more, support everyone, and spread the myth that all other countries disburse subsidies even more generously. Unfortunately, the reality is different: in the last five years, Estonia’s debt burden has grown rapidly, at a time when interest rates have been on an upward trend. It is true that Estonia’s debt burden is still small, but this does not mean that we should finance current expenses with loans.

I recently noted an analysis of the development of the Greek economic environment, which included the graph below. By the way, the rating of Greek government bonds has risen significantly in recent years, and the performance of the Greek stock market was at the forefront in Europe last year.

Pilt
Figure 1. Change in government debt-to-GDP ratio since 2019 (percentage points). Source: DG ECFIN, AMECO

A high debt burden amplifies the risks. At difficult times, risks should be mitigated rather than increased. This means that all expenses need to be critically reviewed, and if something can be cancelled or postponed it should be seriously considered.

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