EUROPE - The €28.8bn Finnish pension insurance company Ilmarinen has changed its investment strategy this year and now only invests its euro-zone sovereign fixed income portfolio in Finnish and German government bonds.



This is on top of what deputy chief executive and head of investment Timo Ritakallio described as a "dramatically decreased focus" on government bonds in general.



Despite pressures to own government bonds under Finnish solvency regulations and as collateral for derivatives, at the end of the first quarter, only €4.3bn of Ilmarinen's €12.7bn fixed income portfolio was invested in bonds.



Approximately €3bn was allocated to collateralised and mostly floating-rate loans to its corporate clients, with the rest in money markets.



"In our euro-zone government portfolio, we have changed our strategy this year so we are holding only two countries - Germany and Finland," said Ritakallio.



"There is so much political risk in Europe - it's far too early to say what the strategy for the future will be. What is the risk level? It's an open question."



By retrenching to Finland and Germany, Ilmarinen has not only rejected AA and AA+ countries like Belgium and Spain, but also AAA-rated including the Netherlands, France and Austria - countries that Standard & Poor's rates as better credits than the US itself.



Moreover, Ritakallio acknowledges that it remains difficult to assess the credit risk of even these "core of core" bonds. Negotiations over collateralisation of loans to Greece indicate the concern of the Finnish government regarding its contingent liabilities to the euro-zone's periphery.



Should investors also be concerned?



"Of course I am thinking that, if this crisis continues, all of these packages that are put together constitute some kind of credit risk for Finland and Germany's government bonds," said Ritakallio.



"These countries are more and more responsible for all government debt in the euro-zone. Once we know how the system to handle this crisis will look on a permanent basis, perhaps then we could assess the situation and consider the bonds it issues - which are like Eurobonds - as an interesting investment opportunity.



"But not yet - there are too many open questions. It is interesting, for example, that, in Finland, the authorities are not accepting these bonds as if they were government bonds, which would be considered risk-free in terms of solvency calculations."


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