Securities investments include, above all, listed fixed-income and equity investments. Etera invests in securities directly, through investment funds and by using derivatives.
In the long run, equities have a high expected return, but they are also a fairly risky asset class. Share prices correlate strongly with business cycles. Hence investors must prepare themselves for up to several consecutive years of negative returns during a downturn. Adjusting the amount of equity risk in the portfolio is a key factor affecting total returns.
Fixed-income investments include money market products, government bonds, corporate bonds and asset-backed securities. The fluctuations in the prices of fixed-income products result primarily from the movements of market interest rates and changes in the pricing of credit risk inherent in fixed-income products. Price fluctuations are typically lower in fixed-income investments than in equities, which means that expected returns are also commonly lower than for equities. Selecting an optimal mix of interest rate and credit risk for the current economic and market situation is important in fixed-income investments.
In addition to equity and fixed-income investments, Etera invests to a lesser degree in hedge funds, insurance-linked securities and commodities.
Etera’s investments unit's allocation team manages the tactical allocation process for securities investments. The long-term goal is to achieve an investment return that, on average, exceeds that of other pension companies through active security selection, effective adjustments of the risk level and risk management.
The allocation process strives to, at any given moment, seek the optimal amount of risk and its allocation. Assets are dynamically allocated into investment opportunities where the expected return relative to the expected risk is as attractive as possible. The overall risk budget is set at a suitable level with respect to company’s solvency position.
The solvency risk management, both in the short and long term, defines the overall risk budget. Next, the allocation of risk into different components needs to be decided. Equity, interest rate, credit and currency risks are the main actively adjustable risk components.