The start of 2022 has been marked by the recovery from COVID-19, especially in the Eurozone and North America. Accelerating inflation has led to an increase in interests. The Russian war of aggression against Ukraine brought dark clouds to the horizon, resulting in not only vast human suffering but also significant effects on the economy.
As Pontos’ Chief Financial Officer, my own gaze within this global turbulence has remained firmly fixed on the risk-bearing capacity of our investment portfolio. At the same time, we have planned measures for times of uncertainty.
How to clarify and stabilize the direction of financial management, despite the instability? I see long-term perspective and strong focus as keys to financial management.
Having a long-term outlook in an investment portfolio helps maintain a clear gaze to outlast blurry economic cycles. It becomes increasingly important to have a carefully thought-out strategy.
Pontos is a long-term owner, and we don’t make sudden movements. Our strategic core themes carry us through economic cycles, even if there are changes in the operating environment slowing down progress.
As we regularly examine our strategy, we note changes in the operating environment and survey risks in our portfolio. After this, we define measures for managing risks. By having thorough contingency measures, we can minimize negative outcomes in matters we can influence.
It is also important to note the risk-return ratio. We use it to define whether to proceed with an investment. Calculated risks are a natural part of investment activities.
Examining the allocation of the portfolio support contingency measures against market fluctuations and being able to keep calm.
The allocation of family-owned investment companies often looks somewhat different due to the history of the company and the origin of wealth. The portfolio may have large allocation clusters, as certain holdings of the family are weighted heavily. Thus, their principles for diversification of assets in different investments may not be optimal.
However, branching out into different asset classes reduces risks, and this is also our principle. Our roots lie in construction and real estate investments, and this is still reflected in our portfolio. Direct real estate investments make up approximately half of it. We are also the largest owner of one of Finland’s largest construction companies, SRV.
Real estate allocation brings us partial protection against inflation, a steady cashflow and more moderate value fluctuation during uncertain times. The risk in our portfolio’s real estate investments is greater. We control this risk with good planning, mutual communication and by modeling different scenarios.
Another important asset class for us is private equity investments, which we make both directly and through private equity funds. This asset class is highly vulnerable to economic fluctuation. The risk is reduced through diversification into fund managers’ largest buyout funds. Their risk-return ratio balances out the risk of direct private equity investments.
In addition to these, our portfolio also includes liquid assets and bonds. Cash assets are a significant part of risk management in unpredictable times.
Rising interests have been discussed for two decades, yet it only began recently.
Over the years, Pontos has prepared for the interest risk with interest radge hedging, but we have maintained a low level of protection during decreasing and low interests. At the turn of the year, we increased our hedging rate.
We aim to keep our debt rate moderate.
In the midst of cycle fluctuation and shocking world events, it is necessary to also focus on things we can truly impact.
For Pontos this means, above all, the climate risk, which affects all operations and is a relevant part of our strategy focusing on sustainable business and vital cities. Because properties produce a large share of CO2 emissions globally, renewing the built environment has a central part in maintaining the Earth’s bearing capacity.
We encourage our companies and properties to introduce new technologies to improve productivity as well as significantly reduce CO2 emissions. We continue to strategically invest in the digitalization of real estate, an industry which has seen too few investments. We also recently published an operating model, which aims for carbon neutrality in our real estate portfolio by 2030.
Our focus on the future is our input for renewing the built environment – and it also carries us through harder times. Acknowledging risks and threats along the way will allow us to head in the direction we have chosen with greater safety.