How to justify target allocation?

News

Originally Pontos was a spin off from a construction company. In 2008 our portfolio consisted solely of direct real estate investments. At that time, it was decided that the target allocation would be 50% direct real estate and 50% direct private equity. In this blog post Timo Kokkila will walk thru Pontos’ current thinking on our target allocation and he would be happy to continue discussion with anyone having interest in this topic. We are curious to learn from your thinking.

I am observing the capital markets with a brain of an engineer whose focus is more in operations and everyday business than in investment theory and finance instruments. We have studied different portfolio allocation methods and combined that with our background and capabilities. Our target is to develop our thinking year by year to come up with our own investment strategy that applies in the best possible way to our business. How to mix theory into practical thinking and apply that to your reality? Our background is in construction and real estate, which for us justifies the large amount of real estate in our target allocation. It also gives a strong flavor to Pontos as company. We are experts in real estate, and it gives us a higher probability to create strong returns in that sector. Private equity players have been generalists in the past years. As the PE has matured as an industry, the competition has been increasing and we are seeing more specialists with more focused investments strategies. We are developing our thinking into direction where we want to see more synergies between our portfolio companies. As an example, Pontos has invested into datacentre company. It is an industry which as such was not familiar to us, but at the same time it is an industry where real estate is in a significant role.

As an investor our focus is in long term value creation. We have a long experience in real estate, and have worked now for 10 years with companies in different industries and in different growth stages. Our teams are currently based in Helsinki, Tallinn and Loule (Algarve). Our roots are in Finland. We want to integrate our values deeper into our investment strategy. We will drive to increase the energy savings in real estate to minimize the impact on environment and we will continue to educate ourselves on organizational wellbeing.

After 2008 we started to do direct private equity investments. Along the way we recognized it would make sense to lower the portfolio risk while increasing the diversification. To achieve this we started to commit capital also to private equity funds. At the same time having a large part of portfolio allocated to illiquid alternative investments we increased the target allocation of liquidity. In the current zero interest rate environment cash is almost a problem as you often need to pay to keep it the bank account. At the moment we are taking some risk with our liquidity with the target to achieve small returns while keeping it in instruments that can be liquidated in few days if necessary. All this results to our current target allocation which is real estate 50%, private equity 25%, private equity funds 10% and liquidity 15%.

What is your target allocation? And what would be your method to justify it?

Blog post by Timo Kokkila.

More information

Kokkila Timo

Timo Kokkila

CEO, Member of the board

+358 (0)10 239 6359