15. November 2017
Over a period of 12 months, Estonia’s first passively managed pension funds – the second pillar fund LHV Pension Fund Indeks and third pillar fund LHV Pensionifond Indeks Pluss, which first became available last November – have earned clients more than 500,000 € with their rate of return. A total of 890 clients are saving money in the LHV second pillar passive fund and 411 are saving in the third pillar pension fund.
Over the last 12 months, 6 index funds have entered the Estonian pension market, with the LHV Pension Fund Indeks Pluss being only the third pillar passively managed pension fund. The second pillar passive funds have a total of 8865 clients and the volume of the passive fund’s assets, 55 million €, comprises nearly 2% of all savings in Estonia’s second pension pillar.
Commenting on the results for the first year of LHV’s passive funds, Fund Manager Joel Kukemelk said that the rate of return for funds that are invested continuously on global markets follows their movements, and since the past year was a very good one on stock markets, this was also reflected in the results for the funds. ‘Passive funds direct pension assets outside of Estonia onto global stock exchanges and the majority of assets are invested in countries where accounting takes place in US dollars, meaning that the results of those funds also depend, in addition to the movement of stock markets, on the fluctuation in the exchange rate between the euro and the dollar’, explained Joel Kukemelk, adding that: ‘if the value of the dollar rises, the effect on the rate of return is positive.’ Kukemelk, who is the Fund Manager for LHV’s passive funds, added that even though the dollar has declined significantly against the euro, this was compensated by the notable rise of global stock markets.
The biggest difference between passive funds and actively managed funds is that during periods of stock market growth and recession the funds follow the market, the fund manager is unable to intervene, and the fund manager’s options are severely limited when it comes to managing risks. The quick rise of exchanges over the past few years has led many exchange indexes to records, which has led to an increase in the risks accompanying stock markets over the short term.
Even though the fees for passive funds offered in Estonia are similarly low, their content is different. LHV’s second pillar passive fund is set apart by its bolder strategy: the bond component, which enables a long-term lower rate of return, is replaced with real estate funds. Another significant difference in the case of both LHV passive management style funds is that the funds invest assets on a global GDP basis and therefore the share of developed markets, which have historically shown greater growth, is significantly higher in these than in other passive funds. ‘At present, the operating history of Estonia’s passive funds is far too short – only one year – to allow for any far-reaching conclusions to be drawn. However, as an exercise in thought, it is possible to calculate historic simulated rates of return for the funds, in order to obtain a better idea of the possible future differences between passive funds. When performing calculations, the current structure and model portfolio of funds could be taken as the basis, along with the actual results of followed indexes’, said the fund manager.*
The pension funds of LHV Varahaldus have nearly 180,000 clients. LHV administers second and third pillar pension funds that are managed actively as well as passively. According to data from the Estonian Chamber of Commerce and Industry, LHV’s active pension funds are the biggest investors in Estonia’s economy, accounting for 82.65% of all investments (Q3 2017). The volume of LHV’s pension funds totals 1 billion €.
*The historic simulated result is not an actual result and in no way constitutes a promise or reference to future rates of return.
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