Fennia Asset Management Annual Report 2017

Report of the Board of Directors

Report of the board of directors

For Fennia Asset Management Ltd, 2017 was the sixth complete year of operations. The company is a wholly owned subsidiary of Fennia Life. The company’s business grew significantly, and the number of personnel doubled as the employees of Fennia’s investment department and part of Fennia’s financial administration were transferred to the employ of the company in the context of the organisational change made on 1 April 2017.

On 18 April 2017, the Financial Supervisory Authority granted Fennia Asset Management a new authorisation to act as a manager of alternative investment funds. At the same time, the company’s old authorisation to operate as an investment services company ended. The new authorisation meant that the administration and management of the special investment fund Fennica Properties I could be transferred from Elite Asset Management Ltd to Fennia Asset Management. The Financial Supervisory Authority granted authorisation for the transfer of administration and management on 19 April 2017 and the transfer was implemented on 23 May 2017.

In the context of the organisational change on 1 April 2017, the company’s management and Managing Director changed. Eero Eriksson, Fennia Mutual Insurance Company’s Deputy Managing Director became the new Managing Director, as Alexander Schoschkoff, the previous Managing Director, became the Managing Director of Fennia Life Insurance Company.

On 1 April 2017, the company moved to new premises located in Länsi-Pasila, Helsinki, at Kyllikinportti 2.

Business during the financial period

For Fennia Asset Management, 2017 was again a time of developing and diversifying the business. During the financial period, the company’s fee and commission income grew by 79 per cent to EUR 5.2 million (EUR 2.9 million). The amount of Group external client assets managed by the company grew by 26 per cent, standing at EUR 242 million (EUR 192 million) at year-end. The amount of Group internal client assets stood at EUR 2.6 billion. The number of clients increased. The new capital was mainly allocated to discretionary asset management and to the new special investment fund established on 12 September 2017, Fennica Building Plot Fund, non-UCITS. The low interest rate level and expensively priced equity market steered investors’ focus towards real estate investments.

From an investor perspective, 2017 was better than an average investment year. As the steering by central banks kept the interest rate at an exceptionally low level, investors invested in equities, real estate and unlisted instruments. As a result, equities continued their steady rise globally, supported by capital flows. The US central bank (FED) raised its key interest rate on three occasions, and this is believed to mean the start of the normalisation of interest rates in relation to inflation and other economic development in western industrialised countries. In addition to equities, investors’ capital flows focused on the real estate markets.

The returns on Fennia Asset Management’s model portfolios were good in light of the market development. The Fennia Asset Management “Equity” investment strategy was most successful, but slightly surprisingly, the “Fixed income” investment strategy also performed well, despite the historically low interest rate level.

The return on the special investment fund Fennica Properties I improved as the investment rate increased. The Fennica Building Plot Fund took off as expected, and interest in the product has been good, as anticipated. For both the special investment funds, operations have progressed as planned and in accordance with the chosen strategy.

Company’s result and solvency

The company’s profit increased on the comparison year. The profit for the financial period was EUR 1.0 million (EUR 0.8 million).

The company’s capital and reserves grew and at the end of the financial period amounted to EUR 3.1 million (EUR 2.1 million).

The company’s solvency at the end of the financial period was good, the solvency ratio was 24.2 per cent and the company’s own funds amounted to EUR 3.1 million (calculated minimum requirement for own funds is EUR 1.0 million).


Administration

During the financial period, Seppo Rinta served as the Chairman of the Board of Directors between 1 January 2017 and 31 March 2017, and the other members of the Board were Eero Eriksson, Kimmo Kilpinen and Juha Sarsama. Alexander Schoschkoff acted as Managing Director between 1 January 2017 and 31 March 2017.

Between 1 April 2017 and 25 June 2017, Antti Kuljukka served as the Chairman of the Board of Directors, and the other members of the Board were Seppo Rinta, Alexander Schoschkoff and Juha-Pekka Kallunki. As of 26 June 2017, the number of Board members was increased to five. Between 26 June 2017 and 31 December 2017, Antti Kuljukka served as the Chairman of the Board, and the members of the Board elected by the General Meeting were Seppo Rinta and Alexander Schoschkoff and the members of the Board elected by the fund unit holders of the special investment fund Fennica Properties I were Juha-Pekka Kallunki and Elli Dahl. Eero Eriksson acted as Managing Director between 1 April 2017 and 31 December 2017.

The Board of Directors held a total of 12 meetings during the year under review, five of which were email meetings. The attendance rate of the members was 94 per cent.

Petri Kettunen, Authorised Public Accountant, serves as the auditor of the company and as the auditor selected by the company for the special investment funds managed by it, and the deputy auditor is the auditing firm KPMG Oy Ab. Satu Malmi, Authorised Public Accountant, serves as the auditor selected by the fund unit holders for the special investment fund Fennica Properties I, and the deputy auditor is the auditing firm KPMG Oy Ab.

The company employed an average of 24 people in 2017.

Policy on disclosures and frequency of disclosure adopted in the context of the preparation of the report of the Board of Directors

In the context of the preparation of the report of the Board of Directors for the financial period as per 31 December 2017, the following policy was adopted on disclosures and the frequency of disclosure.

As a general rule, Fennia Asset Management will disclose all information subject to the disclosure requirements laid down in the Capital Requirements Regulation (EU No 575/2013). Fennia Asset Management has decided not to disclose some items of non-material information by virtue of applying the derogation specified in the Regulation. The omission of this non-material information does not influence the users of the information relying on that information for the purpose of making economic decisions. According to Fennia Asset Management’s assessment, the disclosures convey the company’s risk profile comprehensively to market participants, despite the application of the derogation concerning disclosures.

Fennia Asset Management will publish the disclosures listed in Title II of the Capital Requirements Regulation at least on an annual basis as required by the Regulation. The disclosures will be published in the report of the Board of Directors issued in conjunction with the financial statements prepared for the financial period.

Compliance officer’s assessment:

On 25 January 2018, the compliance officer reviewed the draft report of the Board of Directors prepared by the Managing Director for the financial year as per 31 December 2017 and the policy on disclosures and frequency of disclosure issued in the context of the preparation of the report of the Board of Directors. According to the compliance officer’s assessment, both the report of the Board of Directors and the above-mentioned policy comply with the applicable regulations and the company’s internal policies. The compliance officer therefore proposes no changes to the report of the Board of Directors or to the policy on disclosures and frequency of disclosures.

Risk management

General

Fennia Asset Management belongs to the Fennia Group as a subsidiary owned by Fennia Life Insurance Company. Fennia Life is owned by Fennia Mutual Insurance Company. Fennia Asset Management’s internal control and risk management framework is described partly in the common policy documents of the Fennia Group and partly in the separate policy documents of the company, approved by the Board of Directors.

At Fennia Asset Management, risk management means strategies, processes, principles and measures to identify, measure, monitor, manage and report risks faced by the company. The aim of risk management is to continuously secure the company’s solvency and liquidity. This is pursued by supporting the achievement of the objectives set out in the strategy and action plans and ensuring that the risks taken by the company are in proportion to its risk-bearing capacity.

Fennia Asset Management’s risks are managed by careful planning and implementation of the business strategy as well as by a risk management process taking into account the characteristics of each risk, which consists of both regular and continuous measures. The company assesses the risks of its operations at least once a year and prepares a report on risk and solvency assessment (hereinafter the ICAAP report).
The company’s governance system supports the achievement of the objectives of risk management.

Risk management organisation

Fennia Asset Management’s Board of Directors is responsible for the appropriateness of the company’s internal control and risk management. It is responsible for ensuring that the company abides by the principles of its own risk management system and where applicable, those of the Fennia Group.

Fennia Asset Management’s Managing Director bears overall responsibility for the appropriate preparation and implementation of risk management in accordance with the Board of Directors’ decisions.
Fennia Asset Management has an extended executive group that convenes to prepare, steer and co-ordinate tasks relating to risk management and administration and to communicate information. It is chaired by the company’s Managing Director and includes the persons responsible for the company’s business, administration, legal affairs, risk management and compliance.

The company’s risk management system is based on a three-defence-line model, whereby:

  1. The first defence line, i.e. business and support functions, has the primary responsibility for daily risk management and risk reporting in accordance with the agreed policy.
  2. The second defence line is the owner of the risk management framework and is responsible for its planning and development. The second defence line is responsible for reporting risks to the management and for supporting, monitoring and assessing risk management carried out by the first defence line.
  3. The third defence line is in charge of ensuring the effectiveness and efficiency of internal control and risk management.

Fennia Asset Management’s Board of Directors has concluded that the completion of the tasks of the company’s second and third defence line can be arranged efficiently and effectively without a separate risk management function, compliance function or internal audit of the company. These functions have been outsourced to the Group’s parent company. Compliance services are outsourced partly to the parent company and partly to a service provider external to the Fennia Group.

At the Fennia Group, the risk management organisation consists of the Risk Management unit and the Compliance and Operational Risks unit, which are both under the supervision of the Group CFO as part of the Group’s finances and controlling. The internal audit operates as an independent unit and reports directly to Fennia’s Board of Directors. The Risk Management unit, the Compliance and Operational Risks unit and the internal audit have been integrated into the Fennia Group’s organisation in a manner that ensures that they are free from influences that might compromise the objective, equal and independent performance of their tasks. The internal audit is independent of both the first and second defence line operations.
Allocation of responsibility for risk management

In the three-defence-line model, responsibility for risk management is allocated as follows between the various operators:

  • Managing Director

The Managing Director bears overall responsibility for the appropriate preparation and implementation of risk and solvency management in accordance with the Board of Directors’ decisions.

  • Business and support functions

The business and support functions are responsible for risk identification, daily risk management measures and risk reporting in accordance with the agreed policy as well as for monitoring of their risk profile and any measures required by changes in it.

  • Risk management

The Risk Management unit together with the Compliance and Operational Risks unit form the Risk Management function, are responsible for the risk management framework and maintain an overall picture of the company’s risk profile. They assist the Board of Directors, Managing Director and business and support functions in developing and maintaining a strong risk management system. They report on risks to the company’s management and support the business and support functions’ risk management by developing uniform procedures and providing guidance and training. Together they monitor the business and support functions’ risk management work and assess its adequacy. In the solvency management process, the task of the Risk Management unit is to monitor the appropriateness of capital requirements calculation and participate in the preparation of the ICAAP report. The authority and responsibilities of the Risk Management function are defined in principles approved by the Board of Directors.

  • Compliance

The compliance function, which belongs to the second defence line, is responsible for ensuring that company’s operations comply with regulations, financial sector self-regulation and the Fennia Group’s internal guidelines, and that customer relationships are managed according to the appropriate procedures. The unit also identifies and assesses the impacts of regulatory changes and the risks related to regulatory non-compliance, as well as the sufficiency of measures taken to prevent and rectify possible shortcomings in regulatory compliance. In addition, the compliance function promotes compliance by providing proactive advice and develops internal procedures with which compliance can be monitored effectively and appropriately.

  • Internal audit

The internal audit supports the Fennia Group in achieving its goals by offering a systematic approach to the assessment and development of the efficiency of the organisation’s risk management, control and leadership and administrative processes. The task of the internal audit is to monitor and assess the sufficiency and efficiency of the Group’s internal control and other administration.

Risk management process and risk areas

Risk refers to an uncertain event and its consequence, which can be a threat or an opportunity for the company.

Fennia Asset Management’s risk management process comprises the following areas:

  • Risk identification

The first defence line, the risk owner, identifies and assesses the risks that threaten the operations and objectives, in annual risk assessments and daily operational activities.

  • Risk measurement

During the risk measurement process, the severity of the risks and their interdependencies are evaluated. The objective is to create uniform indicators for different risks and thus to improve their comparability. Risk measurement and comparison allow the targeting of risk management measures on the risks that are most material for the operations. The Risk Management function of the second defence line co-ordinates the measurement of risk severity and dependency and develops methods used in measurement.

  • Risk monitoring

The risk monitoring carried out in the company consists of monitoring, assessment and testing out of management measures that have been planned and decided upon. The first defence line ensures that risks are monitored appropriately and that sufficient information on risks is obtained for their management. The first defence line monitors the management measures that it has planned and decided upon and assesses their effectiveness. The second defence line carries out independent risk monitoring.

  • Risk management

During the management process, the risks are prioritised and management measures are planned to control or limit the risks. The first defence line plans and implements the appropriate risk management measures. The second defence line supports, monitors and assesses risk management carried out by the first defence line, but, in order to ensure independence, does not participate in making operational decisions.

  • Risk reporting

The first defence line reports the materialisation of risks and their effects within the defence line and to the second defence line in accordance with the agreed process. The second defence line reports the risks to the Board of Directors regularly.

Most significant future risks and uncertainties

The above-mentioned risk management process is applied to all of the risks relating to the company’s operations. The most significant risks for the company’s operations are operational risk, concentration risk, strategic risk and reputation risk.

Operational risks primarily relate to the management of client assets in accordance with the client agreements as well as to the company’s processes, personnel and systems. They are managed by continuously developing processes and systems and by ensuring personnel competence.

Concentration risk may arise if dependence on an individual product is strong or if the assets managed under a service offered to clients consist of the asset management agreements of relatively few clients. The management of concentration risk is primarily based on business planning and sales strategies.

The company’s most essential strategic risks relate to the failed implementation of the business strategy which can lead to a poor cost/income ratio in terms of the company’s solvency and a capital shortfall. However, the company’s business operations can be adjusted to changing conditions quite flexibly. The business strategy is reviewed regularly, taking into account any changes in the operating environment, and redirected if necessary.

Changes in regulation increase the impact of reputation risk on the company’s operations. Fennia Asset Management is also subject to other risks, such as liquidity risk, counterparty risk, market risks and group risks for which separate means of risk management are in place.

Solvency and asset encumbrance

The key items of the company’s capital requirements calculation for 2017, 2016 and 2015 are presented in the table below.

Key items of capital requirements calculation

31.12.2017

31.12.2016

31.12.2015

 

Common Equity Tier 1 capital before deductions:

3 114 390

2 146 686

1 357 227

 

Deductions from Common Equity Tier 1 capital: Intangible assets

-2 049

-4 049

-38 021

 

Common Equity Tier 1 capital (CET1)

3 112 341

2 142 637

1 319 206

 

Additional Tier 1 capital (AT1)

0

0

0

 

Tier 1 capital (T1 = CET1 + AT1)

3 112 341

2 142 637

1 319 206

 

Tier 2 capital (T2)

0

0

0

 

Total own funds (TC = T1 + T2)

3 112 341

2 142 637

1 319 206

     
 

Total risk-weighted assets (Overall risk exposure)

12 866 527

6 002 155

5 583 886

 

of which credit risk exposure:

0

0

0

 

of which other risk exposure:

0

0

0

 

of which the own funds requirement for operational risks:

0

0

0

 

Own funds based on fixed overheads multiplied by 12.5

12 866 527

6 002 155

5 583 886

     

Capital adequacy ratios

   
 

Common Equity Tier 1 capital (CET1)/overall risk exposure

24,20 %

35,70 %

23,60 %

 

Tier 1 capital (T1)/overall risk exposure

24,20 %

35,70 %

23,60 %

 

Total own funds (TC)/overall risk exposure

24,20 %

35,70 %

23,60 %

 

Capital adequacy ratio

24,20 %

35,70 %

23,60 %

     

Minimum requirement for own funds

   
 

Minimum requirement for own funds

1 029 322

480 172

446 711

     

Minimum capital

   
 

Act on Investment Services (Sijoituspalvelulaki 747/2012), Chapter 6, section 1, subsection 2

125 000

125 000

125 000

     

Information on the company’s asset encumbrance is presented in the table below.

  

Book value of encumbered assets

Current value of encumbered assets

Book value of unencumbered assets

Current value of unencumbered assets

Reporting institution’s assets

  

3 629 382

 3,629,382

 

Equity instruments

    
 

Debt instruments

    
 

Other assets

  

3 629 382

3 629 382

      

Declaration on the adequacy of risk management arrangements

According to the Board of Directors’ assessment, the risk management systems put in place at Fennia Asset Management are adequate with regard to the company’s profile and strategy.

Corporate governance

Fennia Asset Management’s Board of Directors has adopted a document on the organisation of the company’s internal governance, which describes the duties of the Board of Directors as well as the lines of authority, responsibility and reporting for the Managing Director, directors responsible for key business functions and other personnel as well as deputy arrangements. Fennia Asset Management’s governance system consists of the company’s Board of Directors, acting management, management group and the outsourced functions, i.e. financial administration, IT management, risk management, compliance and internal audit, as well as external audit. For the governance to function appropriately and efficiently, the nature, scale and complexity of the company’s operations have been taken into account in its organisation.
The members of the Board of Directors shall possess various strengths, professional competence and experience. Fennia Asset Management’s Board of Directors has set a long-term goal to promote diversity and gender equality in the composition of the Board. By preparing and planning the search for Board candidates in the long term, the Board seeks to ensure that a Board with the expertise and experience required by the company at any given time as well as equal gender representation on the Board will be achieved and maintained.

Fennia Asset Management complies with its own guidance on the organisation of governance in all of its operations. The guidance is based on the regulations, guidelines and standards included in the FIN-FSA regulations and guidelines of the Financial Supervisory Authority. The regulations and guidelines are publicly available on the Authority’s website: http://www.finanssivalvonta.fi/en/Regulation/Regulations/New/Pages/sections.aspx.

Remuneration

Remuneration at Fennia Asset Management complies with the company’s guideline on its remuneration scheme which is in line with regulations (Act on Credit Institutions 610/2014 and FIN-FSA regulations and guidelines 18/2013 on remuneration policies and practices) and which classifies personnel into risk categories on the basis of their duties and position. The remuneration comprises a fixed pay component and a variable pay component. The fixed salary corresponds with the competence level required, experience and position in accordance with the Hay job evaluation method. Depending on the job, the variable pay component consists of a yearly bonus or sales commissions which can amount to a maximum of EUR 50,000 a year per person. In 2017, EUR 2,070,611 (EUR 875,374) was paid in salaries and a total of EUR 259,237 (EUR 261,780) was paid in variable pay components to 51 (24) people. The variable pay components paid complied with the set maximum and proportionality limits, and there were no deferred variable pay components.


Key figures on financial performance

  

2017

Return on equity (ROE)

%

36,7

Return on total assets (ROA)

%

25,9

Equity ratio

%

64,2

Cost/income ratio

 

0,8

   

Outlook for the current year

Fennia Asset Management’s business operations will continue to be profitable right from the beginning of the year. The result for the current year will be affected by the increase in customer capital and the success of new business as well as the development of the investment markets. For new business, Fennia Asset Management is dependent on the success of Fennia Life’s (primary sales organisation) sales activities, the targeting of these activities on the sales of asset management products and services and the provision of information on potential clients by the Fennia Group’s insurance customer interface. In addition, the company’s own sales organisation will be strengthened. The existing volume of offers and the outlook for new business in the current year are good. Investors’ interest is expected to be focused on the competitive special investment funds Fennica Building Plot Fund and Fennica Properties I. The situation of the capital market, the anticipated market fluctuations and the low, but rising interest rate level may affect the demand for asset management mandates. In addition to market development, MiFID II (Markets in Financial Instruments Directive II), which entered into force on 3 January 2018, will probably have an impact on investors’ interest in asset management model portfolios.

The clearly higher volume of client assets under management, the good return history of funds and model portfolios as well as the more experienced and trained sales organisation will contribute toward increasing customer capital during 2018.

Board of Directors’ Proposal on the Disposal of Profit

The Board of Directors proposes to the General Meeting that the profit for the financial year, EUR 967,704.08, be transferred to the profit/loss brought forward and that no dividend be paid.

Major events after the end of the financial period

There have been no major events after the end of the financial period.

Share capital and shares

At year-end, the company’s share capital was EUR 125,000, and the company had 10,000 shares, all of which are of the same series.