An excellent year for investments

The fair value of the Finnish Cultural Foundation’s assets stood at EUR 1.62 billion at the end of 2016. The result is explained by good portfolio performance and particularly by the excellent performance of the Huhtamaki share, which represents the foundation’s largest holding.

The surplus for the financial year was EUR 39.2 million. Capital gains from the sale of assets was EUR 24.2 million, of which EUR 3 million was used for supporting the general funds of Regional Funds. The return on investment was 22.2 per cent, outperforming the benchmark index by nearly 9 per cent.

A total of EUR 7.5 million was received in legacies and donations. Of these, capital donations totalled EUR 7.2 million, and donations allocated to grant operations totalled EUR 0.3 million. A total of 14 new donor funds were established during the year: ten in the Central Fund and four in the Regional Funds. On 30 September 2016, the Foundation had a total of 826 funds.

The global economy grew quite steadily during the year, even though the geopolitical risks in the Middle East, the terrorist attacks and streams of immigrants in Europe, and particularly the fears of economic restructuring and a rapid increase in debt in China cast a shadow on the outlooks. The result of the Brexit vote in Great Britain came as a shock to the investment market. The market recovered surprisingly quickly, but it is still difficult to estimate the effects of Great Britain leaving the EU on the European economy and corporate investment decisions in particular. The negotiations will take a minimum of two years, and the process is expected to be complicated.

A relaxed monetary policy and an increase in consumers’ purchasing power supported economic growth in the Western countries. Domestic demand increased and unemployment decreased in the eurozone. In the United States, domestic demand and employment improved, and salaries developed favourably. The growth outlook for the emerging markets improved as well, when the prices of raw materials stopped decreasing after a long decline. The increase in the price of oil is alleviating economic distress, particularly in oilproducing countries.

The Finnish economy is recovering from the recession painfully slowly. Consumer demand is suffering owing to the modest development of purchasing power and the cutbacks in public spending. The increase in investments in construction and slight signs of recovery in exports are encouraging.

The concerns about the Chinese economy resulted in strong price movements in the equity, fixedincome and commodity markets in early 2016. The equity market hit a low point in February, but share prices have since resumed their previous levels, with the exception of Europe. The European markets were affected by the concerns about the riskbearing capacity of Italian and German banks, among other issues. In some key equity markets, such as the United States, share prices have reached the highest level of all time. Share performance was strong also in the emerging markets.

In the fixedincome market, shortterm money-market interest rates have fallen below zero. The return levels of government bonds have continued to decrease, while the return performance of corporate bonds with a credit risk has improved strongly, with the general interest rate level and credit risk margins decreasing.

The return on the Finnish Cultural Foundation’s equity investments was 33.2 per cent, while the return on the portfolio’s benchmark index was 18.5 per cent. The share price of the foundation’s most significant investment, Huhtamaki, increased by as much as 54.6 per cent. The market value of the Huhtamaki shares held by the foundation stood at EUR 497.6 million at the end of the year.

The return on the Finnish Cultural Foundation’s long-term fixed-income investments was 7.2 per cent, with the return on the benchmark index being 9.1 per cent. The difference is partly explained by the low duration of the fixed income portfolio, partly by the underweight in emerging market bonds. The return on the foundation’s other investments, mainly private equity funds, stood at 12.6 per cent. The return on the real estate portfolio was 7.9 per cent.

The Finnish Cultural Foundation uses an external expert to assess the responsibility of its domestic equity investments at regular intervals. In foreign fund investments, the Foundation only cooperates with asset managers who act in a responsible and transparent manner and who have signed the UN Principles for Responsible Investment (PRI) or a comparable document.

As in previous years, the most significant uncertainties were related to the development of the global economy and capital markets. Global political uncertainty has increased as a result of the US presidential election and the parliamentary and presidential elections in key EU member states in 2017. The low pricing of risk by the investment market may expose the market to rapid and steep corrections if a negative factor takes effect. The Finnish Cultural Foundation’s assets are distributed across various asset classes, and it has a good riskbearing capacity and crisis tolerance as a longterm investor. The foundation’s high level of cash reserves enables it to endure a longterm decrease in share prices, if necessary.