Global diversification is the order of the day for many European pension funds. For some, Asia is the obvious destination to diversify away from European real estate. For others it's the US. Richard Lowe speaks to three investors about their choices

NAME: Mikko Räsänen
POSITION: portfolio manager
ORGANISATION: Ilmarinen
TOTAL ASSETS: € 22bn
REAL ESTATE ALLOCATION: 10%

Finnish multi-employer pension fund Ilmarinen has invested €1.8bn directly in domestic real estate. This is complemented by a growing indirect international portfolio, amounting to €700m of capital commitments (€400m invested) to funds in Europe and Asia.
Portfolio manager Mikko Räsänen explains that diversification is a "very important target" for Ilmarinen. "When we started the implementation of our international real estate strategy four years ago we realised we were way too big a player in the Finnish property market. We started to go abroad in order to gain some diversification benefits."

At the moment Ilmarinen is focusing on Europe and Asia Pacific (the former makes up 85-90% of the international portfolio, the latter 10-15%), with the US and other emerging markets falling outside its investment universe. This could change, however.

Räsänen deems Asia to be a "very good diversifier for European investors". He adds: "Our aim is to increase our Asian exposure and at the same time increase our return expectations. We will probably improve the risk-return profile of the indirect real estate portfolio by increasing the Asian exposure. We try to gain diversification benefits also in terms of regions, countries, sectors and investment styles - in terms of different fund managers as well."

Ilmarinen has invested in the region through a fund of funds platform. "It is a very good way to get an immediate exposure by investing through funds of funds," Räsänen says. "I can cover the European markets from Helsinki but these other markets are quite difficult to follow up and therefore in Asia we have adopted this approach."

He adds: "In the future we are considering also making investments directly in underlying funds in Asia or some sort of co-investments with existing fund of funds managers."
Fred Green

NAME: Fred Green
POSITION: head of investment
ORGANISATION: Teesside   Pension Fund
TOTAL ASSETS: £2bn (€2.5bn)
REAL ESTATE ALLOCATION:  7%

Close to 70% of the real estate portfolio of the Teesside Pension Fund is invested directly in its UK home market, the balance comprising indirect real estate exposure in the UK and continental Europe.

The local authority fund is aiming to further diversify its indirect portfolio by widening its geographical horizon to invest in markets outside Europe and by targeting funds that invest in niche property sectors.

Teesside began its European investments in 2001 when it committed capital to Standard Life's then newly launched Property Growth Fund. But Fred Green, head of investment, says the pension fund is pretty much fully weighted to Europe and so any increase to the international portfolio will "almost certainly be the Far East".

Green says he has been interested in the Far East for some time, but today the region is more accessible to UK institutional investors. "We have been keen on the Far East as an investment area for the better part of 20 years now," he says. "We probably regret the fact that we hadn't explored going into property in the Far East before now. But we are in the process of exploring that at the moment."

Asia has been identified as a more appealing region than the US, which Green has concerns over relating to its economic outlook. "We are not keen on the US economy generally," he says. "That is reflected in our equity investments as well. It would be a bit perverse to be very underweight equity in the US, which we are, but at the same be time putting money into US property."

Alternative real estate sectors are also seen has having a part to play in diversifying Teesside's property exposure. "We are looking at different sorts of property exposure, whether it be student accommodation, graduate accommodation, hotels, caravan parks," Green says. "We try to get away from the mainstream. We need to look at property in a slightly different way going forward."

NAME: Stein Berge Monsen
POSITION: senior portfolio manager
ORGANISATION: Vital Forsikring
TOTAL ASSETS: €25bn
REAL ESTATE ALLOCATION: 16%

Vital Eiendom manages the real estate investments for Norway's largest privately owned life and pension insurance company, Vital Forsikring. It is one of the biggest real estate investors in the country, if not possibly the biggest, with €4bn-worth of directly held property assets in Norway and Sweden.

Three years ago the decision was made to diversify the portfolio to include the wider European markets through investments in real estate funds. As at August 2008, Vital Eiendom had committed €227m (€115m invested) to 10 European funds, including two pan-European funds of funds and a number of specialist and country/sector-specific funds.

Stein Berge Monsen, senior portfolio manager at Vital Eiendom, says diversification is of central importance in the real estate portfolio. "So far we have been in Europe," he says. "We found that was the safest place to start building up the knowledge and competence about indirect real estate."

The main role of diversification is to reduce overall risk in the portfolio but Monsen believes it also brings some inadvertent benefits. "We have learnt a lot from investing internationally by working with very skilled people outside Norway, which we can now use on the direct portfolio in Norway and Sweden as well," he says.

Vital Eiendom is now considering expanding its investment potential to include the US as well as Europe to further diversfy the portfolio. The US market has been identified as the most appealing destination because of its position in the cycle. "We are looking for more investments in Europe but timing-wise it could be useful to find a good US fund, which would start investments in, say, a year from today."

Vital Eiendom has looked at investing in Asia Pacific through pan-regional fund of funds but Monsen says : "These days it seems to be not so good timing. We try to avoid it."
Monsen is wary of the investment opportunities in the hot market of China, for example, citing concerns about political risk and how big a part the Olympic Games have played in driving the country's recent stellar growth. "I am quite sceptical of it and we are new to the business," he says.