How should pension funds invest when the future is uncertain, diversification can fail when it matters most, and traditional asset allocation may no longer be enough? In the latest episode of Capital Horizons, I speak with Kari Vatanen, Head of Allocation & Alternatives at Elo, about how institutional investors can move beyond traditional strategic asset allocation towards a more integrated, total-portfolio approach. We discuss what this shift means in practice: how to make allocation decisions when expected returns and correlations are uncertain, how to build portfolios that remain robust across different market environments, and how to think about risk in the context of long-term returns, drawdowns, liquidity and pension liabilities. We also explore the role of alternative investments in genuine diversification, the contribution of currency management and overlays, and the integration of responsible investment considerations into portfolio construction. Against the backdrop of Finland’s pension reform, we consider what greater equity risk means for pension institutions and how investment strategies and risk budgets need to adapt. A central question runs through the conversation: Are we optimising portfolios for the world we expect, or building investment systems that can withstand the world we might actually get?
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