On the other hand, there is so-called cyclical weakness in both the Model Portfolio’s underperformance in recent years and the current state of the Finnish economy. Not everything can be blamed 100% on the portfolio managers or the current government.
Finnish economy
As the cost of borrowing rose:
→ Consumers started saving on other expenses.
→ Corporate investments were frozen.
→ Construction ground to a complete halt.
Model Portfolio
The same rise in interest rates has punished the small-cap sector of the Helsinki Stock Exchange more than the large companies. Nordea has outright benefited from the rise in interest rates. Nokia and Wärtsilä are involved in the AI buzz. Etc. etc.
And large companies have at least the benefit of better geographical diversification behind them.
Okay, the Model Portfolio could have dumped Qt Group (Quutit) and Revenio in the fall of 2021 when talk of interest rate hikes began. After that, the strategy would have had to change completely, but then again, juggling between Nordea, Nokia, and Kone is not the Model Portfolio’s “bread and butter”—rather, the core of the operation has from the start been picking winners from the small-cap field.
Right now, it just hasn’t been a winning strategy.
The winners have clearly been found among the largest companies, and the fact that this wasn’t realized at the time is, of course, partly the fault of the portfolio managers.
Hopefully, no one gets worked up about the fact that the message included a bit of politics.
This “Model Portfolio 10y” video, filmed in the spring of 2021, is educational viewing. Near the market peaks, Sauli and Juha are bursting with self-satisfaction and self-praise, believing themselves to be master investors. With these exact same teachings, they then drove straight into the woods for the next five years.
Personally, I have learned the following things from the rise and fall of the model portfolio:
No company is a quality company forever. In general, most companies are in peak financial performance for a relatively short period of time. Then competition inevitably hits, or management becomes blinded by their own success and starts doing foolish things.
The stock market is fifty percent psychology. During the peak years of the model portfolio, small-cap companies were favored by investors and irrational multiples were paid for them. Now the same firms are in the stock market’s trash bin, as is Inderes’ positive impact on share prices.
When the world changes, old investment strategies should be thrown away. The Inderes team didn’t realize how large an impact rising interest rates and the war in Ukraine had on the Finnish and European economies. They stubbornly clung to old theses, even though the macro environment was completely different.
By investing in broad stock indices, you don’t have to worry about any of the aforementioned things. You can enjoy steady returns that beat the model portfolio all the way until retirement.
I agree on many points, but I’ll clarify this essential point: Inderes’ Model Portfolio’s public strategy does not limit investment targets to small-cap companies.
Direct quote from the strategy:
“The investment universe is limited to companies on the Helsinki Stock Exchange. We have no sector restrictions or other similar limitations within companies listed on the Helsinki Stock Exchange.”
Perhaps it’s more about a failure in executing the strategy than the strategy itself, which at least to my eye seems very good.
HS is also questioning Inderes’ poor stock picking performance. The content of the article is largely the same as what has been discussed in this thread.
