At the end of 2012, the value of Varma's investments totalled EUR 34,406 (31,852) million and the return at fair value was EUR 2,492 (-711) million or 7.7 (-2.1) per cent. All asset classes yielded a positive return. The average nominal return over the last five years was 2.5 per cent. The value and returns of the investments are grouped according to risk in this report. The Notes show the breakdown of investments and their returns by investment category, grouped according to regulations and according to risk.
The focus of Varma's investment activities was on active risk management, and the security of investments was emphasised. The key target was to secure a strong solvency position in an uncertain market environment. During the year, Varma reduced the share of its fixed-income investments and increased the share of equities and other investments in its portfolio. In its investment risk management, the company used derivatives for hedging purposes and in controlling the risk level of the portfolio.
Varma's investments stood at EUR 12,576 million (13,151 million) at the balance sheet date and were distributed as follows:
- loan receivables EUR 2,441 (2,948) million
- public-sector bonds EUR 4,052 (5,593) million
- other corporate bonds EUR 5,347 (3,031) million
- other money-market instruments EUR 735 (1,580) million.
The return on fixed-income investments was 4.4 (4.2) per cent. The return on the loan portfolio was 3.2 (3.9), on public-sector bonds 3.6 (5.1), other corporate bonds 8.1 (4.9) and other money-market instruments 0.7 (1.0) per cent.
In a low interest rate environment, the return on Varma's fixed-income investments was good. During the year, the central banks' measures lowered the general market interest rate level to a record low. In addition, there was tremendous demand for corporate bonds, which experienced narrowing risk margins, and consequently generated very high returns. As a precautionary measure, the duration on Varma's fixed-income portfolio was kept quite short, which slightly lowered their overall return.
At the balance sheet date, the value of Varma's equities was EUR 11,727 (9,728) million. Listed equities stood at EUR 8,567 (6,883), private equities at 2,394 (2,099) and unlisted equities at EUR 766 (746) million. The return on Varma's equity investments was 14.5 (-13.0) per cent. Listed equities yielded a return of 14.9 (-18.9) per cent, private equities 13.0 (9.6) per cent, and unlisted equities 15.5 (20.7) per cent.
Equity investments performed the best of all asset classes. The return trend of listed equities was very good, with companies distributing high dividends and share prices rising in the second half of the year. Finnish equities had the highest returns in Varma's portfolio.
Private equity investments and unlisted equities also generated good returns. Of Varma's private equity investments, close to half are invested in the U.S., and the rest mainly in Europe and the Nordic countries. Private equity and unlisted equities represent a long-term asset class in Varma's portfolio, and their long-term return has been very good.
Real-estate investments stood at EUR 4,463 (4,447) million at the balance sheet date. Direct real estate investments accounted for EUR 3,961 (3,975) and real estate investment funds for EUR 503 (472) million. The return on real estate investments was 4.5 (6.4) per cent. Direct real-estate investments yielded a return of 4.6 (5.9) per cent and real-estate investment funds 3.1 (11.2) per cent.
The shaky economic situation was evident in all segments of the real-estate markets, which were very muted all year. Varma's new real estate investments stood at EUR 125 million. Varma had 450 new rental flats under construction in the Helsinki area in 2012. In terms of business premises, Varma shifted its focus from new construction to developing office premises and to maintenance construction and renovations. The change in fair value of Varma's directly owned real-estate holdings totalled EUR -33 million.
Other investments amounted to EUR 5,640 (4,526) million. These consisted of hedge funds EUR 3,779 (3,572), commodities EUR 289 (113), and other investments EUR 1,571 (841) million. The return on other investments was 6.0 (4.5) per cent.
Varma's return on hedge-fund investments clearly surpassed the performance of hedge-fund indices; the investments performed consistently throughout the year, with only minor fluctuations. The return on inflation-linked investments was affected by the decline in real interest rates, and by the inflation rate remaining at a higher level than the interest-rate level. The asset class of other investments provided, on the whole, return and diversification benefits during the year at a low risk level.
The market risk of investments constitutes the greatest risk affecting the company's result and solvency. Equities constituted by far the greatest market risk. The VaR (Value-at-Risk) figure describing the total risk of Varma's investments stood at EUR 1,076 (1,551) million. The figure represents the maximum fall in the market value of the company's investment portfolio in normal conditions over a period of one month with a probability of 97.5 per cent.
The central principles in Varma's ownership policy are high-quality governance in the companies in which it has a holding, transparency of operations, active engagement, and the monitoring of incentive schemes for key personnel. In 2012, Varma actively participated in the Annual General Meetings of the domestic companies in which it owned shares and in the work of the companies' shareholders' Nomination Committees.