Varma - Annual Report 2012

We make profitable and secure investments

Varma’s guiding principles in the investment of pension assets are profitability and security. We strive for the best possible return on investments in order to secure the payment of pensions.

Varma’s investment plan, which is annually confirmed by the Board of Directors, steers the company’s investment activities. The investment plan outlines the general principles for investments, the basic allocation for investments, targets for return, diversification and liquidity, decision-making powers, control systems and reporting, among other things. A benchmark index is defined for each asset class, against which the result is compared. The Board regularly monitors the implementation of the investment plan. The investment plan also covers the share ownership policy, social responsibility and ownership principles.

We diversify investments in different asset classes

Our goal is to maintain the return of the investment portfolio as high as possible while securing a low overall risk level by identifying versatile sources of return. Diversification into different asset classes is essential, as they perform differently under different market conditions. Broad diversification also ensures that the risk of a single asset class or investment does not rise to a significant level. Diversification into different asset classes also allows the allocations to be flexibly changed according to the market environment.

Diversification within asset classes

Diversification is a guiding principle also within the different asset classes. Single investments are chosen based on the portfolio manager’s analysis.

Fixed-income investments is the most secure asset class, where creditworthiness and liquidity are the most important factors. Fixed-income investments are broadly diversified between different bond issuers and maturities.

Equity investments are diversified by geographic location, industry and company size. In Varma’s portfolio, listed equity investments seek the highest returns and are also the most volatile asset class. Varma has strived to identify investments with similar returns as equities but with less volatility. These include private equity investments and hedge funds.

Diversification of these outsourced investments is implemented through fund types and different managers. The funds selected must meet the most stringent institutional requirements. We know our partners well and have long-term partnerships with them.

Varma uses derivatives to make diversified index-type investments in commodities.

Varma’s direct real-estate investments are located in Finland. The assets are diversified according to the types of premises and geographical location. Approximately 56 per cent of Varma’s real estate investments are in the Helsinki area. In addition to rental flats, the portfolio includes all types of business premises, with the greatest weight on office and retail premises.

Risk-return ratio

Investments aim for the best possible risk-return ratio. Desirable investments for a pension investor are those with a steady long-term return with little annual volatility.

We actively seek different types of return sources. The initial investment is based on extensive groundwork and is often fairly small, but the investment’s share in the portfolio may be increased. Fairly new asset classes in Varma’s portfolio include commodity and inflation-linked investments.

Liquidity

The investment portfolio is kept as liquid as possible. This has been beneficial for instance when the demand for TyEL loans has increased. The importance of liquidity is highlighted in a difficult market environment, for example, when the company must be able to adjust the share weighting quickly in accordance with the market situation.