At the end of 2013, the value of Varma’s investments totalled EUR 37,718 (34,406) million and the return at fair value was EUR 3,160 (2,492) million or 9.0 (7.7) per cent. All asset classes yielded a positive return. The average nominal return over the last five years was 7.8 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. 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 fixed income investments stood at EUR 10,624 (10,666) million at the balance sheet date and were distributed as follows:

  • loan receivables EUR 2,026 (2,441) million
  • public-sector bonds EUR 3,869 (4,052) million
  • other corporate bonds EUR 5,363 (5,347) million
  • other money-market instruments -635 (-1,175) million; the impact of derivatives, EUR 1,878 (1,910) million, is presented separately.

The return on fixed-income investments was 1.2 (4.4) per cent. The return on the loan portfolio was 3.3 (3.2), public-sector bonds -1.8 (3.6), other corporate bonds 3.0 (8.1) and other money-market instruments -0.4 (0.7) per cent.

In a low interest rate environment, the return on Varma’s fixed-income investments was divided. Considering the prevailing interest rate level, the return on the loan portfolio and on corporate bonds was good. The returns on government bonds were burdened by sticking to bonds with the best credit rating and by the increase in long-term interest rates during the year.

At the balance sheet date, the value of Varma’s equity investments was EUR 14,756 (11,727) million. Listed equities stood at EUR 11,579 (8,567) million, private equities at 2,175 (2,394) million and unlisted equities at EUR 1,002 (766) million. The return on Varma’s equity investments was 21.8 (14.5) per cent. Listed equities yielded a return of 23.7 (14.9) per cent, private equities 12.1 (13.0) per cent, and unlisted equities 26.7 (15.5) 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 substantially during the year. Finnish equities had the highest returns in Varma’s portfolio, and U.S. equities showed a similar increase in value.

Private equities 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 4,304 (4,463) million at the balance sheet date, with direct real estate investments accounting for EUR 3,739 (3,961) and real estate investment funds for EUR 565 (503) million of the total. The return on real estate investments was 3.1 (4.5) per cent. Direct real-estate investments yielded a return of 2.0 (4.6) per cent and real-estate investment funds 11.6 (3.1) per cent.

The volume of Finland’s real estate trade remained at a low level in the first half of 2013. However, new real estate funds specialised in residential and care properties actively added to their portfolios. The markets picked up towards the end of the year, however, and the volume of real estate trade grew significantly as a result of several commercial real estate transactions. Varma made EUR 84 million worth of new real estate investments, and had 230 new rental flats under construction in the Helsinki area in 2013. 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 -131 million.

Other investments amounted to EUR 6,157 (5,640) million. These consisted of hedge funds EUR 4,850 (3,779) million, commodities EUR 201 (289) million, and other investments EUR 1,106 (1,571) million. The return on other investments was 4.5 (6.0) per cent.

It was a successful year for hedge funds, and Varma’s hedge-fund investments generated a return of 8.8 per cent. They performed consistently, with only minor fluctuations during the financial period. The return on inflation-linked investments was affected by the rise in real interest rates and by the slow-down in the inflation rate. The other investments asset class provided, on the whole, return and diversification benefits at a low risk level during the year.

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 1,118 (1,076) 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 2013, Varma actively participated in the Annual General Meetings of the domestic companies in which it owned shares and in the work of companies’ Shareholders’ Nomination Boards. Varma’s website contains a list of the company’s memberships on the Nomination Boards of listed companies.