|mn €||%||mn €||%||%||%||24 m|
|Fixed-income investments 1)||12,268||29.7||12,845||32.1||-0.4||5.8|
|Other money-market instruments and deposits||2,151||5.2||680||1.7||0.5||0.5|
|Real estate investments||3,906||9.4||3,841||9.6||3.3||3.8|
|Direct real estates||3,313||8.0||3,375||8.4||2.3||3.2|
|Real estate funds||593||1.4||466||1.2||9.9||8.0|
|Impact of derivatives||-336||-0.8||-81|
|Investment allocation at fair value||41,293||100.0||40,039||100|
|The modified duration for all the bonds is 2.3.|
|1)||Includes accrued interest|
Steady investment returns in volatile markets
In 2015, the return on Varma’s investments was good, at 4.2%. Exceptionally large movements were experienced in the capital markets in both equities and fixed income investments in 2015. These movements were stimulated by the central banks’ monetary policy measures and concerns over the state of Greece’s economy and the sustainability of China’s economic growth. Broad diversification of investments muted the risks caused by strong market movements, and returns were generated consistently by the different asset classes.
The value of Varma’s investments grew to EUR 41.3 billion. Solvency capital remained at a strong level and totalled EUR 10.0 billion at year-end. The return on investments was lower than the interest credited on the technical provisions, which weakened Varma’s solvency to 31.4% (34.0%). Varma’s solvency remained at a high level.
Cumulative return 2009-2015
The central bank’s measures were at the core of the investment markets. In January, the European Central Bank announced a government bond purchase programme and launched it in March. In the second quarter, the capital markets were negatively influenced by concerns over Greece’s ability to pay off it loans maturing at the end of June. In late summer, the Chinese central bank let the value of the yuan fall against the U.S. dollar without prior notice, which was taken as a sign of major weakening in China’s economic growth. As a result, the equity markets plunged. Later in the year, market sentiment again picked up as the economic indicators in the US improved and the ECB signalled its commitment to further stimulus measures. The U.S. central bank, the Fed, started to raise its benchmark rate in December.
Despite concerns over China’s economic growth and fears of interest rate hikes by the Fed, the economic growth environment has remained positive both in the U.S. and in Europe. The U.S. economic growth rate has increased to over 2%, and economic growth in Europe is also showing signs of picking up. Expectations concerning economic growth in Asian countries, however, have been revised down somewhat.
Varma’s result developed strongly early in the year, but fluctuated from the spring onwards. Market uncertainty was exacerbated by, in addition to the economic problems in Greece and China, expectations of interest hikes by the Fed and the steep decline in the prices of energy and other commodities.
Consistent returns through effective diversification
The return on Varma’s investments was 4.2% (7.1%). Fixed-income investments accounted for 30, equity investments for 45, real estate investments for 9 and other investments for 17 percentage units of the investment allocation.
Equities generated the strongest return, and Finnish equities in particular performed strongly. Real estate and other investments also generated reasonable returns. The return on fixed-income investments remained slightly negative.
The average 10-year nominal return on investments was 4.8% and the 5-year return 5.1%. The real returns were 3.0% and 3.6% respectively.
Varma’s investment activities focussed on maintaining the company’s strong solvency and broad diversification of investments, with a strong emphasis on risk management.
Varma has US-dollar-denominated investments in hedge funds, equities, corporate bonds and private equity funds. In accordance with Varma’s policy, most of the exchange rate risks have been hedged. During the year, a proportion of the currency position was unhedged, which improved the overall result as the value of the U.S. dollar increased. In terms of operations, foreign currency risks are managed as a single entity, while in the performance indicators the exchange rate impact is included in the investment returns of various asset classes.