Good returns on volatile equity markets
Equity investments performed the best of all asset classes. They accounted for 45% (41%) of Varma’s investments and yielded a return of 8.8% (9.1%).
Equity investments consisted of listed equities (36% of all investments), private equity investments (6%) and unlisted equities (2%). Equity investments have had a very strong seven-year period, with an average return of 12.6%.
Return on equity investments 2009–2015
Share prices rose sharply in the first quarter, especially in Europe, when the European central bank launched its massive stimulus measures. Over the course of the spring, the equity markets were negatively influenced by concern over Greece’s ability to pay off its maturing loans. Equity markets hit bottom in the autumn, as fears over the sustainability of China’s economic growth spread to the global equity markets. At the end of the year, the equity markets again recovered as the economic indicators in the US improved and the ECB signalled its commitment to further stimulus measures.
Despite the strong market fluctuations, the return on listed equities was good, at 8.0%. Finnish equities yielded the best return, at 19.4%. The equities of Sampo Corporation, Varma’s largest domestic holding, performed very strongly, at 27.2%.
Finnish equities accounted for 37.6% of Varma’s listed equities. European equities accounted for 25.5%, U.S. equities for 23.6% and other areas and global markets for 13.2%. To counterbalance the high share of domestic equities, Varma has broadly diversified its portfolio outside of Finland, not only in international equities, but also in private equity investments, hedge funds and corporate bonds.
However, US equities yielded a low return and emerging market equities a clearly negative return. Concerns over China’s economic growth and the strong decline in energy prices depressed share prices in many emerging countries.
Allocation of investments in equities
Good year for private equity investments and unlisted equities
Private equity investments and unlisted equities also generated good returns. Private equity investments yielded a return of 7.8% (13.5%) and unlisted equities 21.2% (19.7%).
About half of Varma’s private equity investments are invested in the U.S., and the rest mainly in Europe and the Nordic countries. European private equity funds performed very strongly in both the traditional buyout funds and infrastructure funds. Following a long period of good performance, the return generated by the portfolio’s focal area, the U.S., remained modest, influenced in part by poor stock market development.
Throughout the year, private equity funds exploited the strong demand in the markets and liquidated large amounts of their investments. The number of new investments was clearly smaller.
The strong performance of co-investments made with private equity funds and the good result of equity-type real estate investments contributed to the very good return on unlisted equities. Real estate companies paid out good dividends, their value strengthened and shares were sold at a profit. During the year, Varma divested its entire holding in SATO Corporation and half of its holding in Certeum Oy.
Private equities and unlisted equities represent a long-term asset class, and their long-term return has been very good.