Tapiola Asset Management Ltd had a good year of operation in 2005. The year was also favourable for customer portfolios under its management. The strong market performance was boosted by the general situation in the global economy, where considerable growth continued.
Equity markets were divided in two categories
The US economic growth was not set back by the hurricanes in the autumn or the Fed’s rate hikes. Private consumption and industrial output remained at high levels.
For equity investors, the year turned out polarised. The US equity markets remained almost flat at the levels seen at the beginning of the year, while Europe, Japan and the emerging markets saw a strong investment year. In Europe, equity prices advanced on average by about 27%. Also Japanese equity markets experienced a strong year after a long wait. Emerging markets, such as Latin America, Eastern Europe and Russia yielded a staggering return of over 50% during the year.
2006 looks fairly promising for the equity investor. Equity prices would not seem yet expensive relative to companies’ profit developments.
Europe expects interest rate hikes
Long-term fixed-income investments yielded a relatively nice return in 2005. On average, fixed-income investors received a 5-% return on their investments.
The market has also been supported by the end of the rate hike cycle in the US and the relatively moderate inflation, which is why the interest rate level may also remain close to its present low level despite improvements in the economic conditions.
In contrast, Europe expects to see a tightening in the interest rate policy, so it is not realistic for fixed-income investors to expect returns similar to those in 2005.
Asset Management’s equity funds performed well
The Tapiola mutual funds managed by Tapiola Asset Management Ltd developed favourably in 2005. Equity funds performed particularly well; relative to risks, their return may even be considered outstanding. As a result of successful allocation and good performance of the sub-funds, the balanced funds also yielded excellent returns. The return on fixed-income funds was no more than satisfactory.
The cornerstone of the operations of Tapiola Asset Management Ltd is a solid return on assets under management in all market conditions while avoiding any unnecessary risk of losing capital. The successful selection of individual investments and the timing of purchases are particularly highlighted in the investment operations.
In 2005, the assets managed by Tapiola Asset Management Ltd grew by over 19% and stood at about EUR 4.6 billion at the end of the year. The number of external discretionary asset management customers increased far more than expected. During the year, the company hired additional personnel.
Customer reporting to be improved in 2006
The most important operative project in 2006 is the procurement of a new yield and risk management system. It will be used to improve customer reporting and investment risk management.
In addition, personnel resources are going to be increased in the middle level office functions responsible for the daily valuation of the portfolios and often also for risk management.
Despite solid returns achieved in recent years, moderation is warranted as regards expectations for future returns. Unexpected political and economic disturbances may cause steep corrections in the investment markets. Therefore it pays to keep proper diversification and risk management in mind.
Jyrki Mäkelä
Managing Director
Tapiola Asset Management Ltd