AnnuAl RepoRt 2006
HQ AB (publ), 103 71 Stockholm, Sweden. Visitors: norrlandsgatan 15, entrance D. tel +46 8 696 17 00. www.hq.se
AnnuAl RepoRt 2006
CONTENTS
1 Twenty-fi ve years of explore, innovate and perform 2 Trends during the year
3 2006 in summary 4 Comments from the CEO
6 HQ Bank
7 Business concept 10 Private Banking 18 Investment Banking 23 Human resources 24 The HQ share 26 Five years in summary 27 Administration report
31 Recommended disposition of profi t 32 Consolidated income statements 33 Consolidated balance sheets 34 Consolidated change in equity
35 Parent company income statements and balance sheets
37 Parent company change in equity 38 Cash fl ow statement
39 Accounting policy and notes to the fi nancial statement
44 Notes
62 Auditor’s report
63 Excerpts from the articles of association 64 Board of directors
65 Management and auditors 66 Scheduled reports and AGM 67 Defi nitions
68 Addresses
Sven Hagströmer Fondkommission founded
1981
1990
1992
1994 1998
2002
2004
2005
2006
2007
Mats Qviberg joins and Hagströmer & Qviberg is founded
Hagströmer & Qviberg AB fl oatation
H&Q Corporate Finance founded
H&Q Trading founded H&Q starts trade in Russian shares
Concentration on Private Banking
Division of group – including spin off of HQ Fonder Financial Planning service launched Focus on Emerging Markets
HQ Fonder listed on O-list of Stockholm stock exchange
Introduction of Struc- tured Products H&Q Research changes strategy to absolute returns
H&Q Fond i Fond founded
HQ Fonder merged with Hagströmer & Qviberg Alfred Berg’s private unit acquired
H&Q Pensions founded
1999
Launch of HQ Bank Alliance with Länsförsäkringar Hagströmer &
Qviberg changes name to HQ
Placing the client fi rst is, and has always been, a guiding principle for HQ Bank. By questioning existing ways of acting and thinking HQ Bank has moved forward its position over the years.
HQ Bank will continue to explore, innovate and perform in order to deliver added value in the coming 25 years as well.
TWENTY-FIVE YEARS OF EXPLORE, INNOVATE AND PERFORM
TWENTY-FIVE YEARS OF EXPLORE, INNOVATE AND PERFORM 01
+ HQ 2006 TWENTY-FIVE YEARS OF SUCCESS
First funds in HQ Fonder launched
1988
+ HQ 2006
TRENDS DURING THE YEAR
300
225
150
75
0 SEKm
Q1 Q2 Q3 Q4
Operating income Operating earnings
Operating earnings, excluding Trading Group
280
210
140
70
0 120
90
60
30
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2003
Variable expenses (SEKm) Fixed expenses (SEKm) Number of employees
2004 2005 2006
Q4 FIXED AND VARIABLE EXPENSES PER QUARTER
VOLUME UNDER MANAGEMENT AND FLOWS
02 TRENDS DURING THE YEAR
80,000
60,000
40,000
20,000
0 5,000
3,750
2,500
1,250
0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2003
Volume under manageme nt (SEKm)
2004 2005 2006
Q4 200
150
100
50
0 SEKm
Q1 Q2 Q3 Q4
Operating income Operating earnings
120
90
60
30
0 SEKm
Q1 Q2 Q3 Q4
Operating income Operating earnings
Operating earnings, excluding Trading
Private Banking Investment Banking
INCOME AND OPERATING EARNINGS
2006 IN SUMMARY
Operating income SEK 931 (518) million.
Operating earnings SEK 350 (128) million.
Operating margin 38 (25) percent.
Earnings after tax SEK 250 (94) million.
Earnings per share after dilution SEK 18.4 (9.7).
Assets under management increased by SEK 24 billion during the year to SEK 78 billion, of which net infl ow SEK 8.4 billion, corresponding to organic growth of 15 percent.
Proposed dividend SEK 12.00 (6.00) per share, and a split 2:1.
FOLLOW UP OF FINANCIAL TARGETS
Financial Target Outcome 2006
Assets under management –
average + 20 % per year 44 %
Operating margin – average 25 % 38 %
Capital adequacy – minimum 15 % 29 %
STRONGEST YEAR EVER
Income increased by 80 percent to SEK 931 (518) million. Compared to 2005, pro forma including HQ Fonder, income increased by 57 percent. Net income from commissions and fees increased by 91 percent to SEK 659 (345) million. Income from trading on the company’s own account, comprising the net result of
fi nancial transactions including dividends, increased by 50 percent to SEK 232 (155) million.
Repeat income in the form of asset management fees and net interest income, after deductions for ex- penses for commissions and fees, increased during the year and covered 67 (41) percent of the group’s current expenses excluding profi t sharing.
Expenses increased by 49 percent or SEK 191 million to SEK 581 (390) million. Compared to 2005, pro forma including HQ Fonder, expenses increased by SEK 144 million. This increase is explained mainly by increased provisions for profi t sharing. The profi t sharing system is directly linked to underlying earnings and the increase in provisions for profi t sharing is explained exclusively by the improvement in earnings. The increase in personnel ex- penses is due to new recruitment conducted during 2006 in order to expand and broaden the level of expertise.
Total assets under management increased by SEK 24 billion to SEK 78 billion, an increase of 44 percent during the year. This positive trend is explained by a net infl ow of new client volumes of SEK 8.4 billion and a value change of SEK 15.6 billion.
During the year the OMX Stockholm Price Index in- creased by 24 percent. The value increase in HQ’s man- aged assets during the same period was 29 percent, which is proof of successful management.
Average income on assets under management in HQ Private Banking, pro forma including HQ Fonder, increased to 1.13 (1.04) percent. HQ delivers added- value services in the form of complete fi nancial solu- tions and is therefore less affected by price pressure.
2006 IN SUMMARY 03
+ HQ 2006
+ HQ 2006
THE JOURNEY HAS ONLY JUST BEGUN!
2006 was a strong year for HQ. Although the general climate was favourable, with a continued vigorous rise in the stock markets and a high level of turnover, this is only part of the explanation. HQ has continued to successfully explore, innovate and perform. Growth has continued in terms of both earnings and the volume of assets under management. And in addition scalability has demon- strated itself even more clearly.
In fi nancial terms HQ is reporting its best fi gures ever and this is the case more or less across the board. The aggressive fi nancial targets adopted by the board of directors in 2005 have been exceeded by a wide margin.
The Stockholm stock exchange rose for the fourth consecutive year and closed with a gain of 24 percent.
Other Nordic markets demonstrated similar trends with rises of between 15 percent and 32 percent. Emerging markets demonstrated a fantastic trend, with Russian shares generally rising by 71 percent (RTS Index), while Indian and Chinese shares rose on average 47 percent and 79 percent respectively (SENSEX 30 and MSCI China Index). Turnover on the Stockholm stock ex- change set a new record, and with four years of stock market gains one might think that the positive earnings trend should be a given. However, HQ has made aggressive efforts along the way, which is a strongly contributing factor in this success.
I am pleased that income during the year more or less doubled, that operating earnings almost tripled, that assets under management increased by over 40 percent, and that organic growth was 15 percent. HQ has exceeded both its own expectations and the targets established by the board of directors during 2005.
Despite the strong level of growth and pressure on prices the operating margin has increased by 13 per- centage points during the year to 38 percent. This clearly demonstrates that HQ’s business is scalable. The aver- age income on assets under management in HQ Private Banking increased to 1.13 percent.
HQ is today a stronger company than only a year ago. This development would not have been possible unless HQ had had fi rst-class personnel. Human resources are, and will remain, HQ’s most important resource.
STABILITY
If we look to the future, the magnitude of assets under management and the stability this brings, will be the critical factor in continued success across the economic cycle. For a couple of years HQ has been focusing on repeat income and since then the income base has been considerably strengthened. As we enter 2007 we do it with an income base that almost 90 percent covers consolidated expenses excluding profi t sharing.
With continued growth in assets under management
stability will be further reinforced, which has created an entirely different company with an entirely different risk structure and with entirely different opportunities. The transition from a private brokerage into till HQ Bank – a rapidly growing and profi table manager of wealth – is therefore complete.
With the positive trend HQ has experienced within Private Banking it is easy to forget that income within Investment Banking increased at the same rate as in Private Banking and, as in 2005, accounted for almost one-third of revenues.
During 2006 interest also increased in the HQ share from both existing and prospective shareholders. One of the explanations for this is our stable and profi table operations. During the autumn the company was pre- sented to a large number of national and international institutions. Several of these have now also become shareholders, which contributed to the HQ share rising by 112 percent during the year, including dividends.
FOCUS ON HIGH NET WORTH INDIVIDUALS
It is reassuring to note that HQ now attracts high net worth individuals from all segments. Previously we have attracted mainly entrepreneurs, but with our success and increasingly strong brand HQ has become recog- nised as a leading private banking business. In addition the average assets under management per client have increased. HQ is attracting larger and larger clients from increasingly many different groups of society.
HQ Bank is for high net worth individuals, as well as for those who want to become high net worth. A high net worth investor is defi ned more by the level of activity than by the amount of capital. Take the HQ Strategifond fund, started in 1988, as an example. Many parents choose to save all or part of their child benefi ts in mutual funds, irrespective of whether they are high net worth individuals or small investors. For those who actively chose to invest the money in the HQ Strategi- fond, instead of choosing a more passive investment in an index fund, the level of growth has differed, even though it has been good for both. The HQ Strategi- fond has throughout the period risen by 2,600 percent while index has risen by less than 800 percent. Those who make an active choice can become high net worth investors, while those who are passive will remain small investors.
Since HQ also addresses clients who want to be- come high net worth individuals our mutual funds play an important role. The merger with HQ Fonder in the autumn of 2005 has been successful. The integration went better than planned and scalability has proven to be greater than we imagined. The individual funds dem- onstrated, almost without exception, excellent returns during 2006. The good returns on the management of assets also contributed to a strong net infl ow.
04 COMMENTS FROM THE CEO
+ HQ 2006
In percentage terms, HQ Fonder demonstrated the fast- est growth in Sweden.
BUSINESS DEVELOPMENT
A large number of business development projects are ongoing within both Private Banking and Investment Banking. HQ’s African fund, the HQ Afrikafond, which was launched during the year, is one example of how business development combined with the strategy of exploring, innovating and performing has a practical impact. Through its emerging markets fund, the HQ Tillväxtmarknadsfond, HQ has with good results been investing on the African continent since 1996. The experience and contact network built up over time is now being used in the HQ Afrikafond to further explore and further innovate on a continent with many exciting investment opportunities. With the competence and experience that exist in Investment Banking and Private Banking, HQ has a good prospect of generating other interesting and attractive investment opportunities.
We will innovate new products and services, but there is also a series of areas that we will get even better at – such as the management of trusts and foundations as well as pensions. We have long been successful in selling structured products through our distribution network, and we must become as good at selling our funds. Continuing to build and strengthen our distribu- tion network is important.
SECTOR CONSOLIDATION
There is obvious price pressure on uncomplicated services, which we expect to lead to continued restruc- turing of the fi nance industry and to some companies being eliminated. In order to remain profi table going forward it will be necessary to either be cheapest or biggest, or alternatively to deliver signifi cant added value. Internet brokers have, with success, chosen to be cheapest. HQ has in a highly conscious and strategic manner chosen to deliver added value. HQ will continue to do this.
Transaction fees are falling, at least in the private cli- ent segment. Meanwhile competition is intensifying, not least within Private Banking, where several players have major expansion plans. In addition the market climate has been strong for several years and a correction of market prices is getting increasingly near. These threats are real, but the increasing proportion of repeat income means that HQ is better equipped to meet a tougher pe- riod, even though a stock market decline would naturally also have a negative impact on HQ’s earnings.
If HQ continues to perform level with its fi nancial targets or better, the volume of assets under manage- ment will exceed SEK 100 billion in 2008, while the company will have experienced good profi tability along the way. The current year will perhaps not be as good
on the stock markets as last year, but will hopefully be another good year for HQ. Our ambition is that organic growth will remain level with that in 2006, and with a continued high level of cost consciousness this means that earnings will increase.
Overall HQ has a strong offering and fantastic staff, which is demonstrated not least by the increase in as- sets under management during 2006. This means there is potential for continued good growth and income for the group, which will generate added value for both clients and shareholders.
Stockholm, February 2007
Patrik Enblad
CHIEF EXECUTIVE OFFICER
COMMENTS FROM THE CEO 05
+ HQ 2006
HQ BANK
In 2002 HQ Bank initiated the long-term and strategic work of more clearly focusing on added-value services and repeat income, with the aim of becoming the market leader in all of its niches. The concept has been highly successful and has transformed the group from a private brokerage into a manager of wealth.
HQ Bank is no ordinary bank. HQ Bank is not for ev- eryone. HQ Bank is a creative and ideas-driven bank for existing and potential high net worth individuals. With a focused strategy, HQ Bank has continuously increased its repeat income – asset management fees and net interest income from custodian account clients – which has contributed to more stable earnings and a lower level of risk.
HQ Bank explores business opportunities and in- novates fi nancial solutions. One of the most impor- tant fundamentals for this is the ability and insight of employees that they are not personally expected to know everything, but to always deliver the best.
ADDED-VALUE SERVICES
The symbol for HQ Bank is the plus sign. According to the dictionary this is a symbol for ”more” or ”higher”
and in physics it designates a positive charge. For HQ Bank the plus sign symbolises added value and improvement. In addition, the plus sign also means that HQ Bank is made up of a team of specialists where the total sum of the shared contributions is always greater than the individual contribution.
In order to generate a clear offering, both inter- nally and externally, HQ Bank has chosen to divide its operations into two business units: Private Banking and Investment Banking.
TRANSFORMATION COMPLETE
Irrespective of whether we are talking Private Banking, Investment Banking, needs analysis, partnerships, teams of specialists or absolute analysis, our work can easily be expressed: explore, innovate and perform.
EXPLORE
INNOVATE
PERFORM
Our business concept has harvested success, leading to ever greater market share and a strong brand. Assets under management have increased from SEK 18 billion at the end of 2001 to SEK 78 billion at the end of 2006, which is explained by successful asset management and a continuous net infl ow of capital. The transition from volatility to stability is complete, and the journey to the next level has started.
06 HQ BANK
GROUP STRUCTURE
HQ BANK
Administration HQ AB
HQ BANK
Private Banking
High Net Worth Individuals
Emerging Markets
HQ Fonder
External Distribution
Investment Banking
Equities
Corporate Finance
Trading
Alternative Investments
+ HQ 2006
BUSINESS CONCEPT
In order to achieve its long-term aims HQ Bank works with the following business concept:
MISSION STATEMENT
HQ Bank shall, by being an ideas-driven added-value supplier of fi nancial services, be the fi rst choice for high net worth individuals on the Swedish market.
FINANCIAL TARGETS AND OUTCOME 2006 In conjunction with the merger with HQ Fonder in autumn 2005, the board of directors of HQ established the following fi nancial targets:
Growth in the volume of assets under management shall average 20 percent per year.
The operating margin shall average 25 percent across the business cycle.
Capital adequacy shall be a minimum of 15 percent.
DIVIDEND TARGET
At least 80 percent of net profi t shall be transferred to shareholders in the long term.
OPERATING TARGET
HQ works with an operating target of achieving assets under management of SEK 100 billion latest 2010. Once this target has been achieved it will mean income in Private Banking of approximately SEK 1 billion assuming existing margins.
OVERALL STRATEGY
By continuously exploring new business opportuni- ties and innovating fi nancial solutions, HQ Bank will over time perform with added value for its clients and shareholders.
One of the most important fundamentals for this is the ability and insight of employees to always deliver the best even if they cannot do everything alone. A team of specialists where the sum is always greater than the individual contribution. A team that grows by delivering fi nancial success.
HQ’s way of working, with a thorough needs analy- sis, partnerships and teams made up of specialists, can simply summarise the strategy – explore, innovate and perform.
Continually explore new markets, opportunities, ways of working and solutions.
Continually innovate new structures, alliances, fi nancial products and services.
Perform through clear and measurable added value for clients and shareholders.
40
30
20
10
0
%
2002 2003 2004 2005 2006
Operating margin (pro forma) Average target
BUSINESS CONCEPT 07
OPERATING MARGIN
60
45
30
15
0
%
2002 2003 2004 2005 2006
Capital adequacy Minimum target CAPITAL ADEQUACY GROWTH
60
40
20
0
–20
%
2002 2003 2004 2005 2006
Growth in assets under management (pro forma) Average target
WE ARE LIKE AN OFF-ROAD VEHICLE.
We are always open to new business opportunities. Our Africa fund, the HQ Afrikafond, which invests in companies on the African continent, is a good example of this. We created this because we regard Africa as an attractive market with good opportunities for growth. Before a new product is launched we conduct detailed research. This includes being on location, feeling the pulse and seeing the opportunities with our own eyes.
+ HQ 2006
PRIVATE BANKING
HQ Private Banking offers professional and complete solu- tions in asset management for private individuals, entrepre- neurs, and companies as well as small and medium-sized institutions.
Our starting point is a tailored needs analysis. Through an ideas-driven organisation that explores, innovates and performs, we generate added value for our clients.
The high level of activity and the continued positive trend on the Stockholm stock exchange, combined with successful asset management contributed to a contin- ued strong infl ow of assets under management during 2006. Income increased during the year by 94 percent to SEK 598 million and earnings almost tripled to SEK 252 million. At the end of the year assets under manage- ment were SEK 64 billion, while the average income on assets under management in HQ Private Banking, pro forma including HQ Fonder, increased by 9 basis points to 1.13 percent. At the end of 2006 the number of employees was 115 (91).
BROAD OFFERING
In order to serve each individual’s risk level and required returns, HQ Private Banking has a broad offering. For this reason, HQ Private Banking starts each new client relationship by drawing up a complete picture of the client’s fi nances. During the past year HQ Private Bank- ing has won additional market share and has further developed its offering of services.
Working with an open architecture is a central tenet of HQ Private Banking’s philosophy. HQ Bank cannot be best at everything, but will always attempt to fi nd the best solution for its clients irrespective of whether this means recommending its own products or those of others. By focusing on the big picture and combining this with specialised knowledge HQ fi nds the route to greater added value for each individual client.
The offering of the HQ Private Banking unit comprises the following seven service areas, divided into four segments:
High Net Worth Individuals: Asset Management – Needs adapted discretionary and advisory asset management and stock brokerage services.
Financial Planning – Complete fi nancial solutions and advice regarding overall fi nancial planning based on the individual needs analysis.
Entrepreneur Services – Offers support to entre- preneurs in company matters related to divestments, acquisitions and capital acquisition for small and medium-sized entities.
HQ Pensions – Brokerage of pension policies for HQ Bank’s clients.
HQ Emerging Markets – Stockbrokerage and analysis of shares on the world’s emerging markets targeted towards institutions and private individuals.
HQ Fonder – Offers attractive and market-adapted savings products based on active securities manage- ment for private individuals.
External Distribution – Brokers structured products, mutual funds and asset management services to institutions, strategic partners and independent fi nancial advisors.
STARTS WITH THE NEEDS ANALYSIS
A thorough and profound needs analysis forms the basis of the overall fi nancial advice and HQ Private Banking has worked with this since 1998. The analysis provides an understanding and knowledge of the needs of each individual client. The client and HQ then jointly defi ne the overall aims, risk level and all other factors from a total-fi nances perspective.
10 PRIVATE BANKING
+ HQ 2006
PRIVATE BANKING
Advice spans a broad area and includes tax advice, pen- sion solutions, legal structures, broad questions of allo- cation and recommendations for individual investments.
Teamwork is crucial in being able to continually de- liver added value since one single advisor cannot solve all problems or pinpoint all opportunities. The teams consist of a lead asset manager, fi nancial planners and/or pension advisors. If necessary these groups are complemented with advisors that have their specialist competence in the fi eld of entrepreneurs or emerging
markets. Irrespective of how it is made up, the team consists of a small number of individuals, including some of Sweden’s foremost specialists in their fi elds, who work in a fast, fl exible, non-bureaucratic and responsive environment.
This business model improves the probability of generating added value for the client. Better added value provides us with satisfi ed clients and in the longer term means higher volumes of assets under management and higher earnings.
CLIENT MANAGER CLIENT FINANCIAL PLANNING
Needs analysis
Asset management and overall fi nances Focus on the big picture
Asset management – Risk profi le – Strategic allocation
– Allocation of Swedish and foreign shares, alternative investments and interest-bearing securities – Choice of sectors – Choice of shares
Overall fi nances
– Current position and future plans – Personal fi nances
– Wills, division of estates, etc – Succession planning – Management form – Foreign companies – Insurance
Reporting and feedback (Agenda, portfolio reporting, completed action)
Contact/meeting, possible change of strategy (needs analysis)
PRIVATE BANKING 11 TEAM
+ HQ 2006
PRIVATE BANKING
HIGH NET WORTH INDIVIDUALS
Asset Management
Asset Management, as HQ sees it, is not about a series of products. It is about creating the best possible return for each client, based on the client’s view of risk and returns and his or her plans for the future. The products simply make up a palette of tools for achieving this.
In order to fi nd the best tools, Asset Management actively works to develop and improve the product offering. There is a continuous process of evaluating different asset managers, both internal and external.
During this evaluation, Asset Management does not work with any absolute model, but those responsible, within Allocation & Strategy, seek out asset managers and funds that are able to demonstrate expertise that is judged at any particular time to be important in deliver- ing good results.
Finding the right mix is an enormously important part of successful asset management. The group does not use an index as a reference but seeks investments that on their own merits can be expected to generate added value over time.
There exists a large range of products, such as Active Share, Active Case, Active Fund, Active Management, HQ Solid, HQ Svea, the Model Portfolio and Hedge Fund Management.
Of the 20 discretionary asset management services that are managed by Allocation & Strategy, 17 per- formed better than index during 2006.
Financial Planning
Financial Planning provides complete fi nancial solu- tions for overall fi nancial planning. Overall fi nancial planning relates to tax solutions for private individuals and entities, business law, family law and pensions/
insurance.
All work is based on the needs analysis, where the at- titude towards risk and anticipated returns is central to recognising the right strategies. Financial Planning takes this a stage further, and considers the client’s complete wealth structure.
Entrepreneur Services
Many companies are facing changes of ownership in the coming years, and according to the Confederation of Swedish Enterprise, there may be as many as 140,000 companies that require assistance through this entire process.
Entrepreneur Services works, for example, with owner-led small and medium-sized entities that have a turnover ranging from SEK 20 million up to a couple of hundreds of million.
During sales and acquisitions of companies, Entre- preneur Services offers support with the projects in or- der to facilitate the acquisition/sale process. In the area of capital acquisition, Entrepreneur Services addresses a limited group of asset owners and arranges the Meeting Point, a forum where entrepreneurs have an opportunity to present their companies and their offerings.
HQ Pensions
HQ Pensions started its operations in the autumn of 2005 and offers full-scale brokerage of pension policies.
The aim of HQ Pensions is to contribute to an overall solution that generates added value.
Most people have a fairly good estimate of their
”unrestricted” assets, but unfortunately the same can- not be said of their ”restricted” assets. This restricted capital is made up of occupational pensions accrued through employment, various types of private pension policy, endowments and the like. These can often make up signifi cant amounts, particularly for those who have worked for many years. Many people do not know what risk level or returns they have on their restricted capital, the capital that is intended to secure their income when they retire.
HQ Pension acts as a pension broker, fi rst and foremost for existing clients. The unit forms teams of ex- perienced managers from Asset Management in order to review the client’s overall investments. Coordination creates effective asset management for both ”unrestrict- ed” assets, that is to say assets in their custodian ac- counts, and ”restricted” assets. By taking an overall view of all the assets, it is possible for asset management to be adapted to the individual in order to minimise risk and increase returns. The motto of HQ Pensions is a focus on asset management.
12 PRIVATE BANKING
+ HQ 2006
PRIVATE BANKING
HQ EMERGING MARKETS
The task of HQ Emerging Markets is to identify attrac- tive business opportunities on the world’s emerging markets. The operations have a natural base in HQ’s many years of experience from the Russian stock market. Since 2004 the unit has also closely tracked Greater China (China, Hong Kong and Taiwan) and South Korea.
Over the years HQ Emerging Markets has built up a broad network and is able to trade on most of the world’s emerging markets. This also includes markets in the less developed countries of Central Asia, Africa, East- ern Europe and Latin America. The advisors have many years of experience from emerging markets and are avail- able to discuss strategy and individual investments.
There has been great interest in emerging markets during the year and the trends on these markets have generally been positive, particularly for Russia and China.
On the Russian market, foreigners were allowed to trade Gazprom shares in early 2006, which has led to more global players looking at the market. This means that Russia now has one of the world’s biggest compa- nies in terms of market value. This has also contributed to a broadening of the client base, which has been favourable for HQ Emerging Markets.
EXTERNAL DISTRIBUTION
In addition to internal sales, structured products, funds and asset management services are also marketed externally. The external sales channels are mainly institu- tions, strategic partners, independent fi nancial players and insurance brokers.
The market for structured products is continually growing. In 2000 the turnover was around SEK 7 billion on the Swedish market, compared with around SEK 70 billion in 2006. This positive development will probably continue during 2007.
HQ regards structured products as tools, which if used correctly, can optimise the relationship between risk and returns in a client’s portfolio.
In order to increase the added value and benefi t to clients, HQ was the fi rst player to create a secondary market this year, with real-time prices, for all structured products.
PRIVATE BANKING 13
WE BELIEVE IN PARTNERSHIPS.
For us, partnerships are a way of demonstrating openness and respect for our clients. We cannot be best at everything. But we can be best at fi nding the optimum solution.
Over the years we have built up a comprehensive network of partners, all of which are among the best in their own area of operations. We strive to fi nd the best solution on the entire market, based on the circum- stances of each individual.
+ HQ 2006
HQ FONDER
The operations of HQ Fonder are made up of the man- agement of investment funds. The company’s stable organisation has longstanding experience and the fund managers have an average of 18 years of professional experience from the securities markets. The unit had 18 employees at the end of 2006.
2006 was very good year for the industry as a whole and for HQ Fonder in particular. Substantial rises in the Swedish stock market and in emerging markets, com- bined with good share choices by HQ Fonder’s manage- ment team, laid the foundation for a record year.
Despite the successes of 2006, the year was simply another important part of the puzzle in our overall aim of being regarded as Sweden’s foremost asset manager.
Continually generating added value for our clients is the route to achieving this overall aim. For this reason HQ Fonder has chosen to specialise in the following three fi elds:
Swedish stock markets – Organisation, expertise, inquisitiveness and proximity are important ingredi- ents in successful fund management.
Emerging markets – HQ Fonder has longstanding experience and a long-term engagement since the start of its emerging markets fund, the HQ Tillväxt- marknadsfond, in 1996.
Hedge funds/fund-of-fund products – Products that are an important complement to the rest of the fund offering and an attractive alternative to investment in fi xed-income products.
In addition to a continued strong focus on these three areas, it is necessary to:
Continue to deliver added value, since HQ Fonder does not have access to the same distribution chan- nels as the major banks.
Have a small and fl at organisation, where each individual enjoys a high level of responsibility and confi dence.
Create positive and stable returns through active management of assets.
At the end of the year HQ Fonder managed 19 securities funds, with the HQ Afrikafond being a new addition to the offering during 2006. Assets under management amounted to around SEK 24 billion of which around half was in the Swedish portfolios, SEK 6 billion in Russia, SEK 2 billion in China and India, and SEK 2.5 billion in the funds-of-funds offering.
HQ Fonder has almost without exception demon- strated successful asset management, with only one fund losing ground during the year. Meanwhile it can be noted that HQ Fonder is at the very top in terms of management results for Sweden funds. HQ Fonder has two funds – the HQ Sverigefond and the HQ Svea – among the six best Sweden funds during 2006. The good results from fund management are also apparent in the net infl ow during the year. In addition, the merger between HQ Fonder and HQ has given the desired outcome in terms of fund fl ows, which increased considerably during 2006. The net infl ow to HQ Fonder amounted to SEK 1.9 billion, which means that HQ Fonder was the fastest-growing fund company in Swe- den during 2006 in relative terms.
The number of directly registered clients at the end of the year was approximately 28,000. However, the number of end clients is signifi cantly greater since HQ Fonder has clients, who are not directly registered, through external distributors and the PPM pension system.
Towards the end of the year parts of HQ Fonder’s fund range were introduced on the Dutch market, and during the fi rst quarter of 2007 HQ Fonder will start distribution in Norway.
By exploring new opportunities, innovating new products and performing through added-value fund management, HQ Fonder will continue working towards its goal of being regarded as Sweden’s foremost fund manager.
PRIVATE BANKING
PRIVATE BANKING 15
THE GROUNDWORK IS THE MOST IMPORTANT.
This is why the needs analysis forms the basis of everything we do. This is best for the client and therefore best for us. A map and compass are no use without a clear goal. Together with our clients we defi ne overall targets, willingness to accept risk and all factors from an overall fi nancial perspective.
+ HQ 2006
manager and fi nancial advisor throughout the entire process, from initial analysis/valuation, drawing up memorandums of information, contacting potential buyers or sellers and management presentations to fi nal negotiations. The department has wide-ranging experi- ence of acquisitions, mergers, disposals, buyouts, and fairness and valuation assignments.
Market
The market climate was highly favourable during 2006.
In order to meet the growing demand, the unit has during the year made a number of recruitments. HQ has been an advisor in conjunction with market listings, preferred issues, redemptions and M&A transactions, and has won several market-making assignments. In addition the unit has retained a leading position in struc- tured secondary placements. A strong level of knowledge in the real estate sector means that the department was an advisor in conjunction with Bilia’s spin off and listing of Catena and Fabege’s bid for real estate company Tor- net. With sound and unique knowledge of the Russian market we conducted a capital acquisition and listing of Varyag Resources AB, which is the fi rst Swedish listed company to invest in private equity in Russia.
EQUITIES
Equities, which at the end of 2006 was made up of 24 employees, is divided into Sales, Sales Trading and Research. This unit is responsible for research and trade in stocks and derivatives on behalf of clients. In order to focus on creating added value for clients research is conducted in terms of absolute advice, that is to say whether a share is worth buying or selling in absolute terms and not in relation to any index. In order to create additional focus the department has chosen to focus on case-driven research, mainly of Swedish shares, since it is on the Swedish market that the unit has its core com- petence and therefore the greatest potential to generate added value. In addition to share analysis the depart- ment produces economic analysis, strategy reports and sector analysis. This strategy has proven successful, and this confi rmed by the higher ranking for 2006 from Financial Hearings.
Clients can mainly be divided into three segments:
Domestic institutions, domestic and international hedge funds and interbank clients.
Market
Income from institutional share trading continued to rise during 2006. The brand has been further strength- ened and the research model that the Equities services unit has worked with since 2002, with a focus on gener- ating transaction proposals that create added value, is gaining greater response among clients.
INVESTMENT BANKING
The Investment Banking business unit conducts opera- tions in the fi elds of research and trade in stocks and derivatives both on behalf of clients and on the company’s own account. We also offer capital acquisition services and advice in conjunction with mergers, acquisitions and initial public offerings. The client segment is made up mainly of Nordic institutions and entities.
The business is made up of four service areas:
Corporate Finance, Equities, Trading and Alternative Investments. Using advice and ideas that dare to be different and unconventional we generate added value for our clients. In order to remain at the cutting edge and develop new added-value services there is continual professional development and recruitment of specialist competence. The Investment Banking unit increased its income during the year by 60 percent to SEK 322 million and earnings rose by 97 percent to SEK 130 million.
CORPORATE FINANCE
Corporate Finance, which at the end of 2006 comprised 14 employees, offers professional fi nancial advice in conjunction with capital market services, mergers, acquisitions and divestments, matters of ownership and capital structures as well as strategy. The principal market is that in Sweden, but to some extent transac- tions are conducted in the rest of the Nordic region and on the Russian market. Our clients are found mainly among medium-sized Swedish listed and unlisted companies. HQ Corporate Finance has since its start in 1992 conducted over 250 transactions.
Corporate Finance works to create added value and to build long-term relationships where clients are able to benefi t from HQ’s comprehensive experience of trans- actions and industrial knowledge. Our guiding lights are thorough analysis, high quality and confi dentiality linked with long-term thinking. When combined with fi nancial creativity, longstanding and broad experience of the stock market and business and comprehensive experi- ence of transactions, this creates strong client relation- ships. Our employees have solid business backgrounds and a high level of competence in both specifi c sectors and complex transactions.
In the area of equity capital markets we bring to- gether knowledge and dedication to execute public and private transactions on both the primary and second- ary markets. HQ Corporate Finance has wide-ranging experience of initial public offerings and other listings, structured placements, designated issues, preferred issues, share buybacks, redemption programmes, the arrangement of underwriting consortiums and other stock-related transactions.
In the area of M&As, Corporate Finance offers fi nancial advice and transaction support to both listed and unlisted companies. Normally, HQ acts as project
18 INVESTMENT BANKING
+ HQ 2006
INVESTMENT BANKING
The price pressure that has for several years applied to more straightforward services in the Equites unit per- sists. In order to counter this, HQ has chosen to focus on an increased level of added value in its services. The strategy of redirecting income fl ows towards added- value products, with higher margins, has remained suc- cessful. Research-driven brokerage fees have continued to rise during 2006, and the year was the best ever in terms of these fees.
One of the cornerstones in the services provided by Equities is the absolute advice assisted by case-driven research. The continued work with case research that generates added value has led to results in the form of increasingly broad acceptance in the market, which is in turn demonstrated by a rising ranking of the Research department. Sales of derivative products have increased during the year. Despite a greatly increased level of activity during the year, in terms of transactions, client service, client activities and company visits, it has remained possible to keep costs under control.
The model and strategy established in 2002, and which is still the right route towards becoming a local market leader, is continually being developed. Standing out by performing better than our competitors, daring to do things differently and innovating new opportunities, is a navigable route in meeting the tough competition.
TRADING
The Trading unit conducts trading in shares and deriva- tives on the company’s own account. The unit, which at the end of 2006 had 11 employees, focuses on con- ducting market making and risk arbitrage transactions,
which take place on many of the world’s stock markets.
Since it was founded in 1994 the Trading department has not experienced a single loss-making quarter. Com- pared to the preceding year earnings have more than doubled while the level of risk has remained constant.
Market
The market has varied during the year. The second quar- ter was characterised by major fl uctuations, resulting in rising volatility. Competition remains intense. Mean- while the number of long-term positions has fallen, and the level of risk has therefore declined. HQ Trading is now the market-leading market maker for both share op- tions and index options on the Swedish market. These rising market shares options, combined with an even level of costs, mean that the trading department contrib- uted positively to HQ Bank’s earnings during 2006.
ALTERNATIVE INVESTMENTS
In the fi eld of Alternative Investments a number of projects are being evaluated with a focus on different hedge-fund products. The ambition is to offer our cli- ents attractive Alternative Investments while increasing the volume of assets under management and improving profi tability.
In summary, targeted skills development and recruit- ment is the key to success when developing added-value services throughout the entire business unit. Explore, innovate and perform will remain the guiding principles for all service areas within HQ Investment Banking.
INVESTMENT BANKING 19
ADVISOR TO SELLER DECEMBER 2006 PHONERA AB ACQUIRES
NOCOM NETWORKS AB
SOLE ADVISOR NOVEMBER 2006
STRUCTURED PLACEMENT
SOLE ADVISOR DECEMBER 2006
RIGHTS ISSUE ADVISOR TO ACQUIRER
MARCH 2006 ACQUISITION OF TORNET
SOLE ADVISOR MARCH 2006 PRIVATE PLACEMENT
SOLE ADVISOR APRIL 2006 SPIN-OFF AND LISTING
AT THE SSE O-LIST
SOLE ADVISOR MAY 2006 REDEMPTION:
DISTRIBUTION OF CASH
SOLE ADVISOR NOVEMBER 2006 STRUCTURED PLACEMENT
SOLE ADVISOR AUGUST 2006 IPO AND LISTING ON FIRST NORTH AT THE SSE
SOLE ADVISOR JUNE 2006 RIGHTS ISSUE
SOLE ADVISOR SEPTEMBER 2006
STRUCTURED PLACEMENT
SOLE ADVISOR DECEMBER 2006 PRIVATE PLACEMENT
WE DO NOT BELIEVE IN SUPERMAN.
We know that no one individual is able to solve all problems. Since 1998 we have been working in small teams, appointed according to the task in hand. These teams include some of Sweden’s foremost special- ists who work in a quick, non-bureaucratic, fl exible and responsive organisation. This means that our clients, who often have complicated fi nances, do not have to approach several providers. They can fi nd a solution and get answers to everything about their fi nances in one place.
WE ARE HQ BANK.
We are no ordinary bank, and we do not off er the same broad range of services and off -the-shelf products as ordinary banks. We are an ideas-driven bank for high net worth individuals. We explore transaction opportunities and develop innovative fi nancial solutions. In Sweden we are almost alone in investing in listed African companies. Next time maybe you’ll meet us in Kazakhstan.
+ HQ 2006
HUMAN RESOURCES
HQ regards all its employees, throughout the entire group, as its most important resource. The fi nancial industry is knowledge-intensive and highly competitive.
The effective provision of competent employees and good development opportunities are therefore signifi cant. The competence, experience and dedication of employees are critical to the success of the company.
HQ lives on delivering added value to its clients. This means that irrespective of whether an employee works in Private Banking, Investment Banking or Administra- tion, the aim is to generate added value.
At HQ, employees are inquisitive, open to change and high-performing, which correlates well with HQ’s guiding principles of explore, innovate and perform.
Work at HQ takes place at a high tempo with short decision-making pathways, which leads to an exciting and stimulating working environment. Employees have good opportunities to participate in and infl uence the development of the company and their own personal development.
In order to provide employees with a greater op- portunity to participate in HQ’s business and develop- ment, two convertible programmes have been offered to employees during 2006. We believe that personal and long-term fi nancial engagement increases the interest of employees in the business, improves motivation and strengthens loyalty towards the group.
HQ subsidises exercise activities and preventative healthcare for its employees. HQ still had lower absen- teeism due to illness than the Swedish average. HQ works actively with the rehabilitation of the long-term sick and has contracts for company healthcare.
Increased marketing activities and a wider product range have led to a strengthening of 45 employees in 2006. The number of employees at the end of the year was 244 (199), of which 66 women (27 percent). The average number of employees was 223 (182).
The age structure in the group is shown in the adja- cent fi gure. The company has employees ranging in age from 20 to 67. The average age of the employees is 37.
The average length of employment is fi ve years.
NUMBER OF EMPLOYEES BY BUSINESS UNIT
AGE DISTRIBUTION
Private Banking 115
Investment Banking 51
Management and Administration 78
HUMAN RESOURCES 23
0 15 30 45 60 75 90 105 120
0–19 20–29 30–39 40–49 50–59 60–69
+ HQ 2006
THE HQ SHARE
Year Change
Increase/decrease in
number of shares Total number of shares
Change in share capital, SEK
Total share capital, SEK
1999 Company formed 1,000 1,000 100,000 100,000
1999 Split and new issue 11,500 12,500 400,000 500,000
2000 New issue 3,551,852 3,564,352 142,074,080 142,574,080
2000 New issue, preferred stock 1,453,022 5,017,374 58,120,880 200,694,960
2001 New issue, warrants 168,850 5,186,224 6,754,000 207,448,960
2002 New issue, warrants 4,000 5,190,224 160,000 207,608,960
2003 New issue, warrants 12,350 5,202,574 494,000 208,102,960
2004 Reduction of nominal value 0 5,202,574 –156,077,220 52,025,740
2004 Redemption 2004 –501,524 4,701,050 –5,015,240 47,010,500
2005 Redemption 2005 –462,954 4,238,096 –4,629,540 42,380,960
2005 New issue, merger HQ Fonder 2,540,524 6,778,620 25,405,240 67,786,200
2006 Split 6,778,620 13,557,240 0 67,786,200
CONVERTIBLE DEBENTURES AND WARRANTS
During 2006, HQ has directed two different convertible programmes for employees of HQ that could mean conversion of a maxi- mum of 406,700 and 400,000 shares respectively, see also Notes 16 and 25. No warrants are outstanding.
SPLIT 2:1
The board of directors proposes that the annual general meeting vote to approve a division of the company’s shares through a split with the terms 2:1.
PERFORMANCE OF THE HQ SHARE DURING 2006
24 THE HQ SHARE
+ HQ 2006 Number of shares traded
SEK
Dec 05 Jan 06 Feb 06 Mar 06 Apr 06 May 06 Jun 06 Jul 06 Aug 06 Sep 06 Oct 06 Nov 06 Dec 06
Number
HQ share (total returns) AFGX indexed (total returns) Source: Thomson 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000
100 150 200 250 300
Market capitalisation (SEKm), Dec 31, 2006 3,593 Turnover (SEKm) 2006 867
Share price (SEK), Dec 31, 2006 265 Number of shares traded, 2006 5,018,132
High/Low 2006 265/120 Total return on HQ share, including dividends (%) 112
