AnnuAl RepoRt 2008
Annu A l Repo Rt 2008
HQ AB (publ), 103 71 Stockholm, Sweden. Visitors: norrlandsgatan 15, entrance D. tel +46 8 696 17 00. www.hq.se
HQ 2008
EXPLORE, INNOVATE AND PERFORM
HQ Bank is no ordinary bank. We do not have the same broad propo- sition of off-the-shelf products and services as ordinary banks. We are an ideas-driven bank with a focus on improving wealth.
Our success is based on two factors: The products and services we innovate and the people who deliver them. By offering a stimulating environment to our people, we create the right conditions for deli- vering financial success to our clients.
Meticulous, in-depth needs analysis is the foundation of everything
we do. A team of specialists – where the sum is always greater than
the individual contribution – ensure that we deliver the optimal solu-
tion, whether or not that is an HQ product.
HQ 2008
04 BUSINESS PERFORMANCE 2003–2008
REPEAT REVENUE AND TOTAL EXPENSES EXCLUDING PROFIT SHARING, SEKm
FIXED AND VARIABLE EXPENSES, SEKm
ASSETS UNDER MANAGEMENT, SEKm REVENUE BY SEGMENT, SEKm
BUSINESS PERFORMANCE 2003–2008
* Including HQ Fonder from October 28, 2005
** Including HQ Direct from October 22, 2008
IB PB Other PB repeat revenue as a proportion of expenses excluding profit sharing
2003 2004 2005* 2006 2007 2008**
% of expenses excluding profit sharing
0 100 200 300 400 500 600 700 800 900
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
0%
20%
40%
60%
80%
100%
120%
140%
160%
Expenses excluding profit sharing Repeat revenue
2003 2004 2005* 2006 2007 2008**
0 50 100 150 200 250 300 350 400 450 500
Number of employees, average
Variable expenses Fixed expenses Number of employees, average
2003 2004 2005* 2006 2007 2008**
0 50 100 150 200 250 300 350 400
100 125 200 250
150 175 225 275 300
100 120 140 160 180 200 220 240 260 280 300
2003 2004 2005* 2006 2007 2008**
Outflow (SEKm) Inflow (SEKm) Assets under management (SEKm)
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 Flows
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000
Assets under management
HQ 2008
2008 IN SUMMARY
05 Operating revenue SEK 818 (986) million -17
percent.
Operating profit SEK 278 (405) million -31 percent.
Profit after tax SEK 246 (290) million -15 percent.
Diluted earnings per share SEK 9.0 (10.5) - 14 percent.
Operating margin 34 (41) percent.
Assets under management SEK 54.3 (79.2) billion, net inflow SEK 5.0 (8.3) billion.
Operating profit was SEK 278 (405) million, and profit after tax was SEK 246 (290) million, corresponding to SEK 9.0 (10.5) per share after dilution. HQ Direct (formerly Glitnir AB) was acquired during the fourth quarter at a price below acquired net assets, which positively influenced earnings by SEK 86 (0) million. Against this, there have been significant integration expenses. Excluding HQ Direct, operating profit was SEK 193 (405) million. This decrease in profit should be viewed in the light of an especially difficult business climate.
HQ’s finances are stable. Capital adequacy is high and liquidity is good. HQ has not reported any credit losses in the past five years, and the ongoing financial crisis has not led to any need to make provisions for uncertain receivables.
Revenue was SEK 818 (986) million, of which SEK 122 (0) million was revenue of a non-recurring nature attribu- table to the acquisition of HQ Direct. The principal explanation for the decrease in revenue is the unfavourable market climate, which had a negative influence mainly on brokerage fees, trading on the company’s own account and advisory fees. Repeat revenue in the form of asset management fees and net interest income was affected to a lesser degree and comprised 49 (44) percent of total revenue.
Operating expenses were SEK 540 (581) million and SEK 496 (581) million excluding HQ Direct, a decrease com- pared to the preceding year of 15 percent. The decrease is explained primarily by lower expenses for provisions for profit sharing. Other expenses excluding HQ Direct were SEK 405 (408) million, which was in line with our previously communicated cost target for 2008.
Total assets under management decreased by SEK 25 billion to SEK 54 billion, a decrease of 31 percent, while the OMX Nordic Exchange Stockholm (AFGX) demonstrated a decline of 42 percent. The net inflow of new client volumes during the year was SEK 5.0 (8.3) billion, which corresponds to annualised organic growth of 7 percent in HQ Private Banking.
The board of directors proposes that the annual general meeting approve a dividend of SEK 6 (10) per share. The proposed dividend corresponds to 66 percent of net profit for the year and a dividend yield of 10.3 percent based on the share price on December 31, 2008.
STABLE FINANCES AND POSITIVE ACQUISITION EFFECT ATTRIBUTABLE TO HQ DIRECT
Rörelseresultat Intäkter
% SEKm
SEKm
2004 2005 2006 2007 2008
Operating profit Operating margin 1,200
900
600
300
0
2004 2005 2006 2007
Revenue
2008
0 100 200 300 400
0 10 20 30 40 50
Operating profit
(Pro forma including HQ Fonder)
Revenue
(Pro forma including HQ Fonder)
HQ 2008
06 COMMENTS FROM THE CEO
NEW CIRCUMSTANCES AND NEW OPPORTUNITIES
HQ’s consistent focus on repeat revenue and cost control has contributed to greater stability and a continuous lowering of the level of risk in the operating activities. This proven strategy is unchanged and HQ has made considerable investment in its business model and staff, and in broadening its value propositions in both Private Banking and Investment Banking.
Despite major stimulus packages around the world, the financial crisis worsened towards the end of the year, which has successively had an increasing impact on the real economy. Considering these exceptional market circumstances, it is pleasing that HQ demon- strated good financial performance during the year.
This is explained by a strong offering, a clearly defined and successful business model and, not least, profes- sional staff.
Operational and financial stability
The net inflow of assets under management during the year was SEK 5.0 billion, of which SEK 1.3 billion was during the fourth quarter. The operating profit of SEK 278 million was one of the best ever for HQ and the operating margin in the underlying business was 28 percent. This was despite Trading having a large negative impact on earnings during the fourth quarter.
Capital adequacy was 15 percent, which is higher than our financial target. In addition we have limited expo- sure of our balance sheet, an effective credit procedure and good liquidity.
The above figures are once again proof of our financial and operational stability, and provide a continued high level of financial preparedness. In times such as these this forms the primary safety net for HQ’s staff, clients and shareholders. In the longer term it will provide opportunities to work actively, further develop the busi- ness move forward our positions.
Broader revenue base
During the fourth quarter we had a unique opportunity to acquire Glitnir’s Swedish operations, now called HQ Direct. The company’s core operations are services in institutional trade. This business complements our ex- isting operations in Investment Banking, and provides a broader client base in Sweden and abroad. The acqui- sition also offers added value in the form of a greater value proposition, and therefore an expanded revenue base, as well as cost synergy in IT and administration.
The integration is proceeding according to plan and cost synergy of approximately SEK 75 million annually will have full effect from the second half of 2009.
Alternative investments
During the year we continued our efforts to expand the operations of Alternative Investments. This segment is increasingly being demanded by our clients since it provides access to new investment opportunities and reduces dependence on equities for capital growth as well as offering generally lower risk. This business has great potential and strengthens HQ Private Banking as a complete manager of wealth and provider of added- value services while offering synergy within the group.
Unique and attractive products also open up signifi- cant opportunities for distribution through external channels.
During the second quarter HQ Loans was launched, a fund that invests in a well diversified portfolio of Nordic corporate debt. Despite a challenging market climate the fund attracted over SEK 1 billion. We have just launched HQ Loans II. The application period is currently open and initial interest has been substantial.
Additional new products are being developed and the timing of launches will naturally be guided by the state of the market.
Operating targets
Our operating target to achieve assets under manage- ment of SEK 100 billion is unchanged, although the ti- ming has been pushed forward. The route to achieving this will require continued hard work. It will require us to explore and innovate new services and products, and to perform by providing added value to our clients, which will in turn generate new volumes. It will also be necessary to achieve an even greater spread of pro- ducts and services. Further strengthening our distri- bution capacity by improving existing partnerships and developing new ones is our highest priority. During the year we have, among other things, deepened our allian- ces with Sparbanken Finn and Sparbanken Gripen. We have also created a jointly owned securities company with SÄKRA, one of Sweden’s largest independent insurance brokerage organisations. We already had a fruitful cooperation and the new company will provide access to an increased range of financial services.
In addition we acquired SFK Svensk Förvaltningskon- sult, now called United Securities, during the year, a company that provides insurance policy holders with discretionary management of insurance assets in fund portfolios. This acquisition is strategically important since it also offers access to the occupational pension market.
Another important factor in success is how we manage
COMMENTS FROM THE CEO
HQ 2008
is to create a leading independent asset manager. In Private Banking we will reinforce our position as a leader.
Continued product development and segmentation of the existing client base are one part of this strategy. In Investment Banking we will advance our positions and reach higher up the value chain. We will achieve this partly through a more business-oriented methodology with a focus on added value and profitability.
Finally, I would like to thank all of our staff for their excellent commitment during 2008. This has been a particularly tough year, which has often demanded extra effort under highly pressured circumstances. It is this commitment, and our expertise, that will also be critical in our future success.
Stockholm, February 2009
Mikael König
Chief Executive Officer in addressing the market outside the Stockholm region.
The past business year was successful in this respect and we took new market share. But I can note that if we had the same relative market share in the rest of the country as in the Stockholm region our operating target would have been achieved.
New circumstances
The competitive picture has changed markedly in recent quarters. Several former local competitors have left the market, while international competitors have increa- singly chosen to focus on their own home markets. In addition, new rules and new legislation create barriers that are difficult for many small companies to clear while remaining competitive. This provides us with good prospects of gaining market share.
Going forward HQ will focus on three areas – Asset Ma- nagement, Investment Banking and Private Banking – with the vision of creating and revealing leading Nordic business in each area.
HQ Fonder will form the basis of our new area of focus – Asset Management – and using the existing business we will broaden our expertise and services offering and address new client segments. Eventually our aim
COMMENTS FROM THE CEO 07
Ph ot o: P et er J ön ss on / V ec ka ns A ff är er
HQ 2008
HQ BANk
08 HQ BANk
ORGANISATIONAL OVERVIEW
Administration HQ AB
Private Banking
Asset Management
Investment Advice
Emerging Markets
HQ Fonder
External Distribution
Investment Banking
Equities
Corporate Finance
Trading Alternative Investments DMA (Direct Market Access) HQ Bank has in the past decade worked in the long
term and strategically with a clear focus on added-value services and repeat revenues. Our aim is to become the market leader in each segment where the group opera- tes. This concept has been successful, and in 2008 the prestigious publication Euromoney voted HQ Sweden’s best private bank.
HQ Bank is an ideas-driven bank that continually explores new markets, opportunities, methodologies and solutions. One of the most important fundamentals in this respect is the ability and insight of employees to always deliver their best as a team, even if they cannot do everything alone. All this is done to meet the needs of our clients and to perform through clear and measu- rable added value to clients and shareholders.
This proven and successful business concept remains unchanged. HQ Bank will continue to explore, innovate
and perform with a focus on repeat revenue and added value.
In terms of the overall market HQ Bank is still a small, flexible and innovative player in Sweden. This provides HQ with many advantages over the major banks, while the work of continuously strengthening our distribution force remains in focus.
Since a significant proportion of HQ Bank’s private
banking clients come from the Stockholm region, the
work of increasing awareness in the rest of the country is
strategically important. If HQ were eventually to achieve
the same market share around the country, assets under
management would double. HQ Bank is currently repre-
sented in eight locations in Sweden and addresses new
clients from these offices.
HQ 2008
By continually exploring new business opportunities and developing innovative financial solutions HQ Bank will over time perform by providing added value to its clients and shareholders. One of the most important fundamentals in this respect is the ability and insight of employees to always deliver their best, even if they cannot do everything alone. By offering a stimulating and formative environment and by working in teams we create the right conditions for delivering financial success for our clients.
Vision
HQ shall generate and reveal leading Nordic business in the following business areas:
Asset Management Private Banking Investment Banking Mission statement
As an ideas-driven added-value provider of financial services, HQ Bank shall be the first choice for entrepre- neurs, institutions and private individuals in the Nordic market.
Financial targets
HQ’s board of directors has established the following financial targets:
The operating margin shall average a minimum of 35 percent.
The net inflow of assets under management in Private Banking shall be a minimum of 10 percent per year.
Repeat revenue as a proportion of total expenses excluding profit sharing shall be a minimum of 100 percent.
Capital adequacy shall be a minimum of 10 percent.
Dividend target
At least 80 percent of net profit shall be transferred to shareholders in the long term.
Operating target
HQ Bank’s long-term operating target is to achieve assets under management of SEK 100 billion. In the short term, focus is on the following areas.
Winning new market share through organic growth and complementary acquisitions.
Increasing the relative proportion of revenue from outside the Stockholm area.
Continuing to build up critical mass in all three business areas.
Retaining and attracting the right expertise.
A continued high level of cost efficiency.
Overall strategy
The HQ approach, with a thorough needs analysis, alliances, external distribution and teams made up of specialists, can be summed up in the strategy: explore, innovate and perform.
Explore new markets, opportunities, approaches and solutions.
Innovate new structures, alliances, financial products and services.
Perform by delivering clear and measurable added value to clients and shareholders.
HQ’s success is based on two factors: The products and services we innovate and the people who deliver them.
BUSINESS CONCEPT
Private Banking
HQ Bank
Asset Management Investment Banking
BUSINESS CONCEPT 09
HQ 2008
4030
20
10
0
%
Minimum target 60
45
30
15
0
%
2005
2004 2006 2007 2008
2005
2004 2006 2007 2008 2005
2004 2006 2007 2008
2005
2004 2006 2007 2008 Average target
120
90
60
30
0
%
Minimum target
60
45
30
15
0
%
Minimum target
BUSINESS CONCEPT
Sven Hagströmer Fondkommission founded
1981
1990 1992
1994 1998
2002
2004
2005
2006 2008
2007 Mats Qviberg joins
and Hagströmer
& Qviberg is founded
Hagströmer & Qviberg AB floatation
H&Q Corporate Finance founded
H&Q Trading founded
H&Q starts trade in Russian equities
Concentration on Private Banking
Division of group, including spin-off of HQ Fonder
Financial Planning launched
Focus on Emerging Markets
HQ Fonder listed on O- list of Stockholm Stock Exchange
Introduction of Structured Products
H&Q Research changes strategy to absolute return
H&Q Fond i Fond founded
HQ Fonder merged with Hagströmer & Qviberg
Alfred Berg’s private unit acquired
H&Q Pensions founded
Voted Sweden’s best private bank by Euromoney
Intensified concen- tration on Alterna- tive Investments
HQ begins selling funds in Norway and Finland
Acquisition of SFK Acquisition of Glitnir Joint venture with OPM Joint venture with Säkra Intensified alliance with Sparbanken Finn &
Sparbanken Gripen 1999
Launch of HQ Bank
Alliance with Länsförsäkringar
Hagströmer &
Qviberg changes name to HQ
HQ begins selling funds in the Nether- lands
A quarter century of success
First funds in HQ Fonder launched
1988
Operating margin
Repeat revenue/total expenses excluding profit sharing
Net inflow, assets under management in Private Banking
Capital adequacy
10 BUSINESS CONCEPT
HQ 2008
PRIVATE BANkING
HQ Private Banking serves private individuals, entrepreneurs, companies and institutions that require
complete solutions in the area of wealth management. For HQ this means assisting with everything
from asset management to legal matters, insurance, financing and taxation.
HQ 2008
12 PRIVATE BANkING
In the past ten years HQ Private Banking has developed into one of Sweden’s leaders in the field. This proven business model is unchanged and the key words are repeat revenue and added value.
Operating revenue was SEK 548 (767) million.
Net inflow of assets under management during the year was SEK 5.0 billion, which represents organic growth of 7 percent.
The business unit reported operating profit of SEK 230 (385) million.
The operating margin was 42(50) percent.
Acquisition of SFK Svensk Förvaltningskonsult during the first half of the year.
Intensified alliance with Sparbanken Finn and Spar- banken Gripen.
Established joint ventures with OPM and SÄKRA.
Total solutions
HQ Private Banking addresses private individuals, entrepreneurs, companies and institutions that require complete solutions in the area of wealth management.
For HQ, Private Banking means providing clients with everything from asset management to advice in legal matters, insurance, financing and taxation.
Our aim is to create innovative financial solutions with the optimum return for each individual client based on individual needs.
The offering of the HQ Private Banking unit comprises the following four segments:
ASSET MANAGEMENT
Asset Management – Needs-adapted discretionary and ad- visory wealth management and stock brokerage services.
Financial Planning – Complete financial solutions and advice regarding overall financial planning based on the individual needs analysis. Financial Planning comprises four service areas: Entrepreneur Service, Pensions & In- surance, Taxes & Legal Affairs and Foundation Advisory Service.
EMERGING MARkETS
Stockbrokerage and equity research in global emerging markets for institutions and private individuals.
HQ FONDER
Attractive and market-adapted savings products based on active securities management for private individuals.
EXTERNAL DISTRIBUTION
Brokerage of structured products, mutual funds and asset management services for institutions, strategic partners and independent financial advisors.
Needs analysis
In order to offer our clients complete financial solutions, each new client relationship starts with a thorough needs analysis where HQ and the client together draw up a complete picture of the client’s finances.
The analysis provides an understanding of the needs of each individual client. The client and HQ then jointly define the overall aims, risk level and all other factors from a total-finances perspective. Based on each client’s unique needs, an allocation model is drawn up that as- sists the client in deciding on the right investment path and in finding the right mix of asset classes. The aim is to generate optimal portfolio distribution, with a good balance between risk and anticipated returns. Advice spans a broad area and includes tax advice, pension solutions, legal structures, broad questions of allocation and recommendations for individual investments.
Own advisors & teams of specialists
Since 1998 HQ Private Banking has worked in teams of personal advisors and other specialists. Teamwork is crucial in being able to continually deliver added value, since one single advisor cannot solve every problem or pinpoint every opportunity. The teams consist of a lead advisor/asset manager, financial planners and pension advisors. If necessary, these groups are augmented with advisors whose specialist expertise lies in other areas, such as entrepreneur services or emerging markets. Irrespective of how it is made up, the team consists of a number of individuals, some of Sweden’s foremost specialists in their fields, who work together in a fast-paced, flexible, non-bureaucratic and responsive environment.
External partners
Working with external partners is a central tenet of HQ’s value proposition. HQ cannot be best at every- thing, but will always attempt to find the best solution for its clients, whether that means recommending HQ products or third-party products. Over the years HQ has built up a comprehensive network of partners, all of which are among the foremost in their respective fields.
ASSET MANAGEMENT
Asset management, as HQ sees it, is about creating the best possible return for each client, based on the client’s risk and return objectives and plans for the future. The products are simply a palette of tools for achieving that aim. Together with the client, the personal advisors develop an individually adapted portfolio, which can be made up of various combina- tions of assets such as Swedish and foreign equities, interest-bearing securities and alternative investments.
Clients are able to choose from HQ’s complete model portfolios or tailor their own. In order to find the best tools HQ Asset Management actively works to develop and improve the product range. There is a continu-
PRIVATE BANkING
HQ 2008
PRIVATE BANkING 13 ous process of evaluating internal and external asset
managers. In the course of the evaluation, Asset Man- agement does not apply any absolute model, but the responsible individuals in Allocation & Strategy seek out asset managers and funds that clearly demonstrate expertise deemed significant at any particular time to delivering strong performance. Finding the right mix is a crucial component of successful asset management.
The group does not use an index as a benchmark, but rather looks for investments that on their own merits can be expected to generate added value over time.
Financial Planning
High net worth individuals are faced with a great many financial and legal decisions. Few want to pay higher taxes or premiums than necessary and none want to make a bad deal when their life’s work is sold, or dis- advantage their children in connection with a business transfer. Tax regulations, myriad insurance regulations, planning of pension withdrawals and matters of family law all have bearing on the decisions. Wise and early planning is essential.
Asset management services give HQ’s Private Banking’s clients access to the added value services included in Financial Planning: Entrepreneur Services, Pensions & Insurance, Taxes & Legal Affairs and Foun- dation Advisory Service. The departments cooperate to ensure optimal financial planning for the client.
Entrepreneur Services
Entrepreneur Services works primarily with owner-ope- rated small and medium-sized enterprises with annual sales of up to SEK 200 million. Entrepreneur Services include business brokerage and capital acquisition.
In business brokerage and acquisition assignments HQ assists clients with advisory services in connection with carrying out these processes. Entrepreneur Servi- ces also works with outside partners to achieve the op- timal solution for the client. These may include lawyers and accountants, but in some cases also other business brokers with particular niche expertise. Many enterprises will be facing ownership transfers in the next ten years, and according to the Confederation of Swedish Enter- prise, there may be as many as 180,000 companies in need of assistance through the entire process.
Pensions & Insurance
The department offers pension advisory services and full-scale brokerage of pension policies. The aim of HQ Pensions & Insurance is to contribute to an overall solu- tion that generates added value for clients. Most people have a fairly good estimate of their “unrestricted”
assets (assets in their custody account), but the same cannot be said of their “restricted” assets (occupational pensions, private pension policies, assets/endowments etc). This restricted capital can often involve significant sums, particularly for people 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.
This unit acts as an advisor in relation to insurance and pension matters for existing and prospective clients of HQ Bank. The unit forms teams of expe- rienced managers from Asset Management in order to review the client’s overall investments. Through this cooperation the asset management can be individual- ised to minimise risk and enhance returns.
Taxes & Legal Affairs
Every transaction leads to a tax consequence, whether the transaction involves securities, a closed company or other assets. HQ Private Banking’s clients are given access to employees who are tax experts. They are involved in the client needs analysis process and are integral to giving HQ an accurate picture of client struc- tures and balance sheets. The tax experts also provide essential feedback in open and objective discussions of the alternatives and their consequences. An employee from Taxes & Legal Affairs is always part of the team available to HQ’s complete Private Banking clients.
Foundation Advisory Service
HQ has been offering legal counsel to foundations since autumn 2006. Foundation Advisory Service pro- vides advice in all matters related to foundations and in connection with the formation of foundations.
EMERGING MARkETS
The task of HQ Emerging Markets is to identify attractive business opportunities in global emerging markets. The operations have a natural base in HQ’s
PRIVATE BANkING
CLIENT HQ TEAM
Advisors +specialists
TAX & LEGAL AFFAIRS PENSIONS & INSURANCE FOUNDATIONS
ENTREPRENEUR SERVICES
ASSET MANAGEMENT - STRATEGY
EXTERNAL PARTNERS
HQ 2008
The total value of assets under management in HQ Fonder’s 23 different funds was approximately SEk 15 billion by year- end. The number of directly registered clients in the funds was some 26,000 at year-end. However, the number of end clients is significantly greater since assets are also funnel- led to HQ Fonder through external distributors and PPM.
14 PRIVATE BANkING
longstanding experience with the Russian equity market. Since 2004 the unit has also tracked selected markets in Asia. In recent years the areas tracked by the department have also been complemented with stock markets in Africa and the Middle East.
In 2008 the performance of the world’s emerging markets has been anything but positive. The credit crisis and the declining global economy have hit emerging regions hard. Many markets have been hit by falling commodities prices and, for example, the weaker price of oil had obvious effects on the Russian stock market. The weakness naturally had a negative effect on institutions with managed assets concentrated on those markets covered by the department. Lower managed assets with clients also have a negative effect on revenues from the average transaction. At the same time this was compensated to some degree through a broadening of the client base and the markets covered by the department.
HQ Emerging Markets has an extensive global network. The added value to clients is found primarily in HQ’s experience, acquired skills and the international network.
The ambition of HQ Emerging Markets is to act as the natural partner of choice for both institutions and private individuals in Scandinavia when investing in the world’s emerging markets.
HQ FONDER
HQ Fonder has been a wholly owned subsidiary of HQ AB since 2005. The operations of HQ Fonder extend to management of investment funds and discretio- nary portfolios. The employees are distinguished by substantial experience acquired in varying market climates. Several employees have had the same role for many years. The HQ Strategifond, HQ’s largest, is one example: it has had the same manager since 1996.
The hallmarks of the working climate at HQ Fonder are focus on high performance and great independence linked with responsibility.
HQ Fonder has made a name for itself in the market and the media as a progressive, medium-sized fund manager that has launched several exciting new fund products over the years, with the HQ Middle East fund a new addition to the range during 2008. Today, HQ Fonder’s products are available to both clients of HQ Bank and external distributors in Sweden and northern Europe, as well as through the Swedish Premium Pen- sion (PPM) system.
Continually generating strong returns for clients is the route to achieving the overall aim: to be considered the foremost asset manager in Sweden. HQ Fonder has chosen to specialise in the following two fields:
Swedish Equity Market – Organisation, expertise, willingness to explore and proximity are important ingredients in successful fund management.
Emerging Markets – HQ Fonder has longstanding experience and has had a long-term commitment since
the 1996 inception of its emerging markets fund, the HQ Tillväxtmarknadsfond.
HQ Fonder has a small, flat organisation in which each individual enjoys a high level of responsibility and trust. The aim of the fund management is to generate positive and stable returns through active manage- ment of assets.
Continually strengthening distribution power is a high-priority objective at HQ. In recent years the of- fering of HQ Fonder has become available on markets in Northern Europe. An innovative player like HQ Fonder, however, has great opportunities of continuing to grow on the domestic market by winning a share of the capital invested with the major banks.
In the past ten years interest in hedge funds has increased very substantially. This is because the large variations in the stock market have caused investors to increasingly seek out new alternative opportunities for stable returns with limited risk. Previously hedge funds addressed only large investors. This has changed somewhat, largely thanks to the creation of funds of funds that invest in hedge funds. This means that relatively small investors, together with other investors, become a single large investor who, through a fund of funds, is welcomed by the hedge funds.
HQ was one of the pioneers in Sweden to provide funds of funds based on hedge funds. In 2003, three funds were launched; HQ Solid, HQ Global Hedge and HQ Nordic Hedge. Aside from all the hedge fund expertise that joined HQ, Swiss hedge fund evaluator Harcourt was engaged as an advisor. HQ’s funds
PRIVATE BANkING
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HQ 2008
PRIVATE BANkING 15 an overall picture of the client’s savings. This means
that the platform becomes the vital link in offering products and services and in creating good prospects of increased managed volumes. The expanded alliance with Sparbanken Finn and Sparbanken Gripen during 2008 is based on HQ’s platform.
HQ’s philosophy is based on dynamic structures and transparency. The demand of the distribution channels on a specific market or exposure, combined with HQ’s assessment of these, is the starting point for when new products are created. Once this has been identified we seek, where possible, to find dynamic exposure to this market or region, which often means an index, or a strategy with an element of active allocation/
management rather than, for example, a static basket of equities or indices. A dynamic construction is often somewhat more expensive, but can be expected to deliver better returns to the investor. HQ is also able to demonstrate a very good history of returns on a num- ber of dynamic structures. Transparency requires that the terms of the product should be easy to understand, and that it should be simple to follow its performance throughout the term. HQ Bank is the only arranger of structured products that lists all bonds on the Stock- holm stock exchange and maintains daily prices in real time.
HQ works continuously to assure a future and long-term distribution capacity. As part of this effort HQ established an alliance with the SÄKRA group during the year, one of Sweden’s four major insurance brokerage organisations. Savings and investments are becoming an increasingly important part of every day for insurance brokers. In order to work fully with advice regarding financial products brokers must work under an authorised securities company with the necessary competence and regulatory framework demanded by the business. HQ has formed a jointly owned securities company that has around 35 SÄKRA offices around the country as representatives, with some 100 individual advisors.
have attracted both institutional investors and private individuals.
In 2003 Swedish company OPM was also founded, and has grown into one of the leaders in Northern Europe in the evaluation and analysis of hedge funds.
OPM also offers funds of funds that invest in hedge funds. Unlike HQ, OPM’s clients are mainly institutio- nal investors.
On September 1, 2008 an agreement was reached between OPM and HQ whereby the hedge fund businesses of each company would be merged within OPM. OPM therefore takes over HQ’s three hedge funds and HQ becomes a fifty-percent owner of OPM. At the time of the agreement the total assets under management were SEK 3.3 billion. At the end of November the Swedish Financial Supervisory Authority approved OPM’s takeover of HQ’s hedge funds. The takeover will be effective from March 1, 2009. The economies of scale in asset management are obvious.
HQ’s and OPM’s businesses in the field of hedge funds also complement each other very well. HQ has limited expertise in the analysis and evaluation of hedge funds while its distribution force is substantial.
OPM, through its research team, has a competitive organisation for evaluating hedge funds. But with its relatively narrow product offering the company has dif- ficulty in building up a broad distribution apparatus.
EXTERNAL DISTRIBUTION
External Distribution is involved in marketing HQ’s products and services via distribution partners and platforms outside the group. Distribution partners are strategic alliance partners: banks, advisory organisa- tions and insurance companies, as well as indepen- dent financial advisors who act primarily as insurance brokers. Products and services distributed via external channels are primarily structured products, funds and discretionary asset management services. One important tool in this work is HQ’s internet-based platform, which offers end investors and distributors
PRIVATE BANkING
-70.0 -60.0 -50.0 -40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0
HQ Obligationsfond HQ Swedish High Yield Fund HQ Likviditetsfond HQ Middle East HQ Protego HQ Tellus HQ Sverige Select HQ Total HQ Sverigefond HQ Strategy Fund HQ Strategifond HQ Gorilla HQ Swedish Equity Fund HQ Utlandsfond HQ Svea Aktiefond HQ Afrikafond HQ Kinafond HQ Tillväxtmarknadsfond HQ Indienfond HQ Rysslandsfond
HQ Solid
HQ Global Hedge HQ Nordic Hedge
Return on all funds during 2008
HQ 2008
INVESTMENT BANkING
In order to create added value, research is conducted in terms of absolute return: whether a share is worth
buying or selling in absolute terms, not in relation to an index. HQ has further elected to orient the depart-
ment towards case-driven research focused primarily on Swedish equities.
HQ 2008
The Investment Banking business unit is dedicated to research and trading in stocks and derivatives on behalf of clients and on HQ’s own account. We also offer capital acquisition services and advice in conjunction with mergers, acquisitions and initial public offerings.
The investment made in the business in recent years, including that in alternative investments and DMA, is successively having the desired effect.
Operating revenue was SEK 243 (205) million, of which SEK 122 (0) million was revenue of a non- recurring nature attributable to the acquisition of Glitnir AB. Other revenue therefore decreased by 41 percent to SEK 121 (205) million. The decrease in revenue is mainly attributable to Trading, which reports a decrease in revenue of SEK 39 million.
The business unit reported operating profit of SEK 70 (55) million.
The operating margin was 29 (27) percent.
Acquisition of Glitnir AB, now with its name changed to HQ Direct.
The operations comprise five areas:
Equities
Corporate Finance Trading
Alternative Investments DMA (Direct Market Access)
Using advice and ideas that dare to be different and unconventional, we generate added value for our clients. Remaining at the cutting edge and developing new added-value services requires continual profes- sional development and recruitment of specialist skills.
Explore, innovate and perform will remain the guiding principles for all service areas within Investment Banking.
EQUITIES
Equities 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 return: whether a share is worth buying or selling in absolute terms, not in relation to an index.
Aimed at sharpening its focus, the department has chosen to direct case-driven research mainly at Swedish equities, since the unit’s core expertise is in the Swedish market. No sector is excluded, but the orientation is selected based on the sectors assessed at any given time as being the most interesting in the market and the most capable of producing added value for the client. In addition to equity research, the depart- ment produces economic analysis, strategy reports and sector analysis.
Clients can mainly be divided into three segments:
domestic institutions, domestic and foreign hedge funds and interbank clients.
Market and business environment
2008 was an exceptionally turbulent year with substan- tial stock-market decline and large volatility as a con- sequence of exceptional events. HQ Equities has been able to win market share during the year by stringently working using an established model that was initiated in 2002. The aim is to become the local market leader in various segments. The work of differentiating HQ by maintaining clear focus, outperforming our competi- tors, daring to do things differently and innovating new opportunities continues. One example of this is the effort in trade in derivatives, where HQ is the market leader.
By being able to demonstrate a stable platform and increase the quality of HQ’s range of services we have increased our presence with clients. The brand has been further strengthened and HQ’s focus on genera- ting transaction proposals that generate added value is gaining increasing acceptance among our clients.
One of the cornerstones of the services provided by Equities is absolute advice based on case-driven research. The steady focus on case research that gene- rates added value has produced results in the form of increasingly broad acceptance in the market, which is in turn demonstrated by a rising ranking.
CORPORATE FINANCE
HQ Corporate Finance provides professional financial advice related to public and non-public acquisitions, mergers and divestments, stock market-related transac- tions and in conjunction with matters of ownership and capital structures. Advice is also provided in strategic matters. HQ Corporate Finance focuses mainly on the Swedish market, complemented by the other Nordic countries and the Russian market. Our clients are found mainly among small and medium-sized Swedish listed and unlisted companies. Since its foundation in 1992 the department has participated in the completion of more than 300 transactions.
The main thrust of the business is to create added value and build long-term relationships in which clients can benefit from HQ’s solid transactional experience and industrial knowledge. Our keystones are thorough analysis, high quality and confidentiality linked with a long-term approach. Our employees have extensive business backgrounds and a high level of expertise in specific sectors and complex transactions. In con- nection with stock market transactions, we also bring together the knowledge and dedication of other parts of HQ to execute public and private transactions on the primary and secondary markets. HQ Corporate Finance has wide-ranging experience of initial public offerings and other listings, structured placements, private pla- cements, preferred issues, share buybacks, redemption programmes, the arrangement of underwriting consor-
INVESTMENT BANkING
INVESTMENT BANkING 17
INVESTMENT BANkING
Despite the turbulent market, HQ Corporate Finance executed five structured placements with a total value of around SEK 810 million. In addition, two stock redemption programmes were completed, in Betsson and Investment AB Öresund, worth a total of SEK 830 million. HQ Corporate Finance has also acted as advi- sor in two directed issues for IP-Only, worth a total of SEK 160 million, and in one rights issue for Bilia worth SEK 100 million.
The stock-market trend has also had a negative impact on the liquidity of stocks in small- and medium- sized entities. Given this, in the second half of 2008 HQ Corporate Finance focused on selling new liquidity provision services that will in future lead to increased repeat revenue.
In addition to the above stock-market transactions HQ Corporate Finance executed the sale of Bindomatic to Valedo and IP-Only’s acquisition of Dataphone from Industrikapital, and participated in Askerö’s public cash offering for Sigma. HQ Corporate Finance also partici- pated in Oberthur’s public cash offering for XponCard, worth SEK 704 million
TRADING
HQ Trading is engaged in trading in shares and deriva- tives on HQ’s own account. The unit focuses on market making and risk arbitrage transactions on many of the tiums and other stock-related transactions. In the area
of M&As and business transfers, Corporate Finance provides financial advice and transaction support to both listed and unlisted companies.
HQ Corporate Finance has solid experience with acquisitions, mergers, sales, buyouts, and fairness and valuation assignments.
Market and business environment
The financial crisis and the worry about its effects on the real economy had a negative impact on demand in this area during 2008. Risk in the execution of transactions and the uncertainty of completion have increased. This and much longer lead times have ne- gatively affected both revenue and profitability during the year.
Stock-market transactions and, particularly, initial public offerings and private placements have, for much of the year, been largely impossible to execute in the current market climate.
Even advice in the area of acquisitions, mergers and divestments was negatively affected during 2008, mainly influenced by the weaker conditions for bank financing and falling asset prices. This, combined with sellers having overly high price expectations, has made it difficult to get buyers and sellers to meet and several assignments have been cancelled.
SOle AdviSOr MAy 2008 STrucTured PlAceMenT
SecOnd OPiniOn MAy 2008 PuBlic cASH Offer frOM
ASkerö
AdviSOr TO Seller MAy 2008 direcTed iSSue leAd AdviSOr
deceMBer 2008 redeMPTiOn:
diSTriBuTiOn Of cASH
SOle AdviSOr June 2008 STrucTured PlAceMenT
SOle AdviSOr nOveMBer 2008 STrucTured PlAceMenT
leAd AdviSOr deceMBer 2008
rigHTS iSSue
leAd AdviSOr June 2008 redeMPTiOn:
diSTriBuTiOn Of cASH
SOle AdviSOr nOveMBer 2008 STrucTured PlAceMenT
SOle AdviSOr June 2008 direcTed iSSue
SOle AdviSOr June 2008 STrucTured PlAceMenT
AdviSOr TO Seller MArcH 2008 vAledO AcQuireS BindOMATic
AdviSOr TO Buyer feBruAry 2008 iP-Only AcQuireS neT ASSeTS
Of dATAPHOne
AdviSOr TO THe BOArd feBruAry 2008 PuBlic Offer frOM OBerTHur
TecHnOlOgieS
HQ 2008
18 INVESTMENT BANkING
HQ 2008
INVESTMENT BANkING 19
INVESTMENT BANkING
world’s stock markets. Trading, which started in 1994, is mainly in equity-related instruments. The percentage of long-term positions has fallen in recent years, which has continually lowered the level of risk. In 2009, HQ Bank’s and HQ Direct’s two trading departments will be merged into one, which will offer a series of synergies.
Market and business environment
HQ Trading’s leading position as a market maker in both stock and index options on the Swedish market overall has been strengthened during the year as a consequence of a new competitive situation.
There was a dramatic shift in market climate during the year, which started out favourably but gradually de- teriorated. The crisis in the US credit market triggered global financial uncertainty that accelerated with every month that passed in the latter part of the year, culmi- nating following the bankruptcy of Lehman Brothers in September. The consequence of this was that focus on counterparty risk and a general risk aversion succes- sively intensified on the market. The combination of forced liquidations due to outflows from hedge funds, higher margin requirements from clearing houses and lower collateral values generally from banks is naturally unfavourable for both HQ and the sector as a whole.
ALTERNATIVE INVESTMENTS
Efforts in alternative investments have successively intensified in the past two years.
At the start of 2008 HQ Private Equity was launched to provide HQ’s clients with an opportunity to invest in global private equity. In 2008 this form of investment has been criticised for its high gearing. The critics claim that private equity investments made during the boom years could leave investors with large losses. HQ Private Equity has not invested in these funds and at the end of the year 90 percent of the capital was uninvested.
However, we regard this area as a highly attractive investment alternative and HQ plans to continue to capitalisation of this company in 2009.
2008 also saw the launch of the highly successful HQ Loans, which attracted capital in excess of SEK 1 billion. HQ Loans purchases collateralised corporate debt issued by primarily Nordic companies, a market that offers highly attractive investment opportunities going forward. In 2009 HQ plans to conduct additional launches of this type of product.
During the year the board of Väring Capital decided to close the Väring Emerging Markets X fund and repay the capital to unit holders.
HQ’s future ambition remains to become the leading independent player in Sweden in alternative investments by creating an efficient and flexible plat- form. Once at full capacity, the business will consist of products and services developed by HQ and solutions crafted in alliances. In 2009 our ambition is to continue on the path towards becoming a full-service provider in alternative investments and to launch new investment opportunities.
DMA
In October HQ acquired Glitnir AB, which has now changed its name to HQ Direct. This business has its origins in Fischer Partners Fondkommission AB and was entirely isolated from Glitnir banki hf and its owner, the Icelandic government.
The acquisition provides HQ’s clients with access to a greater product range in Investment Banking and means a broadened client base, both in Sweden and abroad.
The company, which today has 61 employees, has been a pioneer in direct market access (DMA) electro- nic trade since 1997 and is one of the leaders on the Nordic stock markets, offering direct market access to all the major stock markets in Europe and the USA.
The integration is proceeding according to plan and is expected to be fully completed in the first half of 2009.
Clients are mainly Swedish and foreign institutions as well as private investors.
ALTERNATIVE INVESTMENTS
Structured products Hedge funds
HQ Global Hedge Stock index bonds HQ Private Equity I Property
HQ Nordic Hedge HQ Protego Forest
HQ Solid Agriculture
Infrastructure
Private equity Real assets Alternative fixed income
HQ Loans
Corporate bonds
HQ 2008
HUMAN RESOURCES
HQ Bank’s business is conducted from eight offices in Sweden and via external
partners in Sweden and abroad. Our continued success is dependent on
maintaining a stimulating and innovative working climate that attracts the
brightest talents in every niche and a wide network of successful partners.
HQ 2008
HUMAN RESOURCES 21 HQ Bank’s business is conducted from eight offices
in different locations in Sweden, with new ventures in the Norrköping/Linköping region, and via external partners in Sweden and abroad. Our continued suc- cess is dependent on maintaining a stimulating and innovative working climate that attracts the brightest talents in every niche and a wide network of successful partners. From a human resources perspective 2008 has been an eventful year for the group, particularly with the acquisition of HQ Direct. Excluding acquisi- tions, HQ has largely retained its personnel, even in this highly unusual climate for financial companies.
This demonstrates the company’s strength and the expertise provided by its personnel. HQ is a knowledge company and its most important resource is all of its employees. The financial industry is knowledge-intensi- ve and highly competitive. Efficient provision of skilled employees with strong development opportunities is highly significant since recruitment is often internal.
The skills, experience and commitment of employees are critical to our continued success.
HQ is a modern service enterprise whose mandate is to continually deliver added value to its clients. This applies to every employee, regardless of his or her department or position within the group. This way of thinking pervades HQ and is part of the HQ spirit.
The atmosphere is fast-paced and decision paths are short, which makes HQ an exhilarating place to work.
The ability to acquire and apply relevant knowledge and take fast decisions is crucial. Key characteristics for em- ployees of HQ are an inquiring mindset, openness to change and a strong drive to achieve, which correlate well with HQ’s guiding principles of explore, innovate and perform.
The HQ organisation is driven by enterprise, energy and cohesiveness accomplished through:
Excellent career opportunities.
General employee wellness initiatives, such as subsidised fitness programmes and the company health service.
Initiatives to build the HQ brand to attract new employees and clients.
As a niche player in the banking market, HQ works with a small organisation, which requires breadth and depth of expertise in every employee in order to live up to client demands. In concrete terms, this means that new employees recruited to HQ often have already distinguished themselves professionally, although they may still be moving up the career ladder. However, HQ also wishes to attempt to recruit a small number of outstanding young individuals. With this in mind, in autumn 2008 HQ initiated its second specially desig- ned internship programme, in which recent graduates are recruited for a twelve-month internal training pro- gramme divided equally among all HQ business units.
During the year HQ continued the deliberate ini- tiative to enhance interdepartmental integration. The
objective is to promote communication and cost-effec- tively achieve a sharper, more flexible value proposition for our clients and exploit economies of scale. One consequence of this is the relocation of all fund and asset management expertise to HQ Fonder in order to better consolidate this knowledge into a single centre.
In the current business climate heightened focus on entrepreneurship is essential in encouraging individual, insightful initiatives that HQ clients will perceive as the leading edge of HQ’s value proposition. Many HQ clients are also entrepreneurs who must be taken care of by employees who can rapidly acquaint themselves with each client’s unique situation and requirements.
In order to provide employees with a greater opportu- nity to participate in HQ’s business and development, an offer was made during the year to buy back last year’s designated employee convertible programme and to replace it with a new and more favourable one, as a result of the market downturn.
Personal, long-term financial commitment enhances employee motivation and strengthens loyalty to the group.
HQ had 300 (250) employees at December 31, 2008, of whom 84 (71) are women. The average number of employees was 257 (244). The average age of employ- ees is 37 and they have been with HQ for an average of five years.
HUMAN RESOURCES
Employees
0–19 20–29 30–39 40–49 50–59 60–69
4
3
2
1
0
%
Women Men Total
2007 2008
Private Banking 107
Investment Banking 71 Management and Administration 122 0
20 40 60 80 100 120 140 160
Age distribution
Absenteeism due to illness
Number of employees
by business unit
HQ 2008
22 THE HQ SHARE
THE HQ SHARE
Year Change Increase/decrease in
issued shares Total issued 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 shares 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
2007 Split 13,557,240 27,114,480 0 67,786,200
2008 – 0 27,114,480 0 67,786,200
CONVERTIBLE DEBENTURES
During 2006, 2007 and 2008 HQ directed four different convertible programmes to employees. These could result in conversion of a maximum of 2,764,000 shares. See also Notes 16 and 26.
HQ SHARE PERFORMANCE IN 2008
SEK Number
40 60 80 100 120 140 160 180
Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Aep-08 Oct-08 Nov-08 Dec-08
0 300,000 600,000 900,000 1,200,000 1,500,000 1,800,000 2,100,000
Shares traded ('000) The HQ share
(incl reinvested dividend) AFGX indexed (incl reinvested dividend)
Market capitalisation (SEKm), Dec 31, 2008 1,586 Market turnover (SEKm) 2008 893
Share price (SEK), Dec 31, 2008 58.50 Trading volume, 2008 8,837,832
High/Low 2008 174.50/58 Total return on HQ share, including dividends (%) -64
HQ 2008
THE HQ SHARE 23 PRINCIPAL SHAREHOLDERS
According to the share register maintained by Euroclear Sweden AB, the following entities and individuals were the largest registered shareholders at the end of 2008. HQ had 7,993 shareholders.
Shareholder Shares held, 2008 Interest (%), 2008
Investment AB Öresund 6,719,194 24.8
Mats Qviberg (including family)¹) 1,497,336 5.5
Nordea Bank Nominee 1,356,772 5.0
Swedbank Robur Fonder 1,307,592 4.8
Sten Dybeck (including family)¹) 1,109,532 4.1
Aktie-Ansvar Fonder 919,000 3.4
Herma Securities AB 860,000 3.2
SIX SIS AG 309,646 1.1
Varenne AB 276,500 1.0
Johan Piehl (including family and companies)¹) 266,460 1.0
Other 12,492,448 46.1
Total 27,114,480 100
1)
