Accessing Switzerland: Cultural evolution at measured pace
The Swiss pensions market is attracting much interest from foreign players at a time when the investment culture is changing and its own players go global. John Lappin reports
With Sfr350bn ($240bn) worth of assets - on some estimates Sfr400bn - Swiss pension funds clearly represent an extremely attractive market for international money managers. Last year non-domestic players offered as many as 500 new funds to Swiss pension managers.
They may be entering the market at the right time. Pension plans, partly following the lead of Swiss-based multinational subsidiaries, are diversifying their asset allocations, developing international portfolios and investing in equity. Analysts attribute this partly to low fixed-interest returns but also to a fundamental change in the investment culture.
One catalyst for change is the increasing significance of consultants, both domestic players such as Complementa, PPC and Coninco and non-domestic firms such as Frank Russell, benefiting from the new investment climate and from regulatory requirements for the professionalisation of investment strategy.
But while the trends are clear, they are not revolutionary. The Swiss market is embracing change at its own pace.
Peter Stoll, chief operating officer at UBS Asset Management, emphasises that on average funds do not hold more than 12% foreign stocks. Certain funds, such as those at ABB, Nestlé and Hoffmann-La Roche, are up to the maximum permitted allowance of 20%, however, and Stoll believes others will move in this direction.
I am confident there will be a move to more equity and more international diversification, which will then ease a change from defined benefit to defined contribution," he says. Stoll and others emphasise, however, that DC plans are not in the Anglo Saxon mould, with no influence from the individual on investment strategy.
Hans Lauber, a director of portfolio management at Credit Suisse Asset Management, says pension funds are becoming more professional: "People have an increased understanding of modern portfolio theory: the investment time horizon, how much risk they can take and of the relationship between risk, diversification and expected return."
Yet regulatory restrictions on equity investment remain. As well as being limited to 20% in overseas equity, funds can only have 30% in domestic equities. Stoll points out the importance of another restriction: that real estate and equity should not exceed 70%. Some funds hold as much as 30% property, effectively barring them from increasing equity.
Stoll says private funds are leading the way, but that public funds, despite some political problems - including some assets taken up as loans to city and canton authorities - will follow suit. Consultants will also ease the process. Finally the public themselves may also prompt change as the state pillar becomes less able to support them. "They will concentrate on the pillar they can influence: the company pension plan," he says.
Another development Stoll identifies is the move to indexed products, a trend also highlighted by Karl Grob, a member of the management committee of Julius Bär Asset Management. Grob estimates that 10- 15% of funds are passively managed, although he thinks this should grow.
Hans-Ruedi Mosberger, director of consulting at Frank Russell in Zurich, suggests that pensions managers who have selected poorly performing investment managers are particularly inclined to passive management, although he adds that this should be viewed in the context of benchmarking being a recent development.
All those interviewed, asset managers, pension fund managers and consultants, agree that pension funds are professionalising but problems still exist.
Grob believes that part of this professionalisation will mean smaller funds joining larger schemes. "We will have a restructuring of the pension schemes. Smaller schemes will disappear and join larger schemes with portfolio management getting more professional on the whole," he says.
Lauber sees different sized funds acting in different ways. He says: "I think large companies possess well-skilled internal management resources. They often manage their money by themselves and give out management portfolios for internal benchmark comparison reasons." He also believes that the more active medium-sized pensions funds become in international asset allocation and risk liability studies, the more they will rely on external managers.
Thomas Vock, head of the securities department at Zurich Insurance, points out another size-dependent difference: "Big pension funds generally buy stocks and bonds directly while smaller pensions funds buy pooled. The division is about50:50."
Jean-François Vielliard, pension manager at Caterpillar in Geneva with a fund in excess of Sfr300m ($205m), says that his fund uses pooled funds in transition to direct investment. The fund took over management of its investments from an insurance company in 1989 with a dramatic improvement in returns. "We start by buying shares off a fund, as we have done with mid-cap Europe. With that experience, we have opened a mid-cap European portfolio. We are currently investing in China. We expect it to be an investment which tests the market."
Caterpillar combines mandates for bonds under strict passive management with active management for equity. He explains: "We have very good managers who have exceeded the index by far."
But he places emphasis on a manager's philosophy: "What is important for us is the investment style and philosophy because if it does not work over a period of time, we have to know why. If we agree with it, we go with it, even if at times it doesn't beat the index."
He suggests that multinationals have led the way to more sophisticated asset allocation but he says that they had an advantage in that most began managing funds, as Caterpillar did, in the late 1980s and were not hamstrung by the large property holdings of some of the public funds.
With this trend towards diversification of investment portfolios some new companies have found a niche. Investment and advisory group, FondVest, founded in 1993, rates and invests in mutual bonds or investment funds and institutions make 60% of its business. Says company president Daniel Häfele: "We think we are very well located in this part of the portfolio management." The group analyses thousands of different funds to find regularly outperforming managers. "It is a very small basis of fund managers that can achieve that. In our portfolios we have 20 to 40 funds."
There may be niche opportunities for small domestic players but the most interesting aspect of change is the entrance of new players coming up against the dominance of the Swiss banks and insurance companies.
Robin Amacher, managing director of Frank Russell, assesses the market. "The supply side is dominated by the Swiss banks. Each of those banks such as UBS, Credit Suisse and SBC has Sfr150bn-200bn under management on the institutional side. In addition they have built international capabilities." He adds that the larger private banks have moved successfully into institutional investment, estimating that each of these has between Sfr20bn-40bn in assets under management. The insurers also have a significant share.
Asset managers say they believe it is difficult for a foreign player seeking a share of Swiss pension fund mandates to enter the market. Amacher's colleague Mosberger says those that have met with success have been prepared to develop strong local operations.
One of those new players is Robeco Bank's Graz-iano Lusenti, director of the institutional department, says: "It is not easy being a foreign asset manager. But we found that the initial reluctance among Swiss has very swiftly reduced. You can find a niche. At Robeco we have positioned ourselves only on the international side, because we feel there is more demand. It is good being Dutch in this market. This is a small country and the mentality is very similar."
Most of those involved with the Swiss market acknowledge that foreign players have had an influence on Swiss asset management in raising standards although several made it clear that they did not believe that their own operations needed to change as they already operated in a global market.
Vock of Zurich Insurance puts things most strongly: "I think investment management is a global business. That is how we organise ourselves. We are competing with all these global players already so they didn't influence us very much. The whole industry is very competitive." He points to the investment philosophy which runs through all the offices of the company with operations in 30 centres globally, including many European countries. "There is no other organisation that has this. Other companies say they are global. Do you know what their version of global is? They have seven clocks in their offices. They manage the funds from one location. We do it the opposite way round."
Those evaluating the Swiss market should remember that alongside sleepy cantons with pension funds still to modernise their investments, Switzerland also houses world-class companies - Nestlé was described by one commentator as a good emerging market investment as it gets to emerging markets before the funds themselves - and, perhaps more importantly, world-class financial institutions. The latter still dominate the local market while increasingly proving they can operate globally."