David Hunt finds fund performance hit by a weak economy

The Swiss mutual fund industry is a strange animal in several respects. Firstly, because of a hitherto restrictive domestic regulatory regime, an unfavourable tax policy and the country's decision to stay outside the EU, the Swiss industry has actually developed faster outside the country (mainly in Luxembourg) than it has on home soil.

Then again, only a very small part of the industry's assets are actually accounted for by retail funds. Much of the money held is for institutional clients of the banks, which also hold a lot of money for private clients through in-house collective investment portfolios. Many of the clients are foreign, investing in the country for its strong currency, political stability and reputation for confidentiality.

The big three Swiss banks - Union Bank of Switzerland, Swiss Bank Corporation and Credit Suisse - dominate the industry, controlling around 80% of total assets. After adding in the activities of the cantonal and private banks, little remains for non-Swiss groups which until recently, when regulations eased up a little, found it very difficult to break into the market.

Although the Swiss market was up around 18% over 1996 it still lagged most other European markets. Domestic market performance is not that vital to the Swiss investment industry, however, with only a small proportion of domestic funds specialising in domestic equities anyway. A similar picture can be found in the bond sector where the majority of funds have a distinct overseas flavour.

Despite its reputation for stability, the Swiss economy has been experiencing a period of incredible weakness of late with several quarters of negative growth and hitherto unheard-of unemployment rates. One beneficial side effect, however, is that the franc has actually weakened, helping Swiss exporters, which include most of the major companies, and forcing valuations up.

Despite being outside the EU, investors in Switzerland still have to be wary about the EMU situation. The worst scenario, as far as Switzerland is concerned, would be for a disorderly delay in implementing EMU, an outcome that looks increasingly likely. Under this scenario, the Swiss currency might once again come to be regarded as a safe haven", with the resulting inflows pushing up the currency and once again hitting exporters.

In local terms, the stockmarket in Switzerland has done pretty well so far this year but, as investors have found to their cost in the past, what they gain in performance, they tend to lose on the currency. As a result, the performance figures, shown in dollar terms, for Swiss invested funds over the last 12-month period look less than inspiring on the equity side and downright depressing for bonds.

The average Swiss equity fund gained just 3.64% in the 12 months to the beginning of March this year, with six of the 23 funds listed actually making losses. Top fund Swissbar - a 20- year-old fund from the Bank Julius Bär fund management stable - managed a creditable gain of 10.34% and is also up nearly 60% over the three- year period.

Funds invested in small and mid cap stocks were hit particularly hard over the short-term period and also tend to occupy positions at the bottom of the tables over three years as well.

Offshore funds invested in Swiss equities tended to do rather better over the shorter period than the domestic vehicles but less well on average over three years. Fidelity's relatively new, Luxembourg-based, Swiss umbrella sub fund tops the one- year table followed by two Banque Paribas funds. For consistency though, Dresdnerbank's DIT-Fonds Schweiz comes into the reckoning with top place over three years and fourth over 12 months.

On the bond front there is little to choose between domestic and offshore vehicles, with both losing more than 12% on average over the past 12 months. Over the three-year period, domestic funds tended to outperform although it is interesting that new offshore launches over the past couple of years mean that there are now twice as many offshore Swiss bond funds than funds situated in Switzerland itself.

Bond Valor SFR, the largest fund in the Credis Investments (Credit Suisse) stable, tops the domestic fund tables over both one and three years with the two-year-old Pictet Obligations the runner up over one year and the UBS bond fund taking second spot over three years. Among the offshore funds, it is the Luxembourg offshoots of some of the smaller Swiss banks which stand out, with Lombard Odier's Obliflex fund and Bank J Vontobel's Swiss Franc Bond A funds in leading positions.

Investment restrictions on domestic Swiss funds, which helped to encourage their exodus to Luxembourg in the past, were removed early in 1995 and the tax advantages of such a move have also been largely negated. But although Swiss regulations are now broadly in line with the Ucits Directive, there has been little sign of any reversal of the trend and few people believe that such a move is likely. David Hunt is a freelance journalist"