When in April last year a new regulation on pension funds investments giving more freedom to Swiss pension fund trustees to invest their assets was approved, asset managers forecasted that the months to come would bring important changes and new challenges in the institutional investment arena. More than a year later only very few would define the changes in investment strategies experienced in the last 12 months as being too significant.
The investment guidelines for pension funds approved last year made possible for pension funds to freely determine their own investment strategy as long as they took into consideration the liabilities and risk tolerance of their schemes, giving more responsibility to the pension funds boards when setting up their investment structure.
For those who were already taking an innovative and dynamic approach towards investment, the new legal framework represented a confirmation of what they were already doing.
“Usually it is not a new regulation what makes things change, but a response to the market demand what push new regulations forward,” says Olivier Dumuid, head of institutional marketing at UBP Gestion Institutionnelle in Geneva. “The new legal situation was only an adaptation to the industry’s needs.”
Linked to the prudent man rule, the investment guidelines for pension funds aim to promote a better asset allocation by diversifying risk and putting into place less conservative strategies, increasing equity exposure and introducing alternative investments.
However, in the equities area, there hasn’t been a significant increased in exposure to this asset class. “I think that the bad performance of the equity market is one of the main reasons why pension funds in Switzerland have not dramatically increased their exposure to equities in the last year as the new legal situation would allow,” says Jean Thouvenin, executive director at Pictet Asset Management in Geneva. “In general pension funds in Switzerland are well funded and they could easily increase their equity investments in the foreseeable future.”
Overall, the reaction among pension funds in Switzerland to the poor performance of the markets has been less severe than expected. “The very good performance that the equities market has had during the last decade allowed pension funds to build up fluctuation reserves that, in those cases were these were not distributed among the scheme members, leave them in quite a good position,” says Stephan Thaler, head of marketing at Swiss Life Asset Management in Zurich. “However for those who decided to go more heavily into equities a couple of years ago, in hindsight at the worst time possible, and without having a appropriate risk capacity and/or suficcient fluctuation reserves, the situation is more complicated and they are obviuosly more concerned about these returns.”
It is important to remember that the Swiss pension fund market is a very heterogeneous one in terms of sophistication and investors demands . With around 10,000 pension funds operating in the market, it would be obvious to say that investment strategies differ enormously depending on the size and level of maturity of each individual fund. The first segment of the market is that represented by the large and very large schemes, with assets of more than Sfr1bn (E660m), which account for only 4% of the total number of pension funds but accumulat around 50% of the total pension fund assets in Switzerland. These funds do not differ too much from the big schemes that operate in countries like the Netherlands or even the US. They want specialist asset management and they expect the best reporting, communication and services from their managers. They are also more open to alternative investments and the exposure to this asset class is set to slowly increase.
Although the most adventurous could invest up to 10% of total assets in alternatives, the average is 4 to 5%. “The interest in alternative investments is there,” says Graziano Lusenti, executive director at Robeco Asset Management in Geneva. “Whenever you talk to pension funds, consultants or other asset managers, alternative investments are always present. However is the proportion invested are still small and will take some time before we see these percentages increase.”
At UBS Asset Management in Zurich, CEO Christof Kutscher agrees: “The pension fund regulations that came into force in April last year say you can now invest in broader range of vehicles as long as you are taking the appropiate risk control and taking account of your liabilities. This has opened the investment horizon for the schemes that are now considering to introduce alternative asset classes in their portfolios.”
However this trend is only present in the large size pension funds. Small and medium pension funds are following the developments in the alternative arena with interest but only very few would actually invest in these asset classes for the time being, although new alternative investment products specifically designed for this segment of the pensions market are being launched and their popularity among small and medium sized pension funds is set to increase. “In general hedge funds are attracting more and more money and this is also bringing some problems into the sector because as funds get bigger the opportunities of investment returns get smaller,” says Swiss Life’s Thaler. “Therefore the due diligence process, for instance selecting the best underlying fund investments, is becoming more and more crucial.”
The acceptance and growth of alternative asset classes will also depend on improving investor knowledge about these vehicles. The large majority of pension fund trustees in Switzerland are not investment professionals, and although the role of investment consultants is becoming crucial in terms of advising boards on investment strategies and manager selections, not all consultancy firms have the expertise needed to convince clients to take the alternative path.
“It’s undeniable that consultants are playing an important role in the developments of the pension fund investments field.But in alternative investments for instance, and taking into account that local consultants dominate the Swiss market and the fact that these asset classes are relatively new in the Swiss pension fund arena, not every local consultant has started to acquire the necessary know how yet,” says UBS’ Kutscher.”
But the role of consultants is growing and most agree on the fact they are contributing positively to the development and professionalisation of the Swiss pension fund industry. Unlike in other European countries, local consultants, especially those based on the German-speaking part of country, control the largest marketshare,. Firms like PPC Metrics, Complementa and Ecofin have long been advising pension fund on their investment strategies and in the French speaking region firms like Coninco. Although more recently international houses like William Mercer or Watson Wyatt are finding their place in the market but still far behind Swiss firms.
“At present consultants are key in this market, says Alex Orus, managing directors at State Street Global Advisors in Zurich. “Around 70% of our clients are using consultants and they are playing a major role as independent investment strategy advisers and in helping the market to be more efficient.
“They are helping pension funds by filtering some of the information overload and choosing the best managers around the globe, making sure that they can provide customised local service and are also committed to the Swiss market,” Orus adds.

The Swiss market is still a very attractive market for foreigners but competition with local players in order to gain market share is still very tough. However the increased need for global and specialist expertise required by Swiss pension funds is resulting in more opportunities for outsiders. “Definitely new asset classes like private equity and hedge funds, represent a lot of potential for foreign managers like ourselves,” says Robeco’s Lusenti. “There are also Swiss players providing this type of products, but they are not the same players that those controlling the equity and bonds market, so this is indeed a field with a lot of opportunities for us.”
And also, for those Swiss players wanting to offer these new products for their clients, including foreign names in their own distributions networks seems to be the way forward. “Since we are not specialist in some of the alternative investments area, we work with other asset manager companies, mainly through fund of funds products that can meet our clients requirements,” says Daniel Haefele, CEO at Fondvest in Zurich.
“Investment funds products are gaining importance in institutional portfolios offering a good diversification profile at a very good cost. However, the number of assets invested through funds still represent a very small proportion of total pension fund assets, but this is changing,” Haefele says.
Michel Thetaz, founder of IAM in Geneva agrees: “Pension funds in this country are looking more closely at investment funds as an alternative to individual stock selection, and this is particularly significant among small funds who otherwise wouldn’t be able to afford an appropriate diversification”
Although the trend towards passive investment is clear as far as alternative investments is concerned, in the traditional asset classes arena their presence is also increasing.
Investing indirectly in real estate, for instance, is also one of the trend that we will see developing n the market in the months to come. Swiss pension funds have invested heavily in real estate in recent decades, and there was a good reason for that. Since the 1960s and until the end of the 1980s, domestic real estate was one of the best, if not the best, performing asset classes, and many pension funds made a lot of money by investing in property. But during 1990s everything changed and the performance of Swiss real estate was really poor and the market was overegulated. At a time when the equity markets were booming, pension funds started transferring real estate assets into equity investments and most of them ended the decade with a reduced proportion of property investments in their portfolio. However, the exposure to this asset class among Swiss pension funds is still very high, and in some cases can represent more than 20% of total assets.
“What is really surprising about Swiss pension funds is that, despite the fact that trustees are open minded to global equity or even alternative investments, when it comes to real estate they only invest in Switzerland,” says Lusenti. “I really would like to see a shift to more indirect property investments and a more international approach to this asset class.”
Urban Muller , principal and head of product development at State Street in Zurich, agrees: “Sometimes people look beyond the obvious and opt for very complex solutions without realising the have diversification potential nearby. He adds: “I hope this will change in the near future and more pension funds include foreign real estate funds in their portfolios to complement their local exposure to this asset class, as well as increase their exposure to hedge or private equity funds of funds.”
An issue that everyone seems to agree on is the importance that socially responsible investment (SRI) has now in the Swiss institutional market. What was considered by some as just a temporary trend in the asset management industry, has found its place among pension funds and asset managers, and it seems it’s here to stay. SRI is being used by some managers as a way of differentiating themselves from the rest. For others it’s something like a religion, you believe or you don’t.” For everyone, whether they are already looking at this issue or not, SRI is a major concern. Clients are asking managers about it, members want trustees to look at it and asset managers have to respond.
“We have noticed in the last few months that pension funds in Switzerland want to have a portfolio which includes a strong sustainable approach,” says UBP’s Dumuid. “But we also noticed that the majority of the pension funds that we visited to discuss this topic wanted us to simply integrate this ‘sustainable’ approach within our selection of stocks rather than using an specific product exclusively designed to deal with these issues.” Thouvenin at Pictet says: “There is definitively an appetite for this type of products among pension funds. This trend is particularly visible in the public sector funds where the awareness towards ethical, social and enviromental issues is very present.” Taking into account that Swiss pension funds comprise an equal representation of employees’ and employers’ delegates, the demands about looking at these issues seriously are now becoming strong. Although there is not a legal framework which require pension funds to state their approach to SRI in their investment policies as it already exists in the UK, regulators are looking at the subject and this could be in place in the near future. What is clear is that Switzerland is one of the countries in Europe where SRI is being discussed with more passion, and those managers showing commitment to the subject will be definitely make a difference.
And in this highly competitive and saturated market, this difference could be key.
Conflict of interests in the market, and scandals such as the resignation of the board of Swissair, are also making institutional investors to think more about taking a more active part in corporate governance and the need for shareholder activism is also growing. In general, it can be said that trustees in Switzerland are becoming more and more aware of their responsibilities as managers of the pension funds and also about the rights and committments related to institutional investors. Demands for better reporting and communication between boards and asset managers are increasing, and transparency and client service will be a good recipe for success.
“Gaining new clients in Switzerland has become more difficult,” says Urs Baltensweiler, member at the management committee at Julius Bär in Zurich. “There is a significant number of pension funds but, but there are also many competent competitors and everyone has to try to stand out somehow,” he says.“ Our focus is to concentrated on the specialist side, such as small and mid caps or high yield and convertible bonds, at the same time we continue providing the traditional asset classes.”
Because traditional asset classes will continue to be core investments for pension funds and for instance the demand for balanced portfolios is still alive.
“The appetite for specialist products is still there but in terms of mandates, the balance approach is still strong,” says Laurent Bachmann, senior vice president at Lombard Odier in Geneva. “This approach has proved to provided good results and most of us believe that the bulk of the potential added value comes from a good asset allocation rather than a good selection within the asset classes.”