Swiss shaking off traditional restraints
Asset managers detect shifts in investment attitudes on the part of pension fund investors. Hugh Wheelan reports
For a landlocked country with one of Europe’s most culturally and linguistically diverse populations, Switzerland has always had its idiosyncrasies – and the country’s pensions and investment scene is no different.
One of Europe’s largest funded pensions market with around SFr435bn (E272bn) in assets according to 1998 figures from Watson Wyatt – although Sfr500bn has been suggested as today’s figure including all asset classes – Switzerland still conversely bears the hallmark of paternalistic state influence.
A guarantee of 4% pension return per annum to employees alongside a heavy home market/bond bias in investment guidelines for pension assets set the tone for the country’s asset management market .
The investment guidelines, however, do allow room for manoeuvre, as Mike McShee at Geneva-based Buck Consultants, explains: “There is no deviation procedure, but after actuarial analysis if a company’s circumstances dictate a different investment policy, then they can take on the investment risk as long as the vested rights of employees are met.”
He notes that the traditional attitude was to ensure the 4% return could be guaranteed in safe Swiss bonds and post office savings accounts.
“The safe way though doesn’t guarantee anything but failure now, because you can’t get the rates of return,” he says.
Consequently, McShee explains, two types of pension fund characterise the Swiss scene; those that woke up yesterday and those that woke up years ago to the fact that the pursuit of adequate returns requires serious thinking about the fund objective.
“Such a diversity between scheme investments is unparalleled in other developed markets, “he adds.
And last year’s transfer by the AVS social security fund of several billion Swiss francs in reserves into active and passive equities almost certainly acted as a catalyst to more reticent Swiss funds.
However, the inherent challenge facing Swiss pension funds was that a shift to domestic equities in reality meant exposure to around 12 predominantly multinational stocks. This negated any real liability match or diversification possibility.
Recent strong market performance had been a country insulator, but flat Swiss equity returns since the beginning of the year coupled with low bond yields have begun to make the investment diversification issue more acute.
With the euro-zone removing depth from the European equity market, the main interest has been in global or alternative investment.
“Funds are having to move towards a global strategy for risk reduction, so the opportunities are good for international equity specialists in Switzerland - but the market is not quite there yet, “says Giachinno Puglia, consultant at Watson Wyatt in Zurich.
“Although Swiss investors are still inherently conservative, they are now looking at the high risk/high return areas such as emerging markets, venture capital, small caps and hedge funds – more so than in other markets,” he adds.
Geneva-based Boutique Unigestion Asset Management says it is profiting from the alternative trend.
Patrick Fenal, CEO, comments: “Everyone in the Swiss institutional market wants to do private equity these days and there is a lot of demand for hedge strategies, because the search is on for lower asset correlations and lower volatility.
“There is increasing Swiss interest in convertibles and high yield bonds too.”
Fenal says asset allocation is the key Swiss issue though and believes the small independents can play a valuable role. Pension schemes are not clear what is good or bad in terms of fund and product selection, which is where we come in.”
McShee at Buck, however, notes another nuance: “The flip side is that Swiss investors tend to be sceptical over active management ‘claims’, so low fee passive structures and performance related fees are also getting attention.”
Major asset management groups, Pictet and Credit Suisse have traditionally managed significant indexed assets, although Rolf Banz, director at Pictet Asset Management (PAM) in Geneva comments that indexing is viewed very much as a ‘niche’ business along with custody provision.
Markus Hübscher, head of quantitative and alternative portfolios at Credit Suisse Asset Management (CSAM) in Zurich, managing around SFr13bn in index products of which 60% is pension fund money, comments: “Interestingly enough on the index side at CSAM, Swiss equities were the last product we added two years after starting passive management in 1995. Previously, Swiss pension funds were advised on the home market by the banks and looked around for foreign indexing.
“Now, the outsourcing of Swiss equities and bonds is happening quickly and the passive case as a cost effective alternative for pension funds is being pushed on here by the consultants. We have seen passive
assets under management doubling annually.”
Hübscher says the old Swiss investment sentiments that you couldn’t manage both passive and active assets or that cheap passive management would ‘cannibalise’ active mandates have now been dispelled.
“One thing I know that has surprised the likes of State Street and Barclays Global Investors which have come into the market recently has been the competitive nature of the fees in Switzerland,” he adds.
In October 1998, Synchrony Asset Management in Geneva began marketing a range of five indexed equity mutual funds and one bond fund.
Currently managing Sfr500m, Claude Cornioley, senior vice president at Synchrony, notes: “When we launched our first index fund three years ago interest was flat, but now that has changed, principally due to disappointment with active managers and the consultants advocating the core passive, active satellite ap-proach.”
And Zurich-based Swissca Portfolio Management, created in 1994 via proportional holdings from the country’s Cantonal banks currently manages segregated accounts for around 18 institutions, mostly pension plans and corporates, with an investment philosophy geared towards risk control.
Peter Meier, chief executive officer at Swissca, explains: “The process involves tracking close to the index and offering low management fees which are loaded into the fund costs.
“One of our main strengths, though, is in foreign bonds and we were the first house in Switzerland to do credit spreads and we are seeing typical asset allocation today of about 30% in Swiss bonds and 20% foreign, half of which is in the US,” he says.
Meier notes the rise in Swiss equity, however: “Leading public and private pension plans have raised equities up to 35-40% holdings now, and the investment possibilities are opening up. In the future, large institutions will be looking to have global equity products by index or sector, and this is gaining popularity already.
“Most of the fresh money is being allocated by asset class, so specialist mandates will definitely grow.”
Nevertheless, the mooted transformation of the Swiss investment scene has not crystallised yet into a definite trend on the ground.
The existing guidelines, allied to the relatively small average Swiss fund size of SFr20-30m still drive investment toward to balanced briefs and portfolios with a significant domestic bond bias - although this has started to shift to eurobonds because of liquidity problems. Typical equity allocations remain at around 35%, with 20% domestic and 15% overseas.
As a result the Swiss market still remains predominantly in the hands of the Swiss banks and insurers. Patrick Odier, managing partner at Lombard Odier in Geneva, comments: “The Swiss market has been strong with good asset growth so performance has been comfortably above the 4% level by just staying in the home market, but we are certainly now seeing interest in European and global equities.
“Interestingly though, despite a noticeable trend to specialist management a few years ago we are still seeing large funds going balanced.
“A number of schemes are also looking to take a more ethical investment approach, which is something we are working on with Ethos, the ethical investment foundation,” he says.
And the M&A activity amongst the Swiss groups has kept apace with the rest of Europe with the UBS/Brinson and Scudder/Zurich deals engendering business transformation, and others seeking to consolidate and refocus their sights.
Pictet’s restructuring in July to combine European operations from the previously separate asset management businesses in London and Geneva is a case in point.
Banz, newly appointed CIO of PAM which manages total assets of SFr33bn world-wide, says: “It is now necessary to have a group focus on assets and to gain sufficient critical mass to be able to compete.
“We will continue to manage local clients locally but our specialist experts will be moving throughout the company.” Banz says Italy, Austria and Germany are the main targets for PAM’s European development.
Hansjörg Herzog, managing director institutional clients at CSAM which manages SFr80bn in discretionary assets in Switzerland with SFr30bn of this in balanced portfolios, says the company has been working to shed its old domestic banking image.
“Our intention has been to use the springboard of our good home base and offices in New York, London and Japan to create a truly integrated world-wide asset management group.”
Gabriel Herrera, managing director at UBS Brinson in Zurich, managing pension assets on a two-thirds balanced, one third specialist basis, points out they no longer consider themselves to be a ‘Swiss’ player.
“The structure is global with the investment co-ordination from the group’s worldwide offices including Chicago, London, Zurich and Tokyo.
“It is a process segmentation, whereby global equity teams will determine investment strategy for example, with client functions operating on a local level.
“In essence the Swiss asset management market is still not that mature because individual preferences and personal time allocations continue to override investment delivery to clients.”
Insurance group Swiss Life is also shifting its focus cross border. Stephan Thaler, vice president asset management and head of marketing and client relationship at the group in Zurich, with actively managed segregated funds of Sfr13bn, comments: “We started managing assets for external clients on a mandate basis in 1995 and believe our insurance background is ideal for leveraging this core competence in asset management.
“The groupwide implementation of a structured, disciplined and transparent investment process with a long term focus and steadfast commitment to client needs is a key means of differentiation.
“Since the beginning of this year though, we have been strengthening our institutional network by integrating groupwide all our European asset management units with two main centres Zurich and London and local marketing units in France, Germany, Benelux and Spain,” he says.
Some of Switzerland’s smaller private banks are also reappraising their strategies on the institutional side.
Zurich-based Vontobel Asset Management moved from its private banking background into the Swiss institutional market in 1988 and currently manages SFr6.9bn in discretionary accounts principally for pension funds.
Werner Bollier, senior vice president and member of Vontobel’s executive committee, says their investment switch reflects a long term aim of competing in the European market.
“Vontobel has traditionally been associated with Swiss equity products, but we are looking to have a global/sector investment approach, focusing on Switzerland, Europe MSCI, US, Emerging markets and Japan. The real issue, however, is having the critical mass to do so, and we are certainly on the margins.
“We have the independence though, which is particularly important for research and there is definitely still a need in Switzerland for clients to have a hands-on feel to investment. Other managers are taking a different approach though and splitting up their business.”
Darier Hentsch in Geneva manages around a third of its institutional business for pension funds on an active, predominantly growth/blue chip basis – but concedes it is not a core business.
Hubert Turretini, member of the institutional management board, comments: “We look at the institutional business as the engine for our private banking side.
“We would still like to become a major player in the market though, and we believe that Swiss pension fund managers are looking for the strength and personal servicing skills of investment managers like ourselves.”
However, the diversity within Switzerland’s pension fund investment has brought a number of new investment management approaches and players into the market.
Geneva-based Independent Asset Management (IAM), believes it is picking up on the investment management shift to a more specialised Anglo-Saxon style.
Michel Thetaz, founding partner at IAM, in existence since 1995 with just over SFr1.5bn in assets under management, explains:
“We abandoned the traditional idea of all investment activities such as custody, trading and advisory service being under the same roof as with the Swiss banks, because we don’t believe all three can be done well without a significant conflict of interests.”
IAM manages predominately Swiss, European, global and emerging market equity as well as balanced accounts, operating a novel approach to stock research. We operate a bottom up approach to Switzerland and the surrounding European countries, looking at micro and macro factors with holdings of around 50 stocks.
“Globally, we have access to analyst research via internet, for example, to which we can change the variables to our methods and macro-economic predictions,” says Thetaz. “We pick countries because 80% of the value added comes from the country and not the stock effect. There are no correlations between the German, US and Japanese markets, so we use stock baskets.”
Thetaz believes that what you pay for is becoming increasingly important in the Swiss market. “We are the only solely institutional asset manager in the legal sense in competition with the banks and have concrete experience of advising pension funds and saving them significant money because we can show transparency of charges against the bundled approach of the banks.
“But it has taken a while to get the market to listen to the arguments because there is certainly a great deal of connivance to this business.”
Rene Dubacher, senior vice president at Scudder Investments, the asset management arm amalgamated into the Zurich insurance group and running SFr2.7bn in third party assets on a mandate basis for Swiss clients, concurs: “There is huge competition in the market these days so the issue of fees is crucial.
“Pension funds have traditionally been recommended to stick with one provider for asset management, custody and brokerage, but there is a growing feeling that this could just be a preference for asset managers to hide fees elsewhere in the chain.”
Banz at PAM believes the issue is overblown: “Chinese walls are in place within houses and it is in everybody’s interests to have clear fees. We have many clients for whom we do all three disciplines because they want to have a single fee, but we can split out the different elements.
Odier at Lombard Odier, adds: “For most cases we still do the custody as a separate but integral function, because the bundled approach is a Swiss tradition.
“There has been a shift to global custody, but I believe there is still a strong argument for bundling, because of difficulties sometimes in getting valuations from custodians, which can be crucial.
“We are also being asked to do accounting services because this is proving to be ever more complex . The communication networks and computer information available today have eroded the argument that profitability can be shifted from one arm to another,” says Odier.
The proliferation of domestic managers chasing the growing Swiss pension business stands incongruously though with the number of successful foreign managers in Switzerland.
Puglia at Watson Wyatt, comments:“ The majority of foreign managers are here, but not significantly in asset terms. Most can expect to gain two to three mandates via large pension funds looking to specialist, such as US small caps or international bond mandates.
“On the balanced side the perception is that they can’t really add value, although they may be taken on as a third balanced manager for diversification. That’s not to say they aren’t pushing into the Swiss market, particularly from the public fund side,” says Puglia.
Dutch group Robeco currently manages SFr800m, of which 90% is in discretionary mandates.
Graziano Lusenti, managing director at Robeco’s Geneva base, comments: “We are currently running mandates for the likes of the PKE utilities pension scheme and the Swiss railways, which is a good pointer to our progress in the market.”
Robeco has picked up mainly specialist European, global and Far East equity and bond briefs managed from Rotterdam, but plans are afoot to purchase a Swiss player and Lusenti says a deal could be closed soon. The management of Swiss equities and BVG/LPP balanced mandates in Switzerland is also planned.
He believes the Swiss market is not easy to crack though: “We had to spend a lot of time and effort over direct meetings and attempts to familiarise the Robeco name in Switzerland, which is one of the reasons we carried out 1997’s pensions survey.
“I think being Dutch gives us an edge, because we are clearly European and also share some of the cost conscious attributes of the Swiss.
“Market presence is vital. You can’t just parachute a sales team into Switzerland, because performance has to be matched by a high quality of service and responsibility.”
Thaler at Swiss Life says its domestic and European progress could also be marked by acquisition: “We have seen organic growth in our asset management operations but we wish to purchase other businesses if they fit with our strategy.”
Clearly the message is that the burgeoning Swiss market may have allowed the smaller players to move in, but some will not survive unless they are well placed.
PAM’s Banz, remarks: “Should any of the smaller players in the market experience any kind of business problem forcing them to invest, I’m certain most would probably give the game up.
And Laurent Bachmann, senior vice president at Lombard Odier, adds: “We see the market moving towards four or five large Swiss players, and maybe two or three foreign players with a niche periphery, because in Switzerland you need the servicing background, resources and language capabilities to compete.”
Competition is also being compounded by the likes of engineering group Asea Brown Boveri (ABB) which has started third party management via a life/mutual fund entity.
McShee at Buck, comments: “I could see other companies doing the same – a group like Nestlé, for example, which is set up like an asset management/consulting business, although I don’t know of any which are about to.
“It could be that they are waiting to see what happens at ABB.”
The ABB plan is also heralded as a marker for the eminence of 401k type arrangements in Switzerland.
McShee adds: “The ABB plan has investment and employee contribution rate choices, which is very much the first step towards 401k, although a true 401k plan would be difficult to set up under Swiss law, because of the 4% level.
Dubacher at Scudder sees this issue gaining importance: “I believe that if current pension fund underperformance continues then we could see government intervention and more individualisation of pension responsibility, although it could be another five to six years before anything significant happens.”
And a number of issues could define the Swiss market going forward.
DC schemes in Switzerland have recently passed the 50% marker, although the feeling is that a ceiling may have been reached.
Puglia at Watson Wyatt predicts a DB/DC hybrid taking off with DB covering basic pension provision and DC representing the second pillar.
“Swiss companies now understand that with this kind of system you get more perceived benefit at lower cost, so they are looking at it closely,” he says.
And somewhat surprisingly, Switzerland’s good start in adopting performance standards (SPPS) in the AIMR mould – pushed forward by many of the country’s asset managers – has not yet been reflected in demand on the mandate side, according to consultants, although this is firmly expected for the future.
The initiative itself though is a good indicator of a flexible and innovative asset management community - necessarily so because of the country’s pensions regime.
And one which is busy readying itself for the domestic and international challenges ahead.