The products are in the shop window and the door is open for business to all comers. Swiss management groups stand alone in their ability to straddle the global borders through their unique ability to enjoy all the benefits of the EU without actually being a member – a perfect example of ‘having your cake and eating it’.
Switzerland is essentially a private banking centre rather than a domestic investor market. It has a fund industry with an unusually symbiotic relationship with Luxembourg, which is rooted in recent history and commercial necessity. Money flows into Switzerland from all over the world through the traditional private bank network and then filters into mutual funds based, primarily in Luxembourg. Their funds are therefore highly visible and accessible to foreign institutions.
For Swiss promoters, Luxembourg is a key ingredient to their success, accounting for around two thirds of their fund presence. In the early years Luxembourg offered a regulatory regime considerably more flexible than that existing in Switzerland where, in particular, money market funds were banned. The law now embraces these fixed income funds but the Swiss have remained firmly based in Luxembourg.
The implementation of the Ucits directive and Switzerland’s choice to remain outside the EU is Luxembourg’s trump card. To maintain their global presence, Swiss fund managers had to have access to the European markets via the Ucits passport and so the development of the Luxembourg base became critical. Moreover, Luxembourg offered them a lower cost location and a regulatory environment that enabled them to flex their product development muscles. The Swiss authorities spotted the problem and responded in 1995 with a new law that matched the Ucits directive and went a few stages further, anticipating the inclusion by the EU of master feeder funds, money market funds and funds of Ucits. In addition, an “other” fund category (Übrige Fonds) was introduced offering Swiss fund managers the opportunity to launch domestic funds of a more speculative nature, their status being much the same as Luxembourg’s Part II funds. The aim was regulatory equivalence with Luxembourg and the hope was that the Swiss would be encouraged to bring their business back home.
Five years on, Luxembourg remains even more important to the fortunes of Swiss companies. During this period assets invested in Luxembourg funds of Swiss provenance grew fivefold, compared with one and a half times growth of Swiss domestic assets. The Swiss have stayed away. Resolving regulatory restrictions answered one part of the problem but a number of important issues remain. First, Swiss law does not recognise the corporate form (Sicav) of mutual funds and this restricts product flexibility; second, the Swiss fiscal environment remains tough particularly for Swiss investors who incur withholding tax of 35%. Access to the European passport remains the important third factor and, fourth, from a practical perspective, is the cost and inconvenience of re-location.
For foreign institutional investors, domicile is an irrelevant issue. If you want to consider Swiss investment skills, you can look at a full range of funds, whether Swiss or Luxembourg domiciled, and you can consider the performance of all these funds on a directly comparable basis. The Luxembourg influence has led domestic performance provider, Lipper Schweiz (formerly Bopp), to adopt a wide focus in their data collection – one that encompasses all funds available for sale in Switzerland.
So how do the Swiss managed funds compare with their foreign competitors? The range of funds offered in the Swiss market is sophisticated and diverse, as one would expect from an industry whose market is primarily drawn from high net worth individuals. There are just over 2,000 funds registered for sale in Switzerland ranging from high risk warrant funds to the standard money market fare. Inevitably the Swiss players have greater strength in some sectors for some time periods. Their strength in Swiss equity funds is no surprise but how do they fare in some of the more important generic sectors – Global Equity and European Equity? The table ranks the top 10 funds (authorised for sale in Switzerland) by cumulative performance over five years, and indicate the national provenance of the groups managing these funds.
In the highly competitive Global Equity field, the leading positions are largely taken by non-Swiss groups. Germany’s DWS takes the top two positions followed by the Robeco flagship fund – Robeco NV. The Swiss groups take only three of the top 10 positions, with Julius Baer Investment Funds Services in the strongest position. However, in the equally competitive European equity arena, the Swiss dominate with seven out of 10 positions and they also occupy the leading position with a fund promoted by one of the Cantonale banks – Banque Cantonale Vaudoise. This, though, is a small fund for institutional purposes, but other respectable offerings with large assets can be found through Swissca and Julius Baer. In the recently fashionable European small cap arena, Crédit Suisse tops the sector with five-year cumulative performance of 264%. Again the Swiss dominate this sector with Mercury and Flemings being the only foreign contributors.
Drawing general conclusions from performance data is not helpful. In most sectors Swiss groups offer strong contributions, although the more exotic or far flung the market, the less likely it is that Swiss groups will be strongly represented. Their investment reputation has been built on cautious conservatism, a characteristic that is beginning to change as more competitors enter the market with ever more colourful offerings.
Diana Mackay is managing director , European Fund Industry Services London