Dancing in time to local tunes
Funds in Geneva often play an important role in the region's economy. Fennell Betson reports
Like other funds across Switzerland, those in Geneva are moving steadily along the equities trail in the search for better performance.
With over 27,000 members, the CIA -the canton's pension scheme for public employees - is one of the country's largest. Since 1989, it has been increasing its exposure to equities with the clear objective of increasing returns longer-term. CIA's director Dominique Biedermann says the fund now has around 18% in equities. This somewhat higher than the Swiss average. Our objective is to have 30% of the portfolio in equities, divided 20% Swiss and 10% foreign, in two or three years' time."
But there are local limitations on this. More than a third of the Sfr3,500bn ($2,292bn) fund's assets are invested in real estate, much of it in the city. "We are the biggest owners of apartments in Geneva, which makes the level of rents a very political thing. So it is hard to keep a balance between performance and social needs."
While the average annual return of 5% net being obtained on on the property portfolio is good by public pension funds standards, the long term commitment to 30% in real estate, also limits what CIA can do on the equity side. "This is a definite constraint," admits Biedermann. "If we did not have this, we could go perhaps 50% equities. But this is not possible for us. We need lot of equities for longer term performance."
As a public pension fund, only 50% of the liabilities need to be covered by funded assets, the balance being guaranteed by the city authorities. "Last year we had assets amounting to 62% of liabilities. We do not have enough assets and contributions to increase above this level, so we will do well to maintain the 62% level."
Biedermann and his team manage the Swiss bond portfolio internally, the rest is outsourced. "We prefer to give specialised mandates and to find the best manager for each type of asset." For international bonds hedged in Swiss Francs the mandates are with Dynagest, Fiduciary Trust and Salamon Brothers; for other international bonds, the managers are JP Morgan, Fiduciary Trust and UBS in London.
The 10% of the portfolio in Swiss equities is run by Lombard Odier, Pic-tet, Sarasin, UBS in Geneva and Foundation Ethos (see below) and for non-domestic equities the existing managers; Capital International, Lombard Odier and Robeco, have been joined by State Street and Stewart & Ivory.
But the giving of the the equity mandates posed some local difficulties with some of the 40 board members, who are split equally between em-ployer and employee representatives. Says Biedermann: "Several members said: 'You want to increase equities which is good for performance, but on the other side when stockmarkets go up, a number of companies under-go restructuring and shed labour and increase the numbers of unemployed or locate abroad, which is not very good for us.'"
In response to these critics, the Ethos Foundation was developed by the CIA. The idea is to look at investment-potential companies from environmental and social criteria as well as financial. Biedermann firmly believes that companies picked on such criteria will outperform because they will prove to be companies of higher quality management and vision.
When launching Ethos, CIA was joined by another major Geneva scheme - Caisse Paritaire de Prevoyance Batiment et Gypserie-Peinture(CPP), which covers the building and allied trades.
CPP is very much part of the local economy - it saw its membership among 400 local contracting companies shrink from 10,000 to 4,000 in the early 1990s. The fund was hit by a dramatic increase in disability claims at this time. Since then, the scheme rules have been changed to bring this more under control.
Like other schemes, CPP wants to increase its exposure to equities, but with the rise in disability claims, its flexibility has been reduced. As its manager Gerard Baudry says: "You need an 'airbag' of excess of assets over liabilities to protect against the fluctuations involved." At the end of 1996, around 15% of the Sfr450m was in equities, a third of which were non-domestic. This is at the strategic target set of 20%, which can vary from 10% to 25% of the portfolios. Bonds account for around 30% of the portfolio and mortgages for another 15%.
The fund has 33% in real estate. "Our members are working for the building industry in Geneva, so we have a significant investment to the real estate area.""
In recent years, apart from 1994 when bond returns crashed, the fund has produced returns of 10%, with 6% net coming from the property portfolio, not including any element of property revaluation. CPP uses a number of external managers - three for equity and two for international bond portfolios. The fund gives preference to managers in Geneva, says Baudry.
Since leaving an insurance based arrangement in 1991, the Du Pont de Nemours International scheme has not looked back. Gérald Chopar, head of human resources at the Geneva operation of the US multinational says: "We have more than doubled our returns. Everyone told us the objectives we set ourselves for returns were unrealistic but we have achieved them." The SFr500m fund, covering 890 members and 400 pensioners, is managed by three external balanced managers and one specialist bond manager. The investment strategy is looked after by a local investment committee, which is advised by the group pension investment department in the US.
The decision to move into German and Dutch bonds coincided with the weakening of the Swiss Franc and paid off nicely, he says. But the local limitations on exposure by the fund to foreign currency assets are being ap-proached for both bonds and equities, says Chopard. Following a recent asset liability study, the fund is looking to increase its local real estate exposure from 5 to 10%. "Property prices are becoming cheaper and more in line with other assets. In terms of returns, you can expect 5 to 6% net annually, which is not that different from the stock market returns averaged over the past few years." He believes property has very good prospects as a long term income producer.
The moves within multinational groups to an increasingly international approach to investment is happening within Du Pont. "There is always a potential problem as to the extent within a fund worth billions of dollars you can add value by taking in much smaller funds that need to be measured acording to different sets of rules and in foreign currencies," says Chopard. Even within the largest world-wide groups there has to be a responsiveness to the local situation.
The Du Pont scheme is a member of Groupement des Institutions de Prevoyance (GIP) a local association set up two years ago for pension funds. It was formed to increase awareness of in-vestment and finance issues for schemes by exchange of information and an educational focus. Biedermann, who was active in GIP's formation says: "We started with 15 members we now have 30 and expect to have 50 in another two years' time. We are now attracting members from Lausanne, Berne and Neuchatel." A lo-cally-based approach to meeting needs has obviously struck a chord with funds in the Suisse-Romande IPE"