Even if the Swiss are reluctant to admit it themselves, the prospects for the country's asset managers are set fair. Fennell Betson reports
From whatever angle you come from it, the outlook looks good for the Swiss domestic asset managers contemplating the potential in their local institutional market place - mainly the huge pension fund sector. But then they are not noted for going overboard about such things, even the marketing men.
But one of the best things that has happened for the managers is that the local stockmarket rose by 100% over the past three years. This has changed investor attitudes as nothing else has, including those fixed income devotees who missed this boat.
All over the country, where having a second pillar workplace pension scheme is mandatory, the five minute asset managers are legendary - the finance managers who do their asset management between 6 and 6.30 in the evening. It used to be that easy to make the 4%, technical reserve required on the funds.
The dilemma, as Leo Schrutt of Julius Baer Asset Management in Zurich points out, is that there is now no way to cover this from fixed income investment: The short end of the yield curve is 1.5%, while the 10-year is 3.16%. This is pushing pension funds into equities and has brought up the question of outsourcing, either wholly or just the equity portion."
That is not the only pressure, as pension funds are required now to spell out their situation in a statement of investment practice, showing the return they expect to obtain. Another factor, according to Schrutt is "the wave of asset liability studies over the past three years have has helped in the push to give out mandates". An inevitable consequence of this is increasing the equity portion.
The forces of conservatism have been formidable, with a typical Swiss balance built into the pension fund structure since the pension foundation has to carry a 50/50 employer/ employee representation.
You can have a sympathy for the long suffering private bank asset manager, who refers to the "older generation of internal managers whose standards of professionalism are not very high, with their asset allocation that is 95% in fixed income. And all they want to talk about is their 5% in equities!" In his view , this generation has to retire for the externalisation process to be completed. Estimates as to the proportion of assets internally managed puts this at around 50%, though the proportion of funds will be higher.
So often with good ideas, such as the 4% minimum return, it becomes a norm and its achievement the goal. Pictet head of asset management in Geneva, Rolf Banz says: "It has resulted in the conservative asset allocation. Pension funds are certainly not crowding up against the limits." Switzerland is one of the countries with portfolio restrictions, but with a 50% overall limit on equities, of which 30% can be a maximum for domestic and 25% for foreign.
Lombard Odier managing partner Patrick Odier in Geneva points out that the guidelines' limits of 50% equities may not be as arbitrary as might be considered. "Our research has shown that the guidelines do serve the purpose of risk management and an optimal risk reward ratio." Though, he adds that the guidelines have to be monitored constantly to ensure that they do not become restrictive due to the guidelines being out of date. "In the light of the new euro environment, further analysis may be called for."
The latest official figures show total pension fund assets at the end of 1996, at SFr348bn, on a book value basis, with an official projection for 1997 of SFr380bn, well over SFr400bn, if some uplift is included for unrealised gains. The equity share has moved from 1992's 9.7% to 16% in 1996. "Even on this basis, there has been a 37% more equities in Swiss pension funds over the past two years," says Schrutt, and will be higher if the unstated equity element in the14% of portfolios in commingled funds is counted.
At Independent Asset Management in Geneva, Michel Thétaz thinks the increases in equity will have hit 20% in 1997. His measure of how far things have developed is summed up: " In 1985, pension funds had a 5% exposure to equities. Now the curve is going up steeply. It is something like a fashion."
But how does he feel about those who have taken the equity decision recently if there is a crash? Those who have enjoyed a 100% rise over the past three years, should be able to accept a set back, he feels. "For those who want to join now, the approach has to be a strategic one, with a long term outlook."
In addition, to the move to external managers from private sector funds, there is the move within the public sector funds, where outsourcing of mandates on the lines of the recent move by the national insurance fund and the long awaited decision by the Federal Pension scheme, with the spin off of the railways and Swisscom into their own pension funds (see page 38). At Balse-based Sarasin Bank, marketing director Eric Sarasin says these are new markets in effect. "These need help externally, so there is tremendous potential for managers here."
But how will the asset managers get the business? Increasingly, the established process is the beauty contest, through a public offering from a pension fund or consultants. Odier acknowledges the consultants' presence: "They are now a force in the land - there is barely one request for proposals that does not have some intervention or contribution of a consultant at some point."
The consultants' scene is getting lively, according to Peter Meier, chief executive of Swissca Portfolio Management, the asset management company owned jointly by the cantonal banks: "The proportion now going through consultants amounts to perhaps 70 to 80% of assets, with almost all the larger mandates now in their hands."
Cristof Strässle, marketing director medium sized asset manager Vontobel in Zurich, has no reservations about their presence: "We think the consultants are good for the market. For the client it means the process is more competitive and they definitely gain a better insight".
As a marketing man Strässle appreciates 'the liquidity' consultants bring to the market . "We can get business through consultants without having to go through the whole market." Five years ago, no mandates coming to Vontobel were through consultants, now it is up to two thirds.
But the advisers' arrival means a different relationship with clients, as Mathys Lehmann head of institutional management of the Geneva Cantonal Bank says: "We can't ignore them. It is no longer direct relationship with the clients. We have to develop relationships with consultants. A lot of offers now come through them."
But UBS Brinson executive director Martin Schumacher says that because of the relationship universal banks have with their clients "we find we are not getting as much as 50% through consultants".
According to the asset managers, the international consultants have not made great in-roads into the indigenous marketplace, though they hold sway among the larger international companies, whereas the growing band of domestic pension advisers is controls the main swathes of the local market. And it is much the same when it comes to asset management, as international managers' success has been at the top end, including international companies. Around 10% of the available Swiss pensions market is reckoned to be in non domestic hands.
Most of this is the specialised mandates coming out of the bigger funds. According to Intersec, in the past year more specialist mandates are arising, which are going to the major Swiss houses and international managers.
Last year, Intersec launched its pension market monitor, which was supported by the six of the major investment operations: UBS Brinson, Credit Suisse, Julius Baer, Vontobel, Zurich Cantonal, Banque Cantonal Vaudoise. Between them, these institutions are reckoned to control half of the mandates in Switzerland. The first results of this closely guarded study, broke down market shares, but also produced one conclusion that surprised the participants. Of the new mandates in the year up to July 1997 only one third was balanced and two thirds were specialised. And within the specialised mandates one third was for equities and two thirds for fixed income.
The emergence of the two huge banking groups is providing the pensions market with a new force to come to terms with. UBS Brinson and Credit Suisse are world league players now and yet have the unenviable task of convincing their original customer constituencies that they are the same as before only enhanced by their new reach. Their competitors will obviously take a more aggressive stance, if only because attack is often the best form of defence.
Now the scale in the marketplace has changed, as Banz of Pictet points out: "Until recently we were a close second to SBC as a manager of pension assets." The hope among the smaller managers is that the quantum leap that the two major groups have taken has also taken them out of the ken of their domestic institutional clients.
The most common perception among the competitors is that the big groups are currently absent from the marketplace, as they sort out their considerable internal pre-occupations. Some see this as a breathing space in which to do something. As Meier of Swissca sees it: "The big banks will give the the larger pension funds a more professional and globally oriented service. But the smaller and medium-sized clients will have problems getting good enough service during the transitional period. this is good news for domestic players like the cantonal banks. It is not yet clear how important this kind of domestic business is for the big banks."
He adds: "If Brinson comes from the US into Switzerland, we will have a domestic bonus. But if the banks manage to combine both, so that they can give a global service to their domestic customer, they will succeed." In the meantime, the other banks have time to prepare for the tougher competition he sees in two or three years' time.
At UBS Brinson, Schumacher rejects any suggestion that it is absent from the marketplace while the merger is being put in place. Whatever the bank may be experiencing, the asset manager business has not been affected by this, he maintains.
"Our commitment is to service the pension fund market fully," he says, which means from the smaller funds upwards, but using appropriate vehicles at the lowest end. Also, by using the resources of the bank, all the services pension funds need in addition to asset management can be offered.
As has been up to now, the asset management is organised on a specialist team basis. "This is no different to what we had been doing."
As to the type of mandates coming through, Schumacher says there is a mix of specialist and balanced. "We have noticed a tendency back to balanced, compared to the growth in specialist mandates a couple of years ago."
But the arrival of the two giant groups is greeted on the face by most managers, as a reduction of competition, especially as two years ago with Volksbank there were four significant players. And of course, with the tendency of some funds to have two or three balanced managers there has been some fall out from SBC and UBS Brinson. Funds which have spread their mandates do not want to give double rations to the merged group.
The reason why clients like to have more than one balanced mandate with a number of banks is that it helps overcome the problem with lack of a balanced benchmark, as the LPP index is more of an indicator, the returns obtainable for different mixes assets in portfolios. As one manager says: "For many managers, the LPP 93 means being managed relative to that index. But by having several balanced mandate managers, clients can finesse the issue of the index. Then the managers have just to go for it, as in a race, it just becomes a question of who comes first, last or in the middle. No one worries about the time of the winning horse!" But more customised benchmarks are emerging.
The players most likely to challenge the big banks are the established coterie of private banks, many of whom have been asset managers for years. Banz at Pictet points out: "The established specialist asset managers like Baer, Lombard Odier, Vontobel and ourselves have advantages, we have been at it for a long time and we went marketing before the others did."
Sarasin believes that there is an increasing synergy between the private client business. "There has been a convergence in our approach and process for high net worth private and the institutional clients."
But the private banks are conscious of having to offer something where they add value for clients. As Vontobel's Strässle says it is a question of finding the specialist products to give an edge.
"In our specialist approach we start usually with an investment fund which we market universally, but for institutions we will create a clone and run it as a segregated account."
For Pictet's Banz says that "traditionlly in a private bank if a client wants something you do it. This is product development in the broadest sense. Successful firms are built around particular products where they have been successful. We are in the process of introducing some equity products which are really quite different."
The other long established players on the local secene are the cantonal banks some of whom have asset management businesses such as banks based in Geneva, Zurich and Lausanne.
In Geneva, Lehman says that within the canton, the bank has a preferred status with public bodies and has built up SFr1bn mainly in pension funds. But being part of an active commercial bank in the life of the canton can mean there is some cross selling to commercial customers of pension fund services. "But there is plenty of competition for assets in Geneva!"
The bank took the innovative step of setting up the Synchrony range of funds, which are run on quantitative passive basis. "There is a developing market for indexation."
The bank also works with Swissca the umbrella fund management organisation set up centrally by the cantonal banks, primarily for retail funds, but increasingly on the institutional side, where the portfolio management subsidiary has $25bn under management, most of this for the Prevista KGast.
"Only SFr1.4bn are direct mandates and the effort is being directed to build this up", says Meier. "Our role is to look for business for ourselves to provide the asset management services that cantonal banks want." For example, Swissca has no indexation capability of its own and informally would use the services of Synchrony to provide these.
Meier says Swissca's strength is being an independent asset manager with no ties to any particular bank. "We were set up to compete for the more sophiticated business as well as serve the cantonal asset mangers," he adds. But he expects the growth over the next few years the direct market will grw faster than the business through the cantonal banks.
But what has not really happened on the institutional side in the Swiss market is the arrival of boutique asset managers. On the private client side, there was a big growth, but little crossover to the institutional market.
But in Geneva, at Independent, Thétaz relishes his role. Though only four years old it managed to capture one of the AHV mandates issued recently. His selling point is absence of conflicts of interest. "Having everything under one roof is no longer acceptable," he declares. "The theory of putting the client first has become impossible, because of the clash between the client's and bank's interests." Independent gets the client to chose its custodian bank and its broker; in fact it organises competitive tenders for these services. "Transparency is transparency of cost. You cannot see what you pay for when it is all together.
The interesting question will be if others decide to follow the Independent model and become a new force for change in the market."