In search of a better index
Switzerland is in dire need of better ways for pension funds to measure and judge their investment performance, say consultants. Various new universes and theoretical indices have sprung up in a bid to quench the thirst.
Swiss asset management company Pictet & Cie produces the most established index, the Pictet LPP (in German it is known as the Pictet BVG). This was born in 1985 when Swiss private pensions legislation was first brought in, and is based on an average of all portfolio variants theoretically possible under the Swiss investment restrictions. It is produced monthly, and very widely used by pension fund managers in determining their investment objectives.
But other indices are also gaining acceptance. Consultant Coninco created its IPS (Indice de Performance Strategique) index last October. Coninco's Olivier Ferrari says Pictet's LPP is fine for a pension fund which has an asset allocation of 27.5% in stocks, but the problem is Switzerland has a lot of pension funds which have weightings of 10, 20 or 40% in stocks".
The IPS is produced in association with Micropal in Switzerland. It is calculated every month and the information published quarterly. The index has five variants, each with a different asset allocation. "LPP isn't flexible; it's just one allocation," Ferrari says.
He says the IPS gives more information to pension fund managers and this gives fund managers greater control over returns. "The message I want to give is that the more equities you have, the better the return."
IPS is already being widely used, Ferrari says. Out of 520 pension funds which receive the information, in a Coninco survey 80% said they used the index often, he says.
InterSec produces a measure of performance, which it sees as superior to both the LPP and the IPS, because it is created from genuine performance information from pension funds, rather than being a "synthetic" portfolio. This measure was started by Swiss banks in 1985 and taken over by InterSec in 1993.
And now Watson Wyatt is set to enter the fray. In addition to two types of performance measurement it already runs, it is about to launch a new measure that it hopes will become a benchmark. It will be based on information provided by large Swiss pension funds, each with at least Sfr1bn of assets under management. Twelve major funds, including Nestlé, ABB and the City of Zurich have already agreed to take part.
Gioacchino Puglia, investment consultant at Watson Wyatt, says the planned performance measure is unique in terms of participants. InterSec collects the investment information through the banks, which only disclose the performance of a selection of the funds under management, whereas Watson Wyatt's method will be more comprehensive, he says.
But Pictet's feathers are unruffled at the new competition. Marco Bagutti, portfolio manager at Pictet in Zurich says he is sure the LPP will continue to be widely used. "Somehow it'slike the Dow Jones... Maybe it's not perfect, but its easy to understand and easy to use.""