Martin Roth (pictured), CEO of Pensionskasse Manor, talks to Carlo Svaluto Moreolo about the fund’s diversification strategy and long track record in alternatives
The history of Manor, the popular Swiss retailer, begins in the early 20th century in Lucerne, when Ernest and Henri Maus opened their first department store together with Léon Nordmann. Today, Manor owns 59 department stores, 29 supermarkets and 27 restaurants around Switzerland. However, it retains its identity as a family business. The descendants of the Maus brothers are still the owners of the group via the Maus Frères group, a holding that also owns other iconic brands such as Lacoste and Gant.
The family’s entrepreneurial spirit has inspired the management of the group’s pension fund, according to Martin Roth, the long-serving CEO of Pensionskasse Manor.
The fund has a lean structure, with 12 employees in total. Roth and head of asset management Lukas Gisler are the only two members of the fund’s investment team. Despite the small size, and thanks to that entrepreneurial approach, Pensionskasse Manor has broken away from the traditional asset allocation mindset of the average Swiss pension fund.
The fund has achieved a high level of diversification and has been among the best-performing Swiss pension funds in recent years, according to Roth. This is partly thanks to a large and long-term allocation to alternatives.
Roth says: “We started with a small allocation in 1999 and grew comfortable year by year. In terms of hedge funds, we started with an allocation to a single multi-strategy fund of funds, and slowly developed it into a dedicated allocation to different funds focusing on different management styles. Three years ago, we made the step towards single hedge funds, and today we invest around 52% of the portfolio into single hedge funds and the rest in six specialised fund of funds.”
The hedge fund portfolio, which represents a 12.5% share within Pensionskasse Manor’s strategic asset allocation, consists of 42% long/short equity strategies and 58% macro strategies. Roth says the fund had an allocation to quant strategies but it was discontinued because of poor performance in recent times. The hedge fund portfolio generated a net return in Swiss francs of 14.5% for 2020, and helped Pensionskasse Manor achieve an overall 6.8% return for the year.
The fund adopted a specific governance approach to hedge-fund investing, forming a dedicated four-person sub-investment committee to oversee the portfolio.
In private equity, the fund’s strategic goal is to obtain a net return of 3% over public markets, a target that Roth says has been achieved over the long term.
“The learning curve has been steep, and we have made our share of mistakes, but we have learned from them. We are also aware of the higher costs of our strategy, which is reflected in our total expense ratio, which is higher than average. But if you have a net return target of 1.8% and invest in an environment where the risk-free rate is well below zero, diversification through alternatives is all but necessary in our view,” says Roth.
Another unusual feature of the portfolio is a 3% strategic allocation to gold. The fund has invested in the asset class since 2013 and invests mostly in the physical asset, except for a stake in a gold ETF, which makes up about 10% of the portfolio. This is held for ease of trading in the asset class. Roth says that holding the precious metal was particularly helpful during the March 2020 market crash, when most asset classes fell and investors took safety in the asset class.
The fund had to overcome several obstacles to build up its alternatives portfolio. Under Swiss regulations, pension funds cannot invest more than 15% in alternatives unless they are able to demonstrate they have the capacity and the board’s approval.
It also had to pick the right consultant. Roth says: “It has not been easy to find a consultancy that is in strong favour of alternatives. When working on our asset-liability management [ALM] studies, we would often get unfavourable opinions about our alternatives allocation. In a way, that strengthened our board’s belief in our strategy, because we had to defend it against some strong arguments. Eventually, however, we replaced our consultant. We now work with Ortec Finance, with whom we have a very constructive collaboration.”
The allocation to alternatives has been at the expense of bonds. The fund allocates 5.5% and 2% to Swiss and foreign bonds, respectively, as well as 2% to mortgages and 6% to global convertibles. The allocation to bonds has been steadily reduced over the past few years, and while other Swiss funds have followed a similar route, Pensionskasse Manor has gone further. The average fixed-income allocation for Swiss pension funds, excluding convertibles and mortgages, was closer to 30% at the end of last year, according to the Credit Suisse Swiss Pension Fund index.
“We are also aware of the higher costs of our strategy. But if you have a net return target of 1.8% and invest in an environment where the risk-free rate is well below zero, diversification through alternatives is all but necessary in our view”
Roth says: “My feeling is that we will reduce the weight of bonds even further. We will not go to zero, but we could well end up with 5% overall in bonds. As well as not providing a meaningful return, bonds do not seem to provide significant downside protection.”
Two decades of investing in alternatives has taught Roth some important lessons. “It is essential to have a clear process, assisted by strong, independent external advisers. We are wary of advisers who offer their own products. In our case, we employ two independent consultants, one which does the research and structures the investment proposal, and another who oversees the operational due diligence,” says Roth.
“Generally speaking, one should not invest in a strategy that one does not understand. At the same time, it is also essential to have a strong commitment, owing to the long-term nature of investing in alternatives.
“When investing in private equity, for instance, we bind ourselves to a manager for a long time, and that requires confidence. In this asset class, often the vintages that seem less promising turn out to be the best, and vice versa.
“Finally, a successful alternatives programme requires the trust of the board. We have earned that by maintaining an intense and challenging dialogue with Pensionskasse Manor’s board members,” Roth says.
So far, the pension fund has steered clear of illiquid credit, particularly private debt. This is partly because of liquidity constraints, given that about 40% of the portfolio is invested in relatively illiquid asset classes. Those include infrastructure and real estate, as well as private equity. “Having too much illiquidity in the portfolio can be dangerous for any pension fund,” points out Roth.
But the decision to avoid popular bond alternatives such as private-credit assets is also due to Roth’s scepticism. “There is a lot of money chasing the same asset classes. We may look at it in the future, but for the time being we do not feel comfortable with it,” he says.
The CEO expresses a similar scepticism towards the ever-growing popularity of ESG investing and mentions the possibility of an ‘ESG bubble’ as a concern.
He says: “ESG is here to stay, and companies with an ESG-friendly approach are gaining market share, so even as a passive investor our portfolio will feature a growing share of ESG investments.
“However, if a lot of money goes in the same direction, in the way that investment is flowing towards ESG strategies, that is generally a potentially worrying sign. Besides, it is understood that greenwashing does happen at corporate level, at least to an extent.”
That said, Pensionskasse Manor has a responsible investment policy and a portfolio of impact investments, including stakes in renewable energy projects. It also recently switched 10% of its passive global equity allocation to an MSCI ESG index, with the intention of getting a better, or at least equal, performance level compared with the underlying index. Ultimately, the fund seeks ESG-friendly assets and strategies that do not compromise returns.
Asset price inflation is generally a concern for Roth, who is a veteran of the financial markets. He has been with Pensionskasse Manor for 17 years, after spending 15 years as a portfolio manager for family offices and key clients at UBS. He says the current investment environment is the most challenging he has faced.
“Covid-19 has forced us to change our approach at least to an extent. At the height of the pandemic, we switched to digital communications and tried to keep close contact with our stakeholders. The investment committee went from meeting physically twice a month to having weekly conference calls.
“But the real challenge, which predates Covid-19, is the negative interest rates. Our way of facing it is to continue asking questions and challenging the results of our models. We do not necessarily have to accept every result they produce if we believe in our asset allocation views.
“In terms of liability management, we have to deal with the impact of Covid-19 on the retail sector, but the sector was changing even before the pandemic. The share of active members came down about 10% in recent years, which has affected our liability structure. For that reason, we are trying to become more granular in our ALM modelling using actual data on our members instead of proxies,” says Roth.
“ESG is here to stay, and companies with an ESG-friendly approach are gaining market share. However, if a lot of money goes in the same direction, in the way that investment is flowing towards ESG strategies, that is generally a potentially worrying sign. Besides, it is understood that greenwashing does happen at corporate level, at least to an extent”
Pensionskasse Manor has now reached a size and a level of diversification that could perhaps call for a larger management team. But Roth says he and the fund’s trustee board are happy with the current set up, which consists of the CEO and head of asset management managing passive equities, Swiss bonds, cash and foreign exchange exposure internally.
A key role, according to Roth, is that of the fund’s investment committee, which the CEO credits for the success of Pensionskasse Manor. “It is a diverse investment committee that asks challenging questions of managers. There is a very productive dialogue within the committee and with managers. This acts as an excellent counterweight to the small investment team,” says Roth.
Despite the headwinds, the past year was positive for Pensionskasse Manor. But there was one thing the fund could have perhaps done differently, according to the CEO. “We did not rebalance aggressively in April, which meant we gave up some potential returns. But I was happy with the level of diversification we had at the time, and that is still the case today,” he says.