Law change is just a formality
Swiss pension funds welcome new investment limits on alternatives because of their emphasis on the prudent investor rule, not because they make investing easier, finds Nina Röhrbein
In January, the investment limit guidelines of the Swiss BVV2/OPP2 law were revised. The regulator illustrated the fundamental shift to the prudent investor approach by including alternatives for the first time. It still put a 15% maximum investment limit on alternatives, although trustees can go beyond that by having an expert attestation prepared and filed with their annual accounts, which justifies their decision.
Previously, Swiss investors had to make use of the BVV2's exemption article 59 - now article 50 - when they wanted to invest in alternative asset classes and submit their reasons for doing so in writing.
But although the new rules make the integration of alternatives easier, in these early days they seem to have failed to have an impact so far.
According to a Watson Wyatt study for Swiss pension fund association ASIP, allocations to alternatives remained broadly the same between the end of 2008 and the first half of 2009. While the average pension fund commodities exposure amounted to 1.1% of the average total portfolio at the end of June, up from 0.8% in 2008, the average hedge fund allocation stood at 3%, down from 3.4% at the end of December 2008.
"Pension funds that have wanted to invest in alternatives have always been able to do so via the exemption article anyway," says Daniel Mussett, consultant responsible for French-speaking Switzerland at Mercer. "The financial crisis hampered the growing trend towards alternatives and a lot of plans were scrapped or postponed in its wake, but the trend is expected to continue, albeit maybe in a slightly weaker form."
This is a sentiment also shared by Christoph Ryter, pension fund manager at Pensionskasse Alcan Schweiz, which consists of three pension schemes with total invested assets of CHF1.4bn (€924m). "The new regulations are unlikely to effectively change alternative investments in Switzerland," he says. "They are welcomed by the industry because of their emphasis on the prudent investor rule but significant changes to strategies by our or any other pension fund are unlikely."
"If pension funds did not have the resources to conduct due diligence prior to the rule change they are unlikely to have them now so maybe should refrain from investing in alternatives," he adds. "The law's intention is simply to allow pension funds' individual foundation councils to make their own decisions - it is not intended to promote alternative investments."
Alcan began its alternative investments in 2001. It started off with a combined 8% allocation to hedge fund of funds and commodities but increased that exposure to 10%, split evenly between the two alternatives, in 2007.
An asset liability study in the summer of 2008 confirmed the current asset allocation, meaning that the alternatives' strategy is expected to continue for three to five years.
"However, as we temporarily reduced the general portfolio risk due to the free-fall in equities, alternatives were also pushed to the lower end of their spectrum," says Ryter. "We are currently still underweight commodities but are back at the strategic level for hedge funds."
The pension fund of Swiss Post started its alternatives portfolio in 2005 with hedge funds but has since added allocations to commodities and infrastructure. It currently invests 8% of its total portfolio in alternatives but is building it up via open commitments to its target of 9%.
As the pension fund is used to applying Article 59, the rule changes will have no impact on the fund's strategic asset allocation either, says Andres Haueter, head of asset management at Pensionskasse Post.
However, the financial crisis moved the spotlight onto risk management. "Investors need to be aware of the risks associated with single hedge fund investments, which are more difficult to control than those of traditional investments," says Haueter. "That is why for us it is important to diversify and not have a large exposure to just one single hedge fund."
"We have not been put off hedge funds by the financial crisis," says Ryter.
"Nevertheless, we now concentrate on using building blocks of hedge fund of funds, which should complement the rest of our core portfolio."
Mussett points out that• despite the general caution and a widespread reluctance to rebalance, some of Mercer's clients have undertaken new commitments to alternatives recently, predominantly in hedge funds, although he admits that new allocations now take longer to come about. "Everything has become a little bit slower," he says. "One of the lessons learnt from the crisis is the serious need for proper due diligence. Investors have learnt that they cannot invest in hedge funds the same way they invest in bonds or equities. There is a lot more preparatory work and research to be done."