The new investment guidelines for Swiss pension funds are seen by Switzerland-based consultants as the major change affecting the institutional asset management industry and they expect this to affect their business in different ways.
“Until now you couldn’t invest more than 50% in equities and 30% in currency, and this approach was completely obsolete in the current global marketplace” says Gioacchino Puglia, senior investment consultant at Watson Wyatt in Zurich. Although the investment restrictions are the same under the new law, the requirements for pension funds willing to break these limits have been softened. “Before, you could break these limits but it was considered as an exceptional case which made you feel a bit of a bad guy if you did so. But now pension funds interested in increasing their exposure to these asset classes can do it as long as they prove they can afford it and they are taking investment risks into consideration,” he says.
However, Puglia believes this is not affecting their business much. “We’ve been proposing not to invest in line with the investment restrictions for some time now, so the new law hasn’t changed they way we advise our clients much,” he says.
However, the new investment rules have increased the demand from pension funds for more information on how to increase their exposure to equities or how to approach alternative investment.
“Some of our clients have increased their exposure to equities significantly,” says Olivier Ferrari, partner at Vevey-based consultancy firm Coninco. “We are getting more and more questions on how to invest in, for instance, new technology equity or alternative investments and we are doing more ALM studies and more manager searching for pension funds,” he says.
Ferrari adds: “Swiss pension funds are not happy with the performance of their portfolio managers and they come to us because they see the possibility of changing managers as a way to improve returns.”
In general, all consultants based in Switzerland are experiencing business growth, but the local players are the ones who remain dominating the market. “This market is probably the only one where the local consultants are still controlling the business, but our market share is growing,” says Watson Wyatt’s Puglia. He adds: “We see some increasing interest in our services from pension funds that never had consultants before. As pension funds get bigger they feel the need for more advice.We might not be as big as our Swiss competitors but the current trend towards a more global approach to investment is helping us,” he says.
But Swiss firms like Coninco, PPC Metrics, and Complementa still dominate. “Swiss consultants are still the real players in the market and there is not much room left for the international consultancy firms,” says Ferrari.
The international houses such as Watson Wyatt, William M Mercer and Buck are using their global networks to satisfy the needs of more sophisticated clients. “Pension funds come to us looking for specialist mandates, because they know that our global network can ease manager searches,” says Puglia.
An increasing number of managers searches going though consultants shows that Swiss funds are trusting advisers more and more when choosing portfolio managers. “ It is true that pension fund still choose managers taken into account business relationships with the bank, past performance and so on, but the more they use consultants, the less they do this,” Puglia says. “The fact that they come to us looking for help already means they want to break with this traditional approach and select their managers following other criteria more based on investment processes and style and less related to past relationships,” he says.
This different approach is giving more scope to foreign investment managers. “The problem with foreigners is they expect to gain mandates for SFr 30 or 40m per asset class and medium and small pension funds can’t do that,” Ferrari says. “In my opinion, the foreign managers are right, because working with SFr 5 or 10m mandates is not the best investment strategy, but sometimes the S Fr30-40 m level is too high to start a relationship,” he says.
This is one of the reasons why more pension funds are moving to fund investments, as a more effective way of investment smaller amount of money and still maintaining diversification.“In general, I wouldn’t say that Swiss pension funds are becoming more sophisticated, but it is true that they are more aware of the market’s evolution,” Ferrari says. IPE