Nestle stays ahead of the pack
The €4bn Nestlé pension fund in Switzerland has perhaps gone farthest down the road of any European pension fund in embracing alternative investment in the pursuit of absolute returns. Its current exposure of 15% of assets to hedge funds is probably the largest of any pension fund in the world.
“We are maybe somewhat ahead of the pack,” Jean-Pierre Steiner, Nestlé director corporate pension and risk services, concedes.
Nestlé’s initial decision to invest in hedge funds was made in 1997. “We were quite concerned at the start of 1998 that the markets were somewhat overvalued, and we started then to reduce equity exposure quite a bit and replaced that exposure by more hedge funds and other absolute return strategies, “ says Steiner.
The fund was looking for investments with a low correlation to its traditional investments, and higher returns. Hedge funds offered both of these.
The Nestlé fund invests in four of its own funds of hedge funds. Packaging them in this way has enabled the fund to achieve equity-like returns with bond-like volatility, Steiner says. “They have behaved for us exactly like the textbook. The decorrelation, the risk and the return have all been as expected. It is rare that that happens, but that has been the case for us. We have had no accidents whatsoever and no hedge fund has collapsed or disappeared.”
Returns have been stable and consistently positive. Over the past five and a half years the 12-month rolling returns have never been negative, and the return annually has been over 10% in Swiss franc terms.
Much of this success depends on the selection of the funds, he says. The selection is left to external fund of hedge fund managers. But Steiner and his team choose these managers as carefully as they choose the funds.
“We insist that the main criteria for retaining those providers are that the due diligence process is well-established and detailed,” he says. “They will do due diligence not only before the selection of funds but also after the selection. We also insist that they have two teams, one for the front office and one for the back office – which is at least if not more important – to avoid major accidents.
“We set the parameters we want, and they do the actual work on the ground, meeting the managers and making the selections. This takes a tremendous amount of time, and we probably don’t have the critical mass nor the resources ourselves to do that sort of job.
“The selection is crucial and important and not that easy. But more than that you need people who have known the hedge fund managers they select over a long period of time.”
One reason for this, Steiner says, is that the best hedge funds are generally closed to investors. “So if you want to have an exposure to the best funds you need to have personal contacts with managers who were their first investors, maybe 10 years ago.
“People like Unigestion have have been in the hedge fund business with their own money for a long time, and they have been the first investors in many of them. So hedge fund managers are often willing to give some additional exposure to them because they were there at the beginning.”