The board of trustees for the Pensionskasse of the city of Zurich (PKZH) has decided to adjust the pension fund’s investment strategy to rebalance risks and the outlook for returns of individual asset classes.
The pension scheme is increasing its allocation to equities from 34% to 36.5% – equities will drive up PKZH’s returns on investment in the long-term, it said.
With the share of investments in private equity (7%) placed under its overall equities portfolio, the PKZH expects higher returns compared to listed equities, it added.
Furthermore, the fund has decided to increase investment in corporate bonds from 19% to 21.5%, in real estate from 15% to 18%, in insurance-linked securities from 2% to 4%, and invest in renewable energy infrastructure for the first time with a 2% allocation.
The trustees chose to cut its exposure to hedge fund investments from 9% to 7%, a move implemented last year. Its hedge fund portfolio – which was hedged against Swiss francs – returned 5.5% in 2020, well below its benchmark of 16%.
This was mainly the result of a restructuring of its hedge fund portfolio and also due to a change in its benchmark during the year.
Under the new strategy, PKZH will be able to reduce nominal value investments with a high credit rating from 21% to 11%, and abandon allocations to foreign currency-denominated government bonds.
The changes to the fund’s asset allocation, which kicked in from September following a trustee board meeting, were announced on Monday.
PKZH said that it tends to keep the share of allocations in nominal value investments as low as possible because of low or negative returns. It expects interest rates to remain low or negative for a longer period of time, therefore it is maintaining its allocation to liquidity and Swiss bonds low (0.5% and 4.5%, respectively).
Its fixed-income portfoio consists of 3.5% in high-yield bonds, 2.75% in private debt and 19% in investment grade bonds. Real assets account for 67.5% of the PKZH’s portfolio, with a strategic allocation of 12% in Swiss and 6% in foreign properties to generate stable income and potentially fend off rise in inflation in the medium-term.
PKZH has assets under management of CHF20.8bn (€19.4bn), a funding ratio of 123.1% and recorded returns on investments of 6.4% as of September of this year.
In September, the PKZH listed a series of climate strategy goals to reduce the impact of climate change on assets.
In listed equities the target is to halve financed emissions by 2024 compared with the global markets level at the end of 2016. For public corporate bonds the goal is to halve financed emissions by 2024 compared with 2020.
Under its climate strategy, the pension fund underweights sectors that are most likely to be affected by transitional risks such as energy, utilities, raw materials and transport, and companies with an above-average emission intensity.
The PKZH’s exclusion policy, which began in 2012, has generated returns for CHF25m from the start to 2020.
The pension fund has begun also to analyse the effect of its engagement policy on returns. Engagement could have a positive impact on the performance of the portfolio or prevent possible losses based on initial findings, it said.
PKZH maintains a dialogue with around 1,000 Swiss and foreign companies, as of 2021, to demand improvement in corporate governance social and environmental standards, including with regards to climate risks.