Swiss pension funds are increasing global diversification in equities as home bias gradually eases, while maintaining meaningful allocations to domestic stocks.
The pension fund for small and medium-sized firms Profond places “particular emphasis on adequately considering” the domestic market within an equities portfolio that is increasingly globally diversified.
Profond invests approximately 17% of its CHF18.2bn (€19.9bn) in assets under management in Swiss equities, which it still considers an important component of its strategic asset allocation and “an attractive asset class”.
Targeted increases or decreases in Swiss equity allocations depend on factors including valuation, market environment and risk assessment, it added.
Companies listed on the Swiss stock market combine stable business models with a strong international focus, while offering a degree of portfolio stability during periods of volatility, such as in the first part of this year.
“Publicly traded companies are the backbone of the Swiss economy, and therefore play a significant role in our investment universe,” said Pensionskasse Basel-Stadt (PKBS), the pension fund of the city of Basel.
Swiss equities are an essential component of CHF17bn PKBS’s portfolio and make a significant contribution to investment returns.
One of the main features of the Swiss stock market is its defensive nature, reflected in lower volatility compared with foreign markets and stronger compensation for risk, the pension fund said.
PKBS currently considers its strategic allocation to Swiss equities of 13.5% of total assets to be “appropriate”.
However, the pension fund highlighted the relatively high concentration of stocks and sectors as a challenge when replicating the Swiss market.
According to Luca Tonizzo, head of team asset manager selection and controlling at consultancy PPCmetrics, Swiss equities remain a core holding for pension funds, but home bias has declined in recent years.
“Many pension funds are striving for greater international diversification to reduce concentration risks. Interest in Swiss equities thus remains stable, but is declining relative to global equity allocation,” Tonizzo said.
The Swiss stock market is among the most defensive globally, with healthcare and consumer staples accounting for almost 50% of the Swiss Performance Index (SPI) market capitalisation, according to Pictet Asset Management.
Together with financials, these sectors make up around 70% of the index, underlining the market’s concentration in pharmaceuticals, food and consumer goods.
This concentration means the performance of a small number of large companies can significantly influence overall market returns.
The Swiss market is “dependent on specific sectors and structures”, which can limit diversification compared with a broad global equity portfolio, Tonizzo added.
Francesca Pitsch, head of the pension fund study at Swisscanto, said the share of domestic equities in Swiss pension fund portfolios has remained broadly stable over the past decade at around 13.5%.
Year to date, foreign equities have outperformed Swiss stocks, returning 6.1% versus 1.8%, according to Swisscanto. However, Swiss equities remain a core element of diversified strategic asset allocation decisions, Pitsch said.
