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IPE special report May 2018

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Swiss AHV’s FX hedge prevents CHF1bn loss

The CHF33.1bn (€27bn) Swiss first pillar fund AHV has returned 7.1% for 2014, but admitted that its 2015 year-to-date performance was dampened by recent Swiss National Bank (SNB) actions.

According to a presentation held in Zurich today, the selective currency hedging strategy as part of a currency overlay in place since 2002 has saved the AHV and its subfunds for invalidity as well as military service compensation from losing 3.54% of its assets in January – after the SNB cut the peg to the euro, wiping an estimated CHF30bn off pension savings

On the other hand, the unhedged part of the portfolio suffered a 1.5% drop in return in January bringing the overall performance for the month down to -0.5%.

Marco Netzer, president of the AHV noted the fund’s hedging strategy helped “contain losses despite the large share of foreign investments in our broadly diversified investment portfolio”.

If unhedged, the AHV would see 27% of its currency risk stem from investments in US dollars, 12% from euro holdings, 3% from British pound and another 12% from other currencies.

After hedging into Swiss francs, its currency exposure fell to to 6% for dollars, euro and other currencies, respectively, and stood at 1% for the British pound.

However, the AHV, which is also known as Compenswiss, pointed out the “future challenges are less linked to the currency market than to the impact of negative interest rates on institutional asset management in Switzerland and other countries”.

While the AHV is exempt from the negative interest collected by the SNB on accounts banks, it can still be affected by negative rates introduced by custodians such State Street or BNY Mellon due to its euro-denominated deposits.

But in its presentation the first pillar fund pointed out currently 75% of its assets were managed in Switzerland or by Swiss-based asset managers.

Given the nature of the fund’s cashflow it has a high share of cash – which is not included in the return calculations – of monthly income and outflows of CHF4.5bn amounting to 15% of total assets.

Read how FX hedging impacted performance at other Swiss funds

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