Swiss pension funds have been hit by the sharp decline in Nestlé’s share price, exposing the risks of their heavy concentration in domestic equities.
A combination of inflation, falling revenues, failed acquisitions and scandals has driven a loss of investor confidence in Nestlé, whose market value has fallen by around 40% since 2022.
The food group is the largest constituent of the MSCI Switzerland Index, with a weighting of more than 12%. Its poor performance has weighed on the returns of the Swiss Market Index (SMI) and Swiss Leader Index (SLI), and in turn on pension funds with significant allocations to Swiss equities, according to Andreas Rothacher, head of investment research at consultancy Complementa.
Smaller and medium-sized pension funds that tend to have a more pronounced home bias – 13% versus 8.6% for larger ones – are likely to feel a greater impact, Rothacher said.
For pension funds investing in Swiss small and mid-cap, the exposure is somewhat lower, he added.
Swiss pension funds have invested CHF11bn – or 1.3% of total assets of CHF909bn – in Nestlé, more than any other single company.
The Swiss equity market is highly concentrated, with Nestlé, Roche and Novartis together representing about 38.4% of the MSCI Switzerland’s total market capitalisation, according to a study by consultancy PPCmetrics.
The five largest Swiss stocks accounted for an average 15.5% of the equity portfolios of Swiss pension funds, or 4.8% of total assets, compared with the five largest US companies representing 3.3% of total assets as of June, PPCmetrics found.
Overall, Swiss pension funds allocate 33.5% of assets to domestic equities, reflecting a strong home bias.
“With this home bias, and the three major Swiss names – Nestlé, Novartis and Roche – the issue of concentration risk is all the more acute. We address this challenge in the Swiss market by reducing exposure to these three names by over 10%,” said Susanne Jeger, chair of the management board of PKBS, the CHF15.6bn pension fund of the city of Basel.
PKBS invests 1.5% of assets in Nestlé, and 1.4% each in Roche and Novartis, leaving it less exposed to losses in individual stocks while maintaining positions in the market’s largest companies. These equities, Jeger added, ensure long-term stability and steady income in the form of dividends.
PKBS also benefits from increased exposure to globally diversified equities, combined with the stable Swiss environment, defensive sector distribution, and high dividend payouts, Jeger said.
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