Swiss pension funds have continued to hedge foreign exchange risks across their global portfolios, a strategy that has proven effective, particularly during periods of Swiss franc strength against the US dollar.
With liabilities denominated in Swiss francs, pension funds aim to limit investment volatility by reducing exposure to currency fluctuations.
“Foreign currency bonds are usually fully hedged, while equities are partially hedged depending on risk tolerance. On average, the share of unhedged foreign currencies in the total assets of Swiss pension funds is approximately 17%,” said
Emerging market currency exposures are typically unhedged, largely due to implementation challenges. However, Staub noted that a currency risk premium – compensating for inflation risk – can be a rationale for hedging assets denominated in developing market currencies.
Migros Pensionskasse (MPK), the CHF29bn pension fund for the Swiss retailer, hedges 90-100% of its foreign currency exposure in bonds and real estate, and around 50% of its equity exposure. Overall, foreign currency exposure in its portfolio sits at approximately 11-12%.
“We continue to believe that holding foreign currency risks is not compensated and therefore hedge most of it,” said chief executive officer Christoph Ryter.
Publica, the CHF44bn federal pension fund, fully hedges government bonds issued by developed countries and foreign real estate, while partially hedging equity exposure, according to deputy chief investment officer Patrick Uelfeti.
“Measured volatilities of foreign currencies have increased this year, but they remain at relatively low levels historically. Hedging costs have risen significantly in recent years due to the high difference between Swiss and foreign interest rates,” he added.
Despite higher hedging costs, Uelfeti believes the case remains strong for Swiss pension investors to continue mitigating currency risks, citing the franc’s appreciation against the US dollar, low inflation and Switzerland’s stable political backdrop.
The CHF15.5bn pension fund of the city of Basel (PKBS) sees domestic assets as a stabilising force in times of crisis, leading it to overweight Swiss equities and real estate.
Precious metals
“The Swiss franc is a classic safe-haven currency and remains strong even in times of turbulence. Gold also plays a significant role in our investment portfolio, accounting for 3% of our assets. We are underweight Swiss bonds and have completely avoided foreign currency bonds,” said chair of the board Christoph Tschan, in an interview published in the pension fund’s monthly publication Aspekte.
The Swiss franc has outperformed all other safe-haven currencies – except gold – since 2015, according to research by Eurizon Capital. It has even outpaced the Japanese yen, with Switzerland’s geopolitical neutrality enhancing its appeal.
Gold remains a key asset for several Swiss schemes. For Publica, it is the best-performing asset class in 2024 so far, driven by geopolitical risk and higher inflation expectations, Uelfeti said.
At MPK, gold returned 36.9% in 2024 and 13.3% in the year to end-May, providing a level of protection despite comprising only 3% of total assets, according to Ryter.
PKBS is considering a larger allocation to gold, but Tschan remains cautious. “The market is already relatively expensive,” he said.
Swiss pension funds typically hold small allocations to gold as a diversifier and crisis hedge.
Gold has appreciated during periods of turmoil like the oil crises, the financial crisis, the COVID-19 crisis, and now, but not during the banking crisis in Japan in the 1990s, Staub said.
“Furthermore, gold does not generate current income and can significantly underperform equities over longer periods. Against this backdrop, Swiss pension funds use gold more tactically than strategically,” he added.
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