Swiss pension funds increasing allocations to illiquid assets must prioritise robust liquidity planning and manager selection, according to consultancy Complementa.
Around 30% of the roughly CHF1trn (€1.1trn) in assets under management across Swiss pension funds is invested in illiquid assets, including real estate, on a capital-weighted basis.
“Thus, liquidity planning is of paramount importance. It is also crucial to address the issue of illiquidity during the asset and liability management (ALM) study and, if necessary, regularly in meetings,” said Andreas Rothacher, head of investment research at Complementa.
Two-thirds of the pension funds surveyed measure their illiquidity ratio, with governing bodies increasingly focused on associated risks, he added.
However, higher allocations to illiquid assets require investors to move beyond traditional metrics such as return and volatility.
Pension funds must incorporate additional qualitative factors into portfolio management, including leverage at the asset level in real estate and infrastructure, the composition of returns between capital appreciation and cash flows, vacancy rates, and covenant structures and subordination in private debt.
“Diversification across sectors, regions, managers, and investment vehicles is essential,” Rothacher continued.
“Diversification across sectors, regions, managers, and investment vehicles is essential”
Andreas Rothacher at Complementa
Limited secondary market depth and lengthy transaction processes create uncertainty around the timing and size of cash flows, potentially leading to over- or under-allocations to alternatives. The lack of deep secondary markets can also result in transaction prices that do not fully reflect underlying asset values.
Rothacher warned that gating during periods of market stress, or protracted liquidations of failed vehicles, can further constrain portfolio flexibility.
“Diversification across multiple managers helps maintain the ability to act within the portfolio context despite gating or protracted liquidation, for example, with regard to rebalancing or adjustments to the investment strategy,” he said.
Low-rate pressure persists
The Swiss National Bank has kept its policy rate at 0% since June last year, sustaining pressure on pension funds to seek higher-yielding alternatives.
Demand for real estate and core infrastructure is rising as investors look to replace fixed income exposure. However, supply constraints – particularly in unlisted Swiss residential real estate – have led to frequent oversubscription of capital increases.
“This often makes it difficult for pension funds to meet their real estate targets, particularly when the equity markets are performing very well at the same time,” Rothacher noted.
In this environment, careful investment selection and cost discipline are as important as diversification, with pension funds needing to balance returns, risks, liquidity and complexity, he concluded.
