Pensions in Switzerland: Tectonic plates
The historical shift towards transparency that has taken place within the Swiss financial industry is having a potentially profound effect on the country’s institutional asset management sector.
A “regulatory tsunami”, as one asset manager describes it, has transformed the business model of Switzerland’s traditionally wholesale-focused private banks, forcing them to give up secrecy, their most profitable and sought-after offering.
In turn, they are trying to expand into the institutional asset management sector. A stronger focus on developing institutional business is on the agenda for both banks that already supply pension funds and new entrants to the market.
David Pittet, CEO of Geneva-based consultant Pittet Group, says: “Some private banks are trying to enter this market or to expand their frontiers in this market. The Swiss model of
private banking, that was immensely successful, is declining. These banks are facing a tectonic move and they are trying to offset it by expanding into the institutional market.”
Dominque Grandchamp, senior investment advisor at Mercer in Geneva, sees the Swiss government’s Weissgeld (‘white money’) strategy coupled with the pressure on Swiss banks to rid their balance sheets of undeclared money as drivers of their new business strategy. He believes the Swiss banking sector is going through an “extreme” and “profound” restructuring.
“The erosion of banking secrecy means banks have lost profitability, because private clients are less willing to pay a premium for their services and asset management capabilities,” Grandchamp says. “This has led them to look at the institutional sector also in order to achieve further diversification of their asset base.”
Recently, the fragmented Swiss second pillar of company pension funds has seen a gradual move towards passive investment. Large asset managers closely linked to the banking sector are the champions of the passive business, but smaller players have gained market share through balanced, or smart beta-type mandates.
Smaller asset managers are branding themselves as ‘niche’ players offering tailor-made solutions, as opposed to large firms that tend to offer mass-market products.
One private bank that is aiming to increase its institutional business is St Gallen-based Notenstein Private Bank, a subsidiary of Raiffeisen Switzerland. The bank announced at the end of October that it would consolidate its asset management businesses into a newly branded entity, Notenstein Asset Management.
Aris Prepoudis, head of institutional investors at Notenstein Private Bank, says the new asset management outfit, which will have around 200 employees and CHF14bn (€11.6bn) in AUM, will focus on quantitative as well as smart beta strategies.
He believes that the kind of systematic risk-premia strategies that his firm offers will be in demand in the coming years, and that the size of providers is not what matters. “What matters is IQ and talent. The winners will be the asset managers that have the relevant talent on board”.
He adds: “In order to meet investors’ needs, you have to be able to customise these products and map your own approach into their asset-allocation framework. That means that the boutique-style investment managers will score very well.”
Piguet Galland is another private bank trying to gain institutional market share. It has been managing pension fund assets since 1999. Institutional assets currently represent approximately 25% of total assets, a proportion that has steadily increased over the last six years. The bank has a particular expertise in total return global bonds mandates and actively managed balanced portfolios.
Gioacchino Puglia, first vice-president for institutional business development at Piguet Galland, says the bank has plans to expand the institutional business through organic growth rather than by scaling its activities exponentially. “We want to maintain our tailor-made solution-provider approach focused on clients and their needs rather than adopting a ‘product push’ strategy, as it is increasingly becoming the standard amongst the largest industry players,” he says.
At a glance
• Following the decline of banking secrecy, private banks in Switzerland are aggressively targeting the institutional market.
• Private banks brand themselves as ‘niche’ players, mostly offering tailor-made solutions.
• However, the price war occurring between asset managers puts profitability under pressure.
• Some firms are looking at consolidation as a possible solution.
Frédéric Arnold, head of institutional business development for Switzerland at SAM, believes there is room for mid-sized players, so long as that they focus their offering, provide consistency and seek to be innovative. In this respect, the firm intends to embrace the disintermediation trend in corporate lending by launching the first senior loan fund targeted at Swiss SMEs.
SYZ Asset Management (SYZ AM), the asset management arm of the Swiss banking group SYZ & Co, offers enhanced passive strategies in Swiss franc fixed income as well as actively alpha-generating strategies in both fixed income and equities. The group managed CHF35.2bn as of the end of June 2014, split evenly between wealth management and asset management.
Xavier Guillon, head of marketing and business development at SYZ AM, says that the firm is aiming to develop both solutions and products, but that it “will not try to compete with everything. You have to be lean and very focused in this competitive environment.”
Christian Lorenz, head of Edmond de Rothschild Asset Management in Switzerland, agrees banks are tempted to enter the institutional market, due to the decline of banking secrecy, and that multi-asset portfolios that are specific to the Swiss second pillar pension fund market would be their natural space.
However, Edmond de Rothschild Asset Management is targeting both large and small Swiss pension funds, with a balanced mandate offering through a core-satellite approach. This includes currency and equity risk overlays as well as fixed income and equity management.
“We consider ourselves a niche player, because we offer, on the satellite side, a strong conviction approach based on our funds that we can put forward in our balanced mandates,” Lorenz says. “However, we also offer flexible solutions like currency overlay and index overlay that allow investors to keep their existing managers, but add an extra layer of risk management.”
Lorenz believes this is the correct approach to satisfy Swiss pension funds’ needs, since despite being long-term investors, the regulatory duty to publish the coverage ratio each year makes them increasingly sensitive to risk.
But on all sides of the Swiss markets, management fees are under pressure. This is due to regulatory trends and reflects strong competition from well-established asset managers, which thwarts smaller players’ plans to gain pension funds’ mandates.
“The pressure on fees affects profitability. If you substitute a private client with an institutional one, the assets are larger and the clients commit for longer, but profitability can be significantly smaller,” says Grandchamp. “So, the question is, whether these banks are able to increase their profits by entering the institutional market.”
Puglia adds: “Those players joining with the intent of generating the same kind of margins as for traditional private banking clients are likely to be disappointed.” He believes that many who recently joined this market are likely to exit quite rapidly, as this business will simply not be profitable enough.
Some therefore question whether the trend is going to last. Pittet says: “I don’t believe there will be a significant shift in the market, as I struggle to see many entities succeed in this area. The Swiss institutional market is very conservative, and if you want to enter it, you have to be prepared to invest for 5-10 years before you get your first returns.”
Fabien Delessert, investment consultant at Towers Watson in Lausanne, also does not see a developing trend. He says: “Large private banks have always been strong in institutional management and have an important share of the market. For smaller asset managers, it might be too complicated.”
Delessert argues that because Swiss pension funds tend to be slow in changing their asset allocation, it may be difficult for many niche players to get mandates at a reasonable pace.
But before the trend fades out, the ‘price war’ that is unravelling in the Swiss institutional asset management sector may result in consolidation.
Prepoudis says: “Asset management is potentially a profitable business, but only if there is cutting-edge expertise and talent around. I think we will see a strong consolidation trend between asset management providers. There’s no place to hide anymore. IQ, talent, IT and technology will win over size.”
Xavier Guillon at SYZ AM says the firm is on a recruitment footing. “For asset management firms, multiples are high, so we prefer to grow by hiring talent,” he says. “That means hiring very specific know-how to enhance or complement our capabilities.”
For those not looking to grow by acquisitions, fees remain an issue. However, Puglia believes that the current cost-cutting focus will not last forever. He concludes: “The market will progressively return to a more balanced and rational approach, where fees are being put in perspective with the actual added value provided by each manager. It’s pure common sense.”