Survey spotlights hotter competition
RCP assesses the key market trends
The winds of change are blowing through the centenary halls of Swiss and Liechtenstein investment management firms.
Managers are preparing for much tougher market conditions imposed by the growing competition from foreign firms in their home markets and of the broad move towards the globalisation of institutional mandates. In addition Swiss institutional investors are now seeking higher returns through the use of alternative asset classes such as hedge funds (practically non-existent in Switzerland), direct investments and instruments with higher rates of return. These three factors are contributing to a growing exodus of mandates from Switzerland and Liechtenstein to foreign managers.
A survey we undertook of 152 Swiss and Liechtenstein based investment management firms, who collectively manage $500bn, between October 1997 and April 1998, brought to light the following:
p Swiss managers are shifting their focus from their traditional private clientele towards institutional clients in order to increase assets under management. However, rather than rely on their traditionally strong global experience and networks to win mandates from foreign institutions, Swiss managers are concentrating their efforts on winning mandates from Swiss institutions. As a result, the Swiss institutional market is likely to soon find itself over-serviced with a resulting fall in profit margins for the managers.
p The regulatory environment in Switzerland and Liechtenstein re-mains, at best, superficial when compared to other OECD states. Banks are monitored closely by the Swiss Federal Banking Commission (SFBC) whose focus on the traditional factors of the creditworthiness, liquidity and the overall reputation of Swiss banks provides few safeguards for the investor in terms of the quality of services and active asset protection.
Although the implementation of new risk control systems such as value at risk (VAR) is actively encouraged, these new tool kits are more credit than fiduciary driven. The small amount, or lack of direct regulatory authority has resulted in the general absence of compliance standards, little concern for conflicts of interest and a general disregard for internal surveillance methods to help protect the client in comparison to the rest of Europe.
p There is still little use of performance attribution of portfolios. Al-most 50% of managers interviewed stated that they did not use performance measurement and were content with net asset valuations as a means of measuring their performance. Despite their stated interest in acquiring institutional clientele, a significant number of managers are inadequately prepared to meet those in-vestors' requirements and cannot carry the ex-post risk review essential in manning and fine tuning an investment process.
p Swiss managers are more transparent in their reporting and in their manner of managing portfolios. There is growing recognition that Swiss banking secrecy should only serve to protect the identity of clients (particularly private clients). The RCP TOP 50 Investment Managers of Switzerland and Liechtenstein (see pages 17 & 18) report accounts for $384bn (approximately 75%) of the total assets under management of the 152 firms reviewed. Furthermore, 75% of all assets were under the management of the top 10 investment managers.
In terms of assets under management, the survey comprises ap-proximately 20% of the estimated as-sets under direct management in Switzerland (therefore excluding as-sets managed by a firm's foreign affiliates). If foreign affiliates of the firms surveyed in this study were to be included, the total assets under management of the firms surveyed would approximately double to $1trn.
Another trend is the growing number of independent firms offering funds either by grouping together to optimise management resources or by cloning foreign funds or offering funds of funds. A third of the managers surveyed had funds of their own. The top 50 managers had on average 11 funds with banks offering significantly more funds than independent managers (approximately three times as many).
More than a third of the managers surveyed who provided information concerning their share ownership are foreign, notably in the banking sector. Almost half of the top 50 have foreign origins and are not controlled by Swiss citizens.
Amongst the 30 leading banks or investment managers affiliated to banks, the seven largest firms in terms of assets under management are Swiss-owned with at least $260bn under management. Of greater interest, however, is the fact that 15 of the leading 23 banks in terms of ranking based on assets under management are foreign owned.
Both Swiss and Liechtenstein in-vestment managers are distinctly conservative and risk-averse despite the strong performance of European stock markets over the past two years - 80% of managers surveyed position themselves as bond specialists. Amongst those firms who do trade equities there is a diversification from classic securities to-wards small caps (40%), unlisted stocks (7%) and, in eight cases, venture capital.
Over 20% of managers trade in options, futures and warrants. Even more (30%) state that they hedge regularly. However few are actively engaged in arbitrage (8%), deal in commodities (10%) or derivatives (7%).
Relatively conventional in their management styles and strategies, three out of four managers use a top-down/bottom-up approach selection process which serves as the basis for a country allocation strategy after which they proceed to the selection of specific equities. Those who do not adopt this approach are principally stock pickers (20%) followed by pure country/sector allocators (17%). Only 5% rely on purely quantitative management techniques.
Generally speaking, the managers surveyed are evenly divided between those that select stocks which offer good values and those that represent growth potential. Technical analysis, which relies on a stock's price movements and quantitative analysis which relies on the study of the fundamentals of companies whose stock is being traded are also used broadly by the in-vestment managers surveyed. The use of third party research (whichcomes from brokers) is primarily used by independent investment managers.
The definition of 'quality of service' in investment management is in the process of changing in Switzerland. If diligence, manager availability and secrecy represent the cornerstones of Swiss and Liechtenstein money management, performance and the quality of reporting is increasingly becoming the clients' principal selection criteria. Yet, almost 50% of the managers surveyed admitted to not using any form of performance measurement or performance attribution in the analysis and reporting of their results.
These managers content themselves with periodic reporting of net asset values (NAVs) without knowing precisely how the reported performance came to be (whether, for instance, currency selection, market selection, stock selection or sectorial performance were the principal forces behind a given result). This is perhaps less surprising in light of the fact that a third of the managers surveyed use no benchmark at all. Amongst those that do, a large majority rely on the Morgan Stanley Capital International (MSCI) benchmarks which is preferred over those of FT Actuaries/ S&P. A substantial number also use the International Finance Corporation (IFC) benchmarks to measure their performance on emerging markets funds and portfolios.
Apart from certain banks and local asset consultants (Lombard, Pictet, BCV, Coninco, MBS, Ecofin, etc), the main performance measurers are foreign companies, even though their share of the overall market remains small. Frank Russell is the leading performance measurement provider (6%) followed by Watson Wyatt and the WM Company .
Barely 30% of the managers surveyed stated that they had adopted the Swiss Performance Presentation Standards (SPPS) although another 20% said they plan do so before the end of this year. These standards were designed in co-operation with the Swiss Bankers Association and the US-based Association for Investment Management & Research (AIMR). These figures, however, are hotly contested by the region's leading AIMR certification consultants, such as PricewaterhouseCoopers and Ernst & Young, who affirm that less than 20 institutions in Switzerland have been AIMR/SPPS certified. It must be noted that the question of AIMR certification remains a problem as the standards for certification vary from company to company.
After being questioned by RCP, several managers corrected their initial statements concerning reporting standards and admitted that reporting standards were not, in fact, applied by themselves but were used either by their parent company or by independent fund managers whose products and services they promoted.
RCP & Partners are a Geneva-based consultancy. Taken from the RCP * Risk Publications Guide to Investment Managers in Switzerland and Liechtenstein.