Swiss pension funds cut bond exposure to ramp up alternatives
The CHF1bn (€820m) Pensionskasse for Swiss fashion company Manor has cut its exposure to bonds from 30% to 15% to free up money for higher-yielding investments.
Martin Roth, chief executive at the scheme, which has a target return of 3%, told delegates at the 2014 Swiss Pensions Conference in Rüschlikon that the step had been necessary.
“I do not think, over the next 10 years, we will see the same returns from bonds as we have over the last 20,” he said.
Instead, the pension fund has allocated “very strongly” to alternative investments such as infrastructure, hedge funds and convertibles.
On the same panel at the conference, Stefan Köhler, senior portfolio manager at Swiss pharmaceutical company Hoffmann-La Roche, reported that the company’s CHF7bn Pensionskasse was “managing its bond exposure more via the duration”, which is approximately two years lower than that of the average Swiss Pensionskasse.
Heinrich Flückiger, a pensions expert at Swisscanto, pointed to a growing trend of lowering duration in bond portfolios in Switzerland, with pension funds aiming to increase duration again once interest rates go up.
“However, there is interesting research that, over one year, the downside risk of almost all bonds is much greater than the upside return opportunities,” Flückiger said, adding that some Pensionskassen were therefore opting for equities instead.
He said there was an unprecedented level of interest in fundamental indices, with some of his clients shifting half of their passive portfolios into investments based on fundamental or rule-based indices.
“Three years ago, nobody was interested in alternative indices,” he said.
At La Roche, Köhler also still believes in return from equities and has increased the fund’s equity exposure by 700 basis points to 37%.
On the other hand, Stefan Beiner, head of asset management and deputy director at the CHF36bn Publica fund, decided to sell off some equities at the beginning of the year, as he was unsure the asset class could return as much as it did over the previous two years, when Publica increased its exposure to equities.
Instead, Publica is considering to go into private debt, infrastructure debt and direct lending, although “not necessarily in Switzerland”.
Beiner stressed, however, that the fund was still “at the beginning” of the assessment process of whether these investments would be worth the effort and risk.
Last year, the Roche pension fund made two direct investments in Swiss infrastructure using in-house legal expertise, but Köhler pointed out that this was the limit.
He said he was “disappointed” by the range of infrastructure products, most of which are structured as private equity investments, with a planned exit after 10 years.
“But why should I sell after 10 years only to get back money I immediately want to reinvest?” he asked.
”I am not talking about buy and hold, but buy and manage would be nice.”
Roche and Manor have joined forces with other Swiss Pensionskassen to pool assets and resources for infrastructure investments.
All three panellists argued that the debt situation of Swiss regional and local authorities was too good to really be in need for external infrastructure financing.
However, the Swiss government is thinking to establish a so-called Zukunftsfonds, in which venture capital is to be sourced from domestic institutional investors.
All three pension fund representatives said they were against any obligation to pay into this fund, with Köhler arguing that venture capital investments only worked when there were follow-up investors after the seed money had gone.
“We are no development bank,” he said. “That’s what other investors are for.”