SWITZERLAND – Swiss pension funds seeking new sources of return have shifted their investment strategies increasingly towards emerging market debt, but are still unsure how best to manage those strategies.
Speaking at the PPS conference in Lausanne, Frank Juliano, head of asset management at the AHV/AVS, said that while its fund had to create overlay strategies after 2008 to address potential market instability, the current low-yield environment in Europe meant it had to revise its investment strategy to include emerging market debt instruments.
"I sometimes feel more comfortable investing in emerging markets nowadays than in Europe or the US," he said.
"Even though I'm aware of the fact some investments in emerging market debt, when they are taken separately, can look risky at first sight. When they are part of a portfolio and taken globally, they often offer an attractive risk/return profile."
However, Juliano conceded that the Fonds de Compensation had yet to determine whether these new emerging market strategies should be managed internally by the fund's own in-house team or externally.
Also speaking at the conference, Serge Ledermann, head of the finance division at Retraites Populaires, echoed Juliano's thoughts.
"We now have to look for the risk/return profile we need elsewhere," he said.
Prior the euro-zone debt crisis, Retraites Populaires had not considered investing in emerging markets.
"However, this require some skills and experience Swiss pension funds do not necessarily have," he said.
"That's why we increasingly rely on consultants and external asset managers who have an in-depth knowledge of emerging markets."
Pascal Frei, an associate at consultancy PPC Metrics, agreed that emerging market debt was now an interesting alternative to developed-country fixed income products.
"Unfortunately, I'm not sure financial markets have already anticipated the role emerging markets can play and the investment stability they offer to investors like pension funds," he said.
Frei pointed out that Swiss pension funds would need to introduce more risky assets into their portfolios, but he also stressed that they should weigh those risks carefully.
For Pierre Pinel, CIO and chief strategist at Mirabaud Asset Management, this can be done by adopting an active asset allocation strategy.
"The traditional passive strategy adopted by many Swiss pension funds has been deeply impacted by the market volatility over the past few years," he said.
"It is therefore highly necessary to be more and more active in the market in order to move our asset allocation on time if need be."