Switzerland, long known for its diversity in languages and cultures, could also soon be known for its diversity of asset managers.
Competition is already fierce but with more foreign, in particular Anglo-Saxon, asset managers scrambling for a bigger slice of the market it is intensifying.
Rolf Banz, chief investment architect at Pictet Asset Management, says the Swiss market has been unusually open for many years, allowing its pension funds to hire asset managers from all around the world. “Everybody has benefited from the openness of the market,” he says. “The institutions have benefited because they have had access to a wider range of products and we as asset managers have benefited because we have been forced to adapt to global competition, which is a good thing.” Andreas Schlatter, responsible for Switzerland at UBS Global Asset Management has witnessed a steady evolution in recent years of the Swiss market as a result of the introduction of an investment law and an overhaul of the occupational pension arrangements that set the framework for asset managers.
Language and cultural barriers between the francophone and German-speaking parts of the country only apply to Swiss providers not to foreign competitors, according to Banz. “Of course when a Geneva bank wants to talk to a Zürich client, it needs to have German speakers. But when a New York-based firm comes to Geneva and Zürich, it is fine to have English speakers. We are discriminating against the locals, not against the foreigners.”
Schlatter says the ability to speak the language of the region is only courtesy, which does not distract from such facts as performance. And Hansjörg Herzog, managing director at Credit Suisse AM, says different languages do not play a crucial role with larger pension funds anymore.
“To compete in the Swiss market you either have to be a boutique or of very large size,” he says. “Foreign providers often posses the production capability but in some cases need to increase their distribution power.”
Banz believes while entering the Swiss market is relatively easy, foreign asset managers find that competing in it is made difficult by its various tiers and the large number of small pension funds tied to individual companies and that tend to be home-biased and have balanced mandates in local one-stop shops. The bigger funds though tend to have a range of specialist managers responsible for one asset class each, he says.
Marco Lanci, a director at BNP Paribas Investment Partners, says that despite the room for specialists and boutiques, certain areas, such as Swiss balanced portfolios, will remain in domestic hands.
But head of investment and strategy at private bankers Lombard, Odier, Darier,
Hentsch & Cie (LODH) Serge Ledermann believes that a home advantage no longer exists in the Swiss market. He says that foreign players often compete through consultants who recommend managers and advertise diversification.
“The fact that in half of all mandates consultants are involved makes it more difficult for the traditional providers,” says Herzog.
Ledermann adds that the difficulty is that large groups are now fighting not only to keep clients, but also talents.
This is one of the challenges facing UK asset manager F&C, which opened its first Swiss office in Geneva 10 months ago and is looking to strengthen its existing two-man team. “From the point of view of an independent foreign house, the Swiss market is so immensely huge that there is a niche for everyone,” says Christian Zeitler, F&C country head of Austria and Switzerland. “It is fiercely competitive but if asset managers provide good solutions for institutional clients they will still be considered in the manager selection. Maybe there is a part of the market from which we are excluded because it is relationship or language-driven but that does not concern us because it is the same in Germany or the UK.”
René Raths, client relationship manager at Zürcher Kantonalbank (ZKB), says that Switzerland is open to foreign asset managers, particularly when it comes to specific themes or alternative asset classes such as hedge funds, as long as they know the market and its regulations.
But according to Werner Rutsch, head investment management advisory and managing director at Swiss private bank Clariden Leu, the Swiss domestic market is over-banked and has reached its critical volume, meaning the pressure on asset managers is increasing. “The boutique style has its own chances for success, particularly in alternative beta, such as insurance-linked securities,” he says. “Swiss providers are doing well in fixed income but less so in equities. Public pension funds may still favour Swiss asset managers but for all the others it does not matter that much, their selection is based on the asset manager’s know-how and the best portfolio.” Pictet makes use of consultants - the gatekeepers of pension funds as Banz calls them - to gain access to large pension funds. New products such as a 130/30 Swiss equity product also help, he adds.
Raths believes that home bias, stability and continuity are still important in managing traditional asset classes. “While we administer foreign equities, we also work with external managers on a variety of themes because asset managers have to offer a complete range of investment solutions in addition to traditional asset classes.”
“To keep a leading position we have to maintain the core investments but add foreign and alternative investment exposure,” says Herzog. “We also undertake joint ventures, particularly on the alternative investment side. But we profit from being a one-stop shop.”
“We have seen further consolidation in the pension fund industry over the past few years,” Herzog adds. “But while the reduced number of funds has increased competition, it has also made their size more attractive to the industry.”
To retain a good position in the market, a stable performance and team are as important as a capacity to innovate, according to Ledermann. “One stop-shops providing asset liability studies as well as advice, global custody and actuarial services can be very efficient for small to medium-sized pension funds under time and resource constraints. As satellites are based on a multi-asset approach, LODH offers exposure to alternatives such as infrastructure on top of its traditional side to keep its market position.”
Private bank Wegelin & Co wants to be a quant player and is currently developing distinctive products in that field. Christian Raubach, managing partner at Wegelin, says the private bank is highly alpha-driven and one of the largest single hedge fund managers in Switzerland.
F&C is trying to win clients through direct sales and marketing via press, events, marketing and above all personal contact.
Banz adds that globalisation has two sides, so while Switzerland is still an important market for Pictet, the asset manager has also taken advantage of high growth opportunities elsewhere, such as Japan and North America. Specialisation in terms of mandates and portfolio is the emerging trend in Switzerland as well as in the rest of Europe, according to Ledermann. He says: “Although the traditional portfolio is still in place, the old Swiss scene is now receiving asset allocation advice about diversified portfolios.”
Raths says that the margins in the traditional asset classes such as Swiss bonds are declining due to a tougher and more competitive environment, meaning that today’s asset managers must be able to offer innovative products that cover the needs and expectations of pension funds.
According to Lanci, there is more interest for pension funds to invest in less liquid assets with attractive returns. The long-term liability structure of pension funds should re-allocate part of investments from traditional liquid assets towards less liquid assets, he adds.
So according to many asset managers, the trend in the institutional market has been away from traditional asset classes to alternatives in search of diversification such as hedge funds, private equity, commodities, infrastructure and 130/30, in which pension funds may invest around 5-15%, depending on their size.
Real estate is often considered an established asset class in Switzerland with its own core and satellites, according to Rutsch. The trend in real estate is to move away from direct Swiss property to more foreign real estate.
“Real estate is a headache for most pension funds as it trades at a premium, particularly listed real estate,” says Ledermann. “Direct investment is only possible for certain-sized pension funds.” Several large pension funds have started to embrace new asset classes in view of the outdated pensions framework. Raubach says: “Larger pension funds are very confident with new asset classes such as single hedge funds, long-short strategies, private equity and 130/30.”
Schlatter adds: “The typical asset allocation of a Swiss pension fund is 40% fixed income, 30% equities, 20% real estate und 10% alternatives, with the trend leading away from fixed income.”
In its search for clients, F&C offers products such as global convertibles, emerging market equities, single hedge funds, private equity, tailor-made solutions like GTAA as well as the asset manager’s responsible engagement overlay. Zeitler says multinational pension funds usually require segregated accounts, while F&C also offers pooled products with a diversified strategy to smaller, purely Swiss funds.
Lanci also reports more interest for non-traditional mandates like pure alpha strategies, currency overlay or tactical asset allocation as well as interest in emerging markets such as bonds and equities in local currency.
“Many years ago, pension funds had a bad experience with investing in foreign equities,” Ledermann says. “But the Swiss franc is no longer outperforming so today pension funds usually invest around half in Swiss and half in foreign equities. The return in fixed income has been modest, in particular in Switzerland, and pension funds have realised they will not reach their medium-term objective in bonds. That is what drives the move to alternatives or equities. But the recent turmoil in the financial markets has demonstrated that government bonds do play a good and diversifying role, so a certain amount of bonds in a portfolio makes sense. And the perception of bonds may even improve again as equity markets mature.”
Rutsch says that the problem with the fund-of-fund vehicle, which is used for large diversification purposes, is that a performance of 15% was promised to investors, while only 1-5% was achieved. And many asset managers have observed a growing sensitivity to fees.
Raths also sees a continuing trend for core-satellite strategies as well as passive investment. He says: “Pension funds invest passively in efficient markets where an active management hardly adds value, whereas in non-efficient markets it does. The core-satellite strategy is very popular among small as well as big pension funds, even though it is more difficult for smaller pension funds to undertake, due to the small size of their pension fund assets. Consolidation into pooled vehicles for pension funds can save these costs.”
Rutsch adds that innovation, professionalism and asset classes with an option of increasing exposure are important in the satellite arena. For him, the challenges lie in generating alpha and finding new sources of alternative beta.
“Institutional investors are always on the lookout for investment opportunities with a low correlation in order to achieve an optimum risk/return ratio. That is also why more and more new asset classes are included in investment strategies, in particular with larger pension funds that invest in satellites or alternatives. Smaller pension funds are only slowly moving towards alternatives because their strategy often does not allow it. For small and medium-sized pension funds a cheap and efficient realisation of the investment strategy is important,” says Raths.
A pension fund’s funding ratio also influences its asset allocation. While private pension funds have to be funded with a minimum of 100%, public ones are allowed a much lower funding rate. However, this is currently being discussed by politicians, according to Raths.
Ledermann says that the funding situation deteriorated at the turn of the century due to bad performance, but has since been improving. He adds: “Swiss pension funds are in fairly good shape as the last five years have been excellent in rebuilding reserves.”
Banz also sees the minimum interest rate as a constraint that limits the risk capacity of many funds. He says: “Although it is not as big as it used to be, only very generously overfunded pension funds really have the freedom to pursue aggressive strategies. All the others have to be much more prudent due to this over-insurance, which they would not have to be with a longer horizon.”
Although asset liability studies are important to Swiss pension funds, in particular if they want to apply article 59, they are unlikely to take up liability-driven investment (LDI) like they do in the UK due to the side-effect on the implicit one-year horizon, Banz says.
“A pension fund could have an optimal LDI strategy that punishes it horribly over a one-year horizon - despite it being optimal in the long term with regards to its liabilities - because of a particular change in interest rates,” he notes. “This dual objective of a guaranteed minimum return and long-term strategies will probably limit the growth of LDI here.”
Raths also sees increasing demand for sustainable products driven by media coverage of climate change and the scarcity of resources. He says that by the end of June the sustainable market amounted to CHF25bn (€15.2bn), double the previous year’s total.
According to Schlatter, the higher security of sustainable products and similar returns compared with non-sustainable products also increases their demand.
Sustainability is often still being associated with giving up returns, says Ledermann. But he adds that all major players have demonstrated the possibility of investing according to sustainable criteria without giving up returns. He regards this second wave of responsible investment as more flexible and less restrictive, with a focus on performance.
But Banz warns: “The turmoil in the financial markets over the summer months is undoubtedly going to leave its traces in the behaviour of investors and it is probably a bit early to come to any conclusions. But I assume that certain previously popular asset classes, such as alternatives, will have lost a little of their innocence. Enhanced money market funds, for example, will probably be much more difficult to sell to clients in the future because of the risks involved. I also expect the move towards alternatives to have slowed, but I do not expect a reverse.
“One of the challenges of the future will be to make sure that investors do not throw all products and approaches into the same bucket and do not want to hear about fixed income anymore. But we will have to wait for the quarter end figures to come out, which may even trigger further sales. I am not convinced that we have seen the end of it all.” According to Raths, another big challenge for pension funds is the demographic evolution in Switzerland and the financing of longevity risk.
“In order to contain the longevity risk, pension funds need to invest in more innovative products,” he says. “The targeted returns of Swiss pension funds are between 4-6%, depending on the individual funding ratio.”