SWITZERLAND - The fixed income portfolio at Swiss first-pillar pension fund AHV more than made up for a bad year for equities, according to its 2011 annual report.

The AHV reported a 1.5% return on CHF22.6bn (€18.7bn) of assets without liquidity and 1.2% when including around CHF2.6bn in non-managed cash reserves - which is well above preliminary calculations for the Swiss average.

The fund was split into three entities last year, with each having its own risk profile.

The CHF21bn first-pillar social security fund (AHV) returned 1.4%, the CHF4.15bn invalidity fund (IV) 0.4% and the CHF331m fund for payments during military service or maternity leave (EO) 1.7%.

An 8% equity allocation hit performance across all three funds, bringing it down by around 170 basis points.

However, bonds in foreign currencies (32% of the portfolio) largely cancelled out this loss, while Swiss bonds (33%) contributed another 120bps.

Other asset classes such as real estate and commodities were largely flat, with only mortgages showing a positive return (approximately 60 bps).

Eric Breval, chairman of the board, told IPE the bond portfolio consisted of "a lot of Europe and emerging markets", with only a small exposure to distressed Southern European credit in the first half of last year.

"We suffered insignificant losses from that exposure, but, overall, our fixed income portfolio did well as interest rates dropped," he said.

Last year, the AHV hedged around 80% of its foreign currency exposure, hedging mainly against it largest exposure, a 28% exposure to US dollars.

For this year, the pension fund wants to increase its hedge on yen, Canadian dollars and Australian dollars to 100%, while decreasing the hedge on euros to 60%.

Breval said the negative performance of equities had been entirely down to market turbulence and was "not the managers' fault".

He stressed that AHV had a strictly risk-based approach to asset allocation, with exposures being shifted according to risk budget.

The Swiss pension scheme manages almost two-thirds of its portfolio in-house, including overlays such as currency hedging. 

It uses external managers only for equities, real estate equities and some foreign currency fixed income.

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