Managers assess fallout from Swissfirst

An alleged insider trading scandal that has tainted the reputation of the Swiss pensions industry since it was revealed by Switzerland's most authoritative newspaper, Neue Zürcher Zeitung (NZZ), in July is not expected to have major implications for asset managers, according to industry players.

The allegations, which centre on share trades ahead of a 2005 merger between Swiss banks Swissfirst and Bellevue, have resulted in the suspension and arrest of a portfolio manager at the Siemens Switzerland pension fund, the launching of an internal investigation into the pension fund management and the raiding of Swissfirst's headquarters by officials of the Zurich public prosecutor's office. Six other pension funds, including the federal employee scheme and Roche schemes, have been linked to the alleged misconduct.

The scandal prompted the president of Switzerland's central bank, Jean-Pierre Roth, to claim that there are far too many pension funds and to characterise many who run them as incompetent. But Swiss newspapers have asked why so many Swiss pension funds had invested in Swissfirst, which specialises in asset management but whose shares, according to NZZ, had not been notable for their performance, only to sell their stakes shortly before the announcement of a merger which saw their value surge.

The fallout from the case has also seen the liquidation of the First Swiss pension fund, which is alleged to have lost most of its assets in a development unconnected with the Swissfirst affair, and the filing of charges against some of its board members.

But although the scandal has enlivened an otherwise relatively news-light summer does it have any deeper implications for the Swiss asset management industry?

"The Swissfirst incident triggered discussions about stock picking and there were many academics who came out and reminded pension funds that they are long-term investors that will have to deliver pensions and so urged them to go for a passive index oriented strategy," says Werner Enz, of NZZ.

"And that is a strategy that many are taking a closer look at because they don't want to be caught with stupid little Swiss banking shares in their portfolio because people will suggest they bought it because they got a kickback or preferential treatment."

"The Swissfirst case was not really an active management issue because a lot of the larger pension funds do their own assert management, they work in a brokerage relationship with the banks and so they could decide which stock they bought and at which time," says a well-placed industry source.

"And that appears to have been the issue here. The selling of the Swissfirst stock at a certain point was necessary to enable the merger to proceed in order to double the share price.

"The hot topic is that one of the pension fund managers allegedly got very rich in recent years. The issue is that it is possible with parallel running - where a pension fund manager buys a small cap stock with a very low market capitalisation and buys options with a high leverage, then buys the same stock for a multi-billion pension fund, with perhaps some pension fund managers acting together, thereby boosting the stock price then gets out of the position before the pension fund - to profit from the market impact of a larger pension fund. The regulations forbid it but if you have enough criminal energy it is possible to find a way around it."

"After such an event emotions are always very high and tend to overestimate the situation, and I think that to a certain degree that is what has happened," says Andreas Schlatter, managing director, UBS Global AM.

"I don't think that there is a gap on the legal side; the pension laws we have today and the new laws on governance - which demand total loyalty - are quite good. The question is how you conduct the business and what the different boards and governance institutions really do and how they act. Such incidents occur where there is not true and fair conduct."

"Fundamentally in our minds we are a country of honest peasants," says Serge Ledermann, head of investment and strategy at LODH. "And we tend not to anticipate with our regulations that a small number of greedy high flyers can damage what is reasonably done. So we tend to trust people and regulation is based on this trust. There is too much money at stake in those pension funds and this case will bring further regulation because the public cannot accept the idea that even if it is a small number of people, they can unduly benefit from their positions."

"As the ripples abate people will realise that the legal framework is in place, so I don't think it will have a big effect on the legal side," says Schlatter. "But I can imagine that many pension fund boards will start to look more closely at what the people responsible for the fund are doing, that this will act as a wakeup call to remind them that they have certain duties. But I don't think it will have a big effect on the way that pension funds invest."

"It will have consequences in the sense that good governance and reasonable principles will arrive," says Ledermann. "There is always the risk that the response will be over-stringent but we are pragmatic people. And maybe because we have a tradition of consulting widely there is not a body that can make a decision, the system is that you have to consult all the organisations involved, it has the handicap of taking time, so that by the time you have reached a consensus maybe things have passed but the positive is that you don't react too harshly to one event and make a decision you may regret 12 or 18 months later."

"There will be adjustments to the regulations, there will be higher awareness among pension fund employees but there will be no big reform," agrees another source. If we had a political system allowed the passage of a law in a short period there might be a rapid intervention, but we don't go this way. We had similar incidents 10 years ago but nobody got a grip on what is really the problem, and that is very hard to do. Should pension fund managers have to sign off each transaction in front of the board?"

But others note that there is a political aspect to the issue because, although there is no suggestion of misbehaviour, well-known politician Hans Kaufmann, whose Swiss People's Party (SVP/UDC) has been outspoken in its attacks on the inefficiency and corruption of other parties in the past, was a member of the of Swissfirst board.

"Several politicians sit on the boards of pension funds and one conclusion might be that this could lead to a conflict of interest," notes Martin Vogel, chairman Julius Baer Investment Fund Services. "And that may be one of the lessons to learn from the Swissfirst case. So maybe there will be guidance on how to qualify as a trustee and what would count as a conflict of interest."

"Swissfirst is more an issue of pension fund trustees," says Daniel Muntwyler, head of institutional clients at the SAM Group. "The regulations might be stricter in areas like parallel running or they might require that pension funds open their books annually. And we would have nothing against that, indeed one could ask why they don't do that already when the whole of the banking sector is, and that would support the trend towards more transparency and professionalism. The downside would be that certain actors for a certain time would become very risk averse, and while that would be very good for the big banks it would be a setback for the boutiques."

"The Swissfirst situation indicates that in some cases there may be a gap between what trustees know and whatever the head of the pension fund is actually doing and proposing," says Vogel.

"My personal opinion is that one of the lessons from the Swissfirst discussion is that from a governance point of view there are too many smaller pension schemes who think they can manage money themselves rather than trying to get the money out to large well-established companies. Their performance is not necessarily bad but for everything else - for trading, economies of scale, risk management, exercising voting rights - all aspects that are just as important as performance, an asset manager is better. We larger asset managers are not in a position to allow ourselves to violate any kind of governance rules and we have the system and the controls in place to ensure that we are very sound in this respect. And even if a small assert manager does a good job, there is no way they can have the same controls on place."