Although investment limits by asset class remain the same – 50% equities, 30% foreign currency – the new Swiss investment rules for pension funds which came into force in April have brought a greater freedom for pension fund sponsors, who are now free to determine their own strategy without seeking special dispensation from the supervisory authorities as was required before.
Although is still early days, the new investment guidelines will significantly affect the work of asset managers serving the Swiss market.
“This new regulation changes the philosophy of how to look at the asset allocation strategy of pension funds,” says Gabriel Herrera, member of the managing board and head of asset management at UBS Asset Management in Zurich. “It means a move towards giving more responsibility to pension funds that will have to assess their liabilities to be able to choose the right asset allocation, instead of just following a regulatory book,” he says.
Jean-Claude Birchler, marketing director at Fiduciary Trust International in Geneva, which has Sfr3.2bn (e2bn) assets under management for institutional clients, agrees: “This is the most important move within the institutional asset management industry in Switzerland.” He adds: “Although there have not been direct implications for us so far, it will certainly change people’s mentalities and establish a broader Anglo Saxon investment approach among Swiss institutional investors and also help managers who have a broader view on investment strategies. But it will take time. In Switzerland everything goes slowly but smoothly.”
And indeed,more time is needed before we can see how the new regulations will affect institutional investors and the way they plan investment strategies, the new legal framework has brought relaxation to the market. “This is the right way to go,” says Stephan Thaler, marketing director at Swiss Life Asset Management, a wholly owned subsidiary of the Swiss Life Group, in Zurich. “To get more autonomy, pension funds are also becoming more aware of what they are doing, conducting ALM studies to prove that they really can afford to go further in terms of investments. This is making the industry more professional.”
Olivier Dumuid, head of institutional marketing at Geneva-based UBP Gestion Institutionnelle, with more than Sfr5bn assets under management, comments: “One of the most important consequences of the new law is that the term security has not the same meaning anymore. Before, security meant to have a prudent approach to asset management but now it means to manage your assets taking into account your liabilities, and therefore choose the investment strategy which better suits your necessities.”
The new investment guidelines for pension funds also make investing in non traditional asset classes more flexible. “The trend to alternative investments is definitely coming,” says Laurent Bachmann, senior vice president at Lombard Odier in Geneva. “The new law allows private equity and venture capital investments in non Swiss companies when before exposure to these asset classes was restricted to domestic companies,” he says. The major pension funds are already including alternative investments in their portfolios and the small will probably take this approach using pooled vehicles, Bachmann says.
“I see alternative investments as an essential part of the strategic asset allocation of a pension fund,” UBS’ Herrera says. In this respect, the size of the pension fund affects the way fund sponsors address investments in non-traditional assets. “Large pension funds can afford individual investments in each alternative asset class, and can even have a small internal team exclusively dedicated to this area,” Herrera says. “But a small or medium-size pension fund can’t do that. To be able to put different alternative strategies into one basket, allowing small funds to include this kind of investment in their portfolios, is one of our challenges ”
However the exposure to alternative investment from Swiss pension funds is still pretty small. “People talk about alternative investment but so far not all the funds are taking this approach,” says Mathys Lehmann, portfolio manager at Synchrony Asset Management, a wholly owned subsidiary of Banque Cantonale de Geneve. “But consultants are telling pension funds about the possibilities of these products, so the interest is growing.”
Some companies who have been offering alternative investments outside Switzerland for years, are not active within the Swiss market as yet. “We have a very good experience in alternative investments and especially in selecting managers to deal with these products, but so far all the demand is coming from clients based abroad,” says UBP’s Dumuid. “We have decided to make ourselves more visible in this field for our Swiss clients, but we are still at a preliminary stage.” He adds: “But the demand will increase because there is a need among pension funds for diversifying investments and we think we’ll be active in providing alternative products to Swiss pension funds soon.”
Despite the fact that more flexibility and diversification are present in the institutional marketplace, Swiss pension funds continue to be rather conservative. “The majority of Swiss institutions are still very conservative and in this respect I don’t see much difference between public or private sector pension funds,” says Jérome Chevallereau, head of marketing at Unigestion in Geneva.
This traditionalism is also present when it comes to selecting investment managers. According to a report by Robeco Institutional Asset Management on Swiss pension funds investments during the period 1998–2000, Swiss managers continue to dominate the field, with only 15% of the pension funds taking part in the survey commissioning mandates to non-Swiss houses.
“The typical Swiss pension fund is a conservative institution that likes to know who it is in business with,” says Jean Thouvenin at Pictet in Geneva. “It is a very interesting paradox because on one hand the market is opening up to foreign players but on the other it has very specific requirements which make it difficult for international houses to break into the market – such as local presence, individual relationships, understanding of local regulations, languages and so on,” Thouvenin says.
“What can play a very important role when choosing a Swiss bank instead of a foreign house is the reciprocity business,” says Fiduciary Trust’s Birchler. “This way pension funds not only see the investment profile of the manager but also they consider other services that could be in the form of a credit for the company, mortgage facilities or insurance products,” he says.
It is true that Swiss institutional investors remain attached to brand names, and although this very sophisticated and mature market is attracting more foreign managers they need to show patience and consistency in their marketing efforts to succeed. “I see more foreign players coming into the market,” says Alex Orus, managing director at State Street Global Advisors in Zurich. “One of the reasons is that the liberalisation of the investment rules for pension funds is increasing the need for more global expertise and more specialist mandates, especially from the large pension funds. Other reason is that the good performance of the international houses operating in Switzerland shows that there is still room for more players,” Orus says.
“It’s true that more foreign asset management companies are showing special interest in the Swiss market and, to a certain extent, we see a greater acceptance for foreigners within the institutional marketplace, particularly when it comes to investing in more specialist asset classes,” says UBS’ Herrera. “However, in a sense, we are both a domestic and also a foreign player, because we have international capability and I think the same applies to some of our Swiss competitors.”
In terms of active versus passive management, the big pension funds still go for a rather conservative passive investment style. “This means they often track a major index and follow its asset allocation,” says Daniel Häfele, managing diector at Fondvest in Zurich. “ This investment strategy usually works for up to 80% of the funds assets,” he says. To enable performance, these pension funds give part of their assets to an active investment specialist. “Small and medium sized pension funds invest more and more into collective investments, like funds. That way they keep more flexibility in their asset allocation, save cost and diversify their portfolios,” Häfele says.
Diversification of investment strategies is also playing a main role within the asset management industry.
“Institutional investors are going more global and less Swiss,” says Fiduciary Trust’s Birchler.“We are more and more considering Europe as being part of our ‘internal’ market. This trend is very clear in fixed income investing, where euro-bonds are replacing Swiss bonds. It is a question of diversification.” He adds: “And also, the interest rate differential between Switzerland and Euroland is prompting pension funds to diversify away from Swiss bonds, to either European or international bonds.”
Specialist mandates are also increasing in demand, but their growth seems to be slower than was expected a few years terago. “Two or three years ago everyone was saying that the interest in specialist mandates will increase enormously but actually I don’t see that happening in the marketplace,” says Lombard Odier’s Bachmann. “We still get many balanced mandates, not only from the small institutions but also from large and medium-size pension funds.”
Fiduciary Trust’s Birchler says: “Swiss balanced mandates are still very popular. They have always shown good performance and it is difficult to say that the asset allocation has not been good. This means that this investment approach is still very much ‘a la mode’ and it is not going to disappear so far but they will cohabit with more specialist investment solutions.”
But there are also other factors affecting the work of asset managers. One of them, and showing an increasing interest, is the socially responsible investment (SRI) approach, whose long term nature it’s attracting more and more pension funds. “When you think about sustainability you think about long term, and long term is the horizon for pension funds,” says Lombard Odier’s Bachmann. “But taking into account these issues while ensuring financial performance is not something that everyone can prove to be good at.”
Since building up research teams is expensive and it’s not easy to find dedicated analysts who are willing to work with this approach, not all the managers are embracing this investment strategy. Those who are believe this is certainly the way forward.Those who aren’t seem suspicious about the way ethical and green funds are being managed. Unigestion’s Chevallereau comments: “People involved in SRI think that it’s the future, but we don’t share this view. As long as there is not a standard definition of ethical investing of sustainability, SRI will not be a subject for us,” he says.
At UBP, on the other hand, the opinion is completely different. “We think sustainability is very important and we’ve been applying this criteria on the Swiss equity side,” says Dumuid. “We have developed a questionnaire that is sent to all the largest companies in Switzerland which contains questions on their ecological and social approach,” he says. “We don’t do this to follow a trend. We really believe that SRI can bring added valued to investment returns and it’s important to see which companies are setting the right standards for the future.”
In terms of the move from defined benefit (DB) to defined contribution (DC) most managers agree that this trend will not affect their work as much as it’s affecting asset management strategies in other countries in Europe. “In other European countries DC arrangements are linked to more choices for scheme’s members, but this is not the case in Switzerland,” says Fiduciary Trust’s Birchler. “I don’t think Swiss pension funds will give the possibility to their employees to choose their benefits. I see boards of directors getting more sophisticated in terms of investment decisions and developing better investment skills but I can’t see them giving more choices to scheme members.” However, the fact that many international companies, in particular American corporations, have headquarters in Switzerland is bringing to the market new ideas that could accelerate the process of setting up ‘à la carte’ schemes. “These international companies, many of them based in Geneva, are bringing creativity to the market,” says UBP’s Dumuid. “But for the time being not a lot of companies have decided to provide choices to their employees. But things will change.”
In general, there is a greater investment awareness within the pension fund boards. According to some, one of the reasons why boards are getting more sophisticated is the fact that the younger generation is taking over them. “People in decision-making roles are becoming younger,” says Pictet’s Thouvenin. “They have a very good educational background in terms of portfolio management and they are also more demanding,” he says. This is when communication becomes crucial. “You have to be able to articulate in a clear and more transparent way your investment philosophy and improve your reporting process,” says Thouvenin. The reporting side is increasingly gaining importance and it is linked to technology developments. “There is a debate going on about how much is too much in terms of communication, but the truth is that our clients demand more information. In this sense technology is helping us to not only manage our funds in a better and easier way but also to communicate with institutional investors,” says Lombard Odier’s Bachmann.
More pension funds are setting up their own websites, and some of them offer very precise information on performance to their members on the net. “This is also helping to improve transparency,” says Peter Meier, chief executive officer at Swissca Portfolio Management, the asset management arm of Swissca, a subsidiary of Switzerland’s cantonal banks, in Zurich. “Technology will become one of the most important driving forces of our business and it’s crucial to communicate with clients and for them to be able to compare performances and the work of other managers. IT developments are affecting every single aspect of our job,” Meier says.
However the individual and personal relationships remain basic within the Swiss institutional asset management industry. “In our local market place, investment management business is still based on individual relationships and some level of trust,” says Lombard Odier’s Bachmann. “I think you still can’t sell mandates on the internet. You need to shake the hand of a client for them to know that the company managing their money is not a virtual machine.” He adds: “But the internet will bring us more flexibility, more efficiency to communicate and I believe all fund managers based in Switzerland are working very actively on this.”
Developing technology and achieving greater diversification depends on having the best team, but finding the right people sometimes seems to be an increasing problem. “Hiring and keeping top level staff is becoming increasingly difficult,” says Bachmann. “One of the reasons is that the market has been growing so fast that there is a shortage of professionals. It is very difficult indeed to build up a team which can satisfy the increasing demand of our services from pension fund, which are more and more outsourcing investment tasks.”
“The market will continue growing because many pension funds are still managing their assets internally, and they will tend to outsource more and more,” says Swiss Life’s Thaler. “With the current volatility in the market, the pressure on those internal teams managing assets will increase and they will feel the need for putting this work in the hands of specialists.”
Urs Baltensweiler, member of the management committee at Julius Bär Asset Management in Zurich, says: “Pension funds, especially the public ones, are still looking for external managers. Some of them, in particular the largest ones, have already done it, and all the rest our moving in the same direction. And most of those searches go through the consultants.”
So the consultancy business is also growing. According to Robeco’s report, the majority of Swiss pension funds use the services of consultants, especially when searching for new managers. “Consultants are very important to gain mandates,” says Swissca’s Meier. All the major international consultancy houses have tried to develop a practice in Switzerland but not all of them have succeeded,” he says. “Swiss consultants still dominate the market and it will remain like this for the time being.” Although the new regulation framework and the need for find specialist managers could increment the role of the international houses, and of the all consultancy firms in general, who will also see a growing demand for ALM studies, to prove that they can afford to adopt riskier investment strategies.
It will take some time before the implications of the new regulatory framework change the way Swiss institutional investors approach to asset allocation, but the market has opened up and the opportunities for asset managers are on the table. IPE