The Novartis Pension Fund is a combination of the pension funds of the Ciba and Sandoz companies following their merger to form the Novartis group.

The most recent publicly available figures show the combined assets of the funds, which are in the process of being financially merged, standing at around Sfr15bn ($10.1bn) at mid-1997. The new fund covers 15,700 active members and 16,900 retireds.

The fund's assets are managed internally by the treasury department of the group, apart from around Sfr500m managed externally in emerging markets and other specialist equity portfolios. The bulk of the assets, amounting to 44% of the total, is invested in equities. Our equity proportion is quite high by Swiss standards," says Geino Pfister, who heads the new pension fund. The maximum legally permitted in equities is 50% of assets.

The current equity strategy is to be a longterm holder of a very concentrated core portfolio of some 25 globally operating 'blue chip' companies, chosen on the basis of their growth prospects. "They are leaders in selected growth industries." But these companies also have important risk control characteristics, in his view. "These are all very large companies, with a very long track record and excellent reporting. Because they are globally operating in themselves they, as well, have a hedge against currencies and they will themselves hedge against currencies, as they try to match their revenues with where their costs arise. These help control risks." Also, these companies are generally least affected by a downturn in the markets and usually recover faster, he points out.

The other main asset area is in AA or better rated bonds amounting to 22% of assets, the bulk being in Swiss Francs, though dollar, mark and guilder bonds are also held. "These were generally held to maturity, though if we want to change duration, then we trade." The other areas of the fund's investments are 13% in real estate and 9% in mortgages and loans and the balance of 8% in cash.

One of the biggest challenges facing Novartis and other Swiss funds is how to respond to the advent of the euro. Pfister says: "Our short-term view is that the Swiss franc will increase in value, with 'flight money' coming to Switzerland. In the long term, the Swiss national bank will have to peg the Swiss franc to the euro, because this area is such a massive trading partner for the country. So if the franc moves too far from the euro, it will make it difficult for Swiss industry to export there."

So whatever happens in the short term, the franc will need to be close to the euro, unless it becomes very soft. "Then the franc is not likely to follow," he says. So the crucial issue is whether the euro will be hard or soft. The euro-optimists believe that the euro will inflict discipline on the member states. "But will really happen?", he asks. "Will not the long-ingrained habits gain the upper hand? If unemployment remain high, it is hard to believe that there will not be programmes and pressure to spend to ease this." The optimists reckon that the euro will bring flexibility to the labour markets and stop state subsidies to sick industries and money flows to the industries and areas of the economy which produce most efficiently. Pfister is somewhat sceptical: "We do not have full faith in this scenario coming true," he adds.

"The consequence is that we are rather prudent." But there are limits as to how far precautionary measures can be taken in any portfolio. "A substantial equity investment in the long term cannot be isolated from the effects in the global economy if overall there is growth or there is a drop. But we believe the companies we hold will not be heavily exposed to the euro."

So while the current equity strategy does not need to be changed in his view, it is a different story on bonds. "The first point is that the interest return on Swiss bonds is very low. So this forces us to go into other foreign currencies. But then our pure buy and hold strategy we have with the Swiss portfolio cannot be followed in the same way." The outcome will be a move from buy and hold to trade. "So if we believe there will be a rather favourable situation in the UK pound, and unfavourable in the euro, we will move to the pound." Because of the uncertainty, another outcome will be to keep the duration short for foreign bonds - to under three years in order to have less volatility.

The holdings in domestic bonds will remain considerable, because legal regulations require Swiss pension funds not to have more than 30% of the portfolio in foreign currency. "As our equity portfolio is largely in foreign, we use a lot of our allowed allocation for equity. It reduces what might go to bonds. So we do not have much leeway."

But the fund will be ready to respond to developments in the euro. "We will adjust. But currently we do not have a huge exposure. So we have no fears concerning the euro, as we are protected against any real mishaps."

Based on a presentation to the European Pensions Symposium in Prague"

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