The CHF16bn (€14bn) Swiss multi-employer pension fund Asga sees “major need for improvement” in cost transparency and manager performance in private market investments.

Speaking at a seminar for Pensionskassen representatives organised by the Swiss VPS publishing group in Zurich, Andreas Dänzer, CIO at Asga, said the pension fund was working to find and implement an assessment tool to understand better how returns in private markets are generated.

“We no longer want to rely on what managers are telling us but rather check the available data ourselves – but it is still early stages,” Dänzer said.

He added that a lack of real alpha was one of the reasons why the Pensionskasse reduced its unusually high exposure to hedge funds, which made up 11.3% of the portfolio at the end of last year.

“Hedge funds have made a positive contribution in the past but we noticed a correlation to equities and other systematic risk factors,” he said.

Additionally, hedge funds had come “under pressure from factor and style investment approaches” but fees remained high and “fee structures are not always aligned with investors”, said Dänzer.

He added: “We are willing to pay higher fees for real asset management skills but these have to be proven. Over the last five years the actual alpha – especially from our long-short hedge fund exposure – was quite low and we were disappointed by the actual management skill.”

However, Dänzer added: “We believe in private markets and we have profited from these investments last year and this year along with our foreign real estate exposure.

“Our aim is not just to reduce costs but to pay for real skill and make use of risk premiums.”

New-look allocation

In reshuffling its asset allocation Asga Pensionskasse has focused on different risk premiums: equity, term premium, credit, real estate and illiquidity.

“Hedge funds are no longer a standalone asset class but they can be part of the implementation decision within each asset class,” Dänzer said.

Similarly, private equity has been added to the fund’s equity risk portfolio.

Asga has also added a dedicated credit risk portfolio, which comprises corporate bonds, loans and other forms of credit risk such as mortgages or asset-backed securities, although the latter two asset classes were still to be evaluated.

Over the next few years Asga aimed to grow its credit allocation to make up 12% of the overall portfolio.

In addition, Dänzer said its exposure to foreign real estate would be raised from 7.5% to 8.5%.

“We are convinced we need an internationally diversified real assets portfolio,” said Dänzer, “and we [will] increase allocation to infrastructure by 100 basis points.”

Within the equity segment, Asga reduced its home bias from 13% to 10%, but overall equity exposure increased by 100 basis points.

Strategic changes

Another addition to the portfolio was a 3% “drawdown management” section.

“We will implement a portfolio of convex strategies like CTAs, which could potentially be liquidated in a stress situation,” said Dänzer.

Its purpose was not to protect the whole portfolio but “to allow a rebalancing within the portfolio in a stress situation,” he added.

“This is necessary because we have a high exposure to illiquid investments,” the CIO said.

Asga has also changed its approach to foreign exchange (FX) hedging, Dänzer said.

“Previously hedging did not lower long-term returns but now there are additional foreign exchange hedging costs for Swiss hedgers like the FX basis,” he said. “This is way you have to discuss the risk-return implications of FX hedging.” 

FX hedging was still a main risk mitigation factor for the pension fund, the CIO said, and could significantly reduce tail risks.

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