Taking the wraps off

Daniel Gloor of the Canton of Zurich believes passionately in transparency. Fennell Betson reports

Swiss financial secrecy is a thing of the past for one-time banker Daniel Gloor, who runs the assets of the Canton of Zurich’s Civil Service Insurance Fund, one of the country’s largest pension funds. Transparency is his watchword. “I believe that if you are doing your job properly, you have to be very transparent.”

But not all funds are so committed to the cause: “There are pension funds in Switzerland who feel that if you are too transparent, people will want too much from your money. I do not think this is so.”

The whole philosophy of the fund is to hide nothing and its annual report is geared to spell out not only the figures but the detail of how the fund’s assets are run. How many funds disclose, for example, their earnings from securities lending; the total amounts with their individual custodian banks and their derivatives transactions and so on. All this is accompanied with a three-page glossary defining technical and financial terms for the fund’s almost 50,000 active participants. “People are much more interested now in what is happening with their money and you need such a detailed report.”

But to cap this, the fund not only issues the report in German, but since last year publishes a full colour version in English. Gloor goes a little on the defensive here: “People say it is some kind of luxury to do this, but we do not think so. As one of the largest pension funds in the world and Switzerland’s second biggest, we are a very international organisation, with US managers and global custodian.” Also, he acknowledges, it does help in handling the stream of enquiries coming from the US about the fund. “We wanted to copy the way banks and mutual fund groups go about providing their reports, it creates an impression. There is a professionality about doing it.”

As an organisation that is currently bedded into the structure of the canton’s directorate of finance, the fund is never far away from the eyes of politicians. “This is the kind of information they are eager to read and it builds up a lot of confidence from the political side.” Though from a local political point of view, the fund must be in politicians’ good books, as thanks to superb results in 1997, employer and employee contributions were reduced, at a time when the canton’s employees had to take an enforced cut in salaries.

This is one of Gloor’s milestones to have brought the fund from its position of being 82% funded in the early 1990s to 100% in 1996 to 104% last year, or 119%, if the SFr2bn ($1.3bn) of fluctuation reserves are included in the calculation.

He cannot understand the situation where Swiss public sector funds are allowed run underfunded. Cantons may not be able to go bankrupt, but CSIF knew even as far back as 1991 that to expect increased contributions from employers or employees was not politically on. “Our only opportunity was to increase the returns on the assets.”

Gloor, who had joined the canton’s asset management team from UBS in 1989, recalls that back then, his problem was that though the fund was diversified in Swiss investments, he had no way of assessing whether “we needed to invest 10 or 20%, or whatever in equities - what was lacking was an asset liability process”.

Another milestone was the appointing of Complementa Consulting to undertake such a study enabling a long term strategic asset liability allocation to be undertaken with a view to increasing the overall financial strength of the fund, by investing more in bonds and equities and less in Canton of Zurich loans and imposing an overall limit of 10% on mortgages to members.

A further key step was the defining of benchmarks for the different asset categories and to ensure the investment management done in-house was measured properly. This was was undertaken by Complementa, under a strict monthly supervisory reporting process.

The fund now works on much the same basis, with Gloor who took over as head of asset management in 1995, putting forward each year the ‘investment concept’, which includes the asset allocation. “We are monitored on a monthly basis to see that assets are being managed in line with the investment concept.” And he cheerfully accepts this as the price of transparency.

The portfolio, which currently is SFr17bn, is roughly 50/50 in real assets (domestic equities 22%; foreign equities 18% and domestic real estate 9%), and the balance in nominal assets, with cash and Swiss franc bonds making up 19%, foreign bonds 19%, and 6% in mortgages and 5% in Canton of Zurich loans and other loans at 1%. The real estate and mortgages are looked after by the canton’s property department, while the Swiss equity portfolio is on an index basis, as are that part of the non-domestic equities relating to G5 countries and an MSCI portfolio. Back in 1990, the portfolio was invested in Swiss equities on a 50% indexed and 50% actively in-house basis. But there was no consistency in the results, with one yerar good , the next year mediocre. “We wanted stability with regard to our results, with a heavy emphasis on liquidity.” The higher returns were to be achieved by diversification.

Gloor and his team of four run the index portfolios themselves - a process he describes as simple. “I do not believe in market process as no one knows where the market is going. So in our asset allocation we have set a quota of 20% for Swiss equities, but if the market goes up and we have 23%, then we reduce these holdings. But if we have a mini crash as last November, then we are going to invest more.”

Until last year, the fund ran an active US portfolio called ‘Stockpicker US’, covering US small and mid caps, but when the in-house manager running this left the fund, the portfolio was outsourced to four US managers. These were appointed last year, after a search by Complementa, with the honours going to William Blair in Chicago, Invesco in Boston and Montgomery in San Francisco and Barrow Hanley in Dallas. In addition, Jefferies International was appointed to run a convertibles portfolio.

Exposure to emerging markets was obtained through three mandates set up against the MSCI benchmark, run by three banks, through investment funds run to the same guidelines. “The results proved quite different, the best was -1.4, the worst was -10.7, due to the market. Overall our results were a little better than the index.”

The fund does invest in private equity situations both in Switzerland and elsewhere, but at year-end these totalled just SFr25m.

“On the investment management side, we have tried a lot over the past few years and I think we have a structure that is now able to go ahead unchanged over the next few years,” says Gloor. But that said, he immediately talks about the changes the euro will bring and the moves from country to sector allocation. “We will also look at hedge funds as a category. We will certainly be cautious here as they are not miracle investments.” The fund is not negative about such instruments, he adds but they do need to be fully analysed. The only place he is prepared to use derivatives is in the currency hedging programme, run for the fund by State Street (see page 58).

The fund caused a flurry in the Zurich banking dovecote some years ago when it appointed State Street as global custodian, the first time a non Swiss institution was appointed, partly for the monitoring and control services. “This caused a little difficulty at the time,” he concedes. Zurich Cantonal Bank acts as custodian for domestic assets.

In this year’s report, the progress of the fund is reviewed as having not only the financial equilibrium over the last six years, but its additional profits have enabled reserves to accumulate to cover cost of living adjustment for pensions, and to build up the SFr2bn buffer for financial market volatility, as well as making SFr222m available to reduce contributions.

But as a careful husbander of the members’ pension assets, Gloor is keeping watch for what lies ahead. One of his concerns is whether politicians will try to see that successful funds distribute their funds “according to political rules”. Other challenges abound. “In January 2000 we are going to change to a defined contribution plan, which was approved recently by Parliament.” And there is no doubt that the fund is heading to become an independent entity, quite no longer part of the canton’s directorate of finances. “But this has to go through Parliament, it could be in 2005.” There is nothing like being in a long term business.”