(May 28, 2014) – A kilogram of good Swiss gruyere cheese costs almost CHF 30 ($33) these days and it is a grocery staple for many Swiss citizens. Consider then the task of Dr Stefan Beiner who is in charge of the Switzerland’s largest pension fund, and responsible for its members to stay above the bread (and cheese) line, in a country whose citizens were ranked as Europe’s richest last year by Credit Suisse.
“I joined the fund five years ago and was looking after equities and commodities. As deputy head of asset management, I was also part of the ALM team—it is worth investing a lot of time in this to see about how to identify and manage risk,” says Beiner, now deputy CEO and head of asset management at PUBLICA.
“We put a lot of focus on dynamic asset-liability management. Strategic asset allocation determines about 90% of our performance. We work with consulting firm Ortec Finance and once a year carry out an ALM study, which means going through our liabilities line by line—every person is modelled.”
This modelling exercise is no mean feat. PUBLICA has assets of almost CHF 36 billion ($40 billion) and more than 100,000 members, which equates to just over 1.25% of Switzerland’s population of eight million people. The fund’s contributing employers are closely associated with the Swiss Confederation or exercise public responsibilities either on its behalf or on that of a canton or a municipality. Other employers joined PUBLICA when the Swiss government privatised various public companies and removed their pension funds to make them more attractive to investors. They tipped the balance and now more than 50% of PUBLICA’s members draw a pension from its 21 plans.
“We discuss liability-matching and assumptions about duration. We don’t cash flow match though,” says Beiner. “In Switzerland, regulation aims for pension funds to take some risk as it can and should be rewarded for it in the long-term. But, the pension fund manager must carefully analyse risk factors. We try to have as many risk factors as possible—currently we are highly dependent on the equity risk factor. It is our objective to reduce this and add other opportunities.”
Across the 21 pension plans, the strategic asset allocations are implemented as part of a “unitisation” concept that corresponds economically, though not legally, to that of an investment fund by using different building blocks or units.
“We have currently 13 building blocks: Swiss fixed income, euro and US dollar corporates, industrialized government debt, real estate, equities (in which there are six different regions), commodities (in which there are precious and industrial metals), and petroleum. We then have emerging market debt and equities, cash, and direct mortgages.”
Beiner and his team have recently begun to look at private debt and are building up internal resources and know-how to examine bank loans, infrastructure debt, and real estate debt.
“We do not yet have any allocation to that asset class. If we decided to make a new allocation, the transition will take several months. We are looking just at the industrialized nations around the globe, not just Switzerland.”
For the moment, the team is building a portfolio of inflation-linked assets. “Unexpected inflation is a good additional risk factor,” he says, “and we think the consensus is currently too low for the next couple of years.”
The recent good run in equities markets has turned the team off this asset class, however.
“We think in the next few years the likelihood of a downturn is quite high,” says Beiner. “The yield from bonds is still small and this low yield environment continues to concern us. We are thinking of when to increase our fixed income again—US treasuries have risen to [a yield of 2.8%]—so it could make sense to partially reallocate.”
A major shift could be in around the corner for PUBLICA. The team has initiated a venture that could shape the entire portfolio in the future.
“We have started a large project on environmental, social, and governance (ESG) investing,” Beiner says. “We are taking a holistic approach rather than allocate just a small pot of CHF50 million, for example.”
Beiner says PUBLICA will not undergo a revolution, but take a step-by-step approach and ensure the entire investment team is clear on its internal definition of the term.
“I’d like to say we will manage all our CHF36 billion in an ESG way, but there is a lot of discussion about what ESG is and what it is not. In our team it is clear, but we need to be able to communicate it effectively,” says Beiner. “We would like to be able to manage the fund even more dynamically – we have a great team so we are confident about our new projects.”