“We believe that by having less in bonds and more in alternatives we will have better returns with the same amount of risk.
Our exposure to bonds is only 15%—the average in Switzerland is 30%. This is a strategic view taking into account low interest rates: The yield on Swiss government bonds is 0.45%, so the risk-return profile isn’t really attractive in the medium term. That’s why we started to reduce exposure last year. We had a 9% return in 2013, which put us in the top 5% of funds in Switzerland. We have assets of CHF1.6 billion (€1.3 billion), and a coverage ratio of 112%.
In Switzerland, 15% is the maximum exposure you can have to alternatives. The average fund has 6%, but we have allocated 10% to hedge funds—which is quite high—3% to private equity, and 2% to infrastructure.
Art by Steve Wacksman
The cash flow profile of infrastructure is exactly what a pension needs: you can use that cash flow to pay benefits. But when you get into the details, most infrastructure funds are more like private equity, and not bonds or real estate. We started to develop an idea, and thought, ‘Why don’t we pool our assets with other pensions?’
We put together an investment committee for the infrastructure platform with dedicated sector specialists and four independent members with expertise in direct investments. The platform should be, by the end, two-thirds direct co-investments and one-third funds.
We did the first fundraising and got CHF300 million. That’s quite a substantial commitment, and we know quite a lot of other pension funds are interested in the platform. You always have the first movers that believe in the concept, and you have others waiting to see some investments. I’m sure we will see other pension funds coming in.
We would like to start an evergreen structure. Normally an infrastructure fund would already have an exit strategy by this stage and be planning another fund. But if we like an asset, why should we sell it? Instead, we might make more investments after a few years.
One of our beliefs is to have a Swiss bias, but infrastructure investing in Switzerland hasn’t developed at all. The government has excellent figures for its debt, so it does not have to attract private investors. We still think a direct deal will be quite a good case to make. I’m sure the government would be far more open to pension fund money than to professional managers.
We chose an independent platform, which is the best way to invest for Swiss pension funds, and the most tax-efficient way. We have complete alignment of interests.
It’s also very cost-efficient. Funds-of-funds’ fees can affect the internal rate of return of your investment: With a charge of 150 basis points a year when you have a target of 4.5% to 5.5%, you give away a large amount of return.
In Switzerland there is a lot of talk about fees. The government implemented regulations last year for reports covering 2013, demanding full transparency on fees—so we need to record the total expense ratio of the funds-of-funds, including the underlying funds and their performance.
Of course fees are only one part—risk-adjusted net performance is an equally weighted criterion for us. Funds-of-funds charge typically 300 to 500 basis points, and you have to justify that with performance. When making changes, it would be too easy to say you only have to think about the fees, but we do also need to pay more for external advice for some asset classes: We don’t have the capacity to do the required level of due diligence on hedge funds, for example.
That said, ‘hedge funds’ are not really an asset class—they’re a pool of talented managers in different areas who can achieve alpha. At some point, we will be able to allocate these funds to other asset classes, but this would need a lot of education.”