Equities help Canton of Zurich end underfunding

Von Joel Chernoff

Veröffentlicht im Pensions & Investments

14/06/1999

 

The Canton of Zurich pension fund is now 122% funded, up from 88% 1991.

 

ZURICH, Switzerland - For the Canton of Zurich pension fund, equities have made the difference.

 

After officials of the 17 billion Swiss franc ($11.3 billion) pension fund embarked on a strategy in 1991 to boost its equity exposure, the fund moved from being 88% funded to 122% funded by the end of last year.

 

One of the largest Swiss pension funds, the Canton of Zurich fund has boosted equity exposure from 15% solely invested in domestic stocks at year-end 1991 to 40.3% in a mix of domestic and foreign equities at the end of 1998.

 

The resulting investment performance has powered the fund to its overfunded position. And good performance is especially important to the fund now, because it will be converted into a defined contribution plan early next year.

 

That move will enable participating governmental entities th shift up to one-third of plan assets to other fund sponsors.

 

Daniel Gloor, head of the Canton of Zurich's asset management department, thinks only about 10% assets will migrate, but he has to maintain adequate cash reserves to handle a larger exodus. 'We have to try to sell our track record.'

 

The fund is 95% internally managed, with most of the equity assets passively managed. But Mr. Gloor also has been hiring external money managers during the past two years for specialized briefs.

Heavily index

The Swiss pension fund is heavily indexed, particularly in Swiss stocks, where five stocks comprise 72% of the Swiss Market index. Its 3.7 billion Swiss franc domestic equity exposure is nearly 90% passively managed; the rest is invested in small-cap and midcap stocks, either directly or through funds.

The pension fund's 3.6 billion Swiss franc international equity exposure (up 20% from 3 billion at year-end 1998) is 73% indexed to stocks in the G5 countries: the United States, Japan, the United Kingdom, France and Germany.

 

The G5 porfolio's strategic position is to equally weight allocations to those five countries, but last year fund officals reduced Japan to 10% as a tactical bet, raising the other country weights to 22.5% each. Japan now is sitting at 9%, although plans are to raise it to 15% during coming months, Mr. Gloor said. He admitted he has been surprised by Japan's rebound during the past few months.

 

'As we've seen it, we still have an optimistic view on the U.S. We think Europe will face more problems,' since it still is hamstrung by rigid labor markets and heavy social spending obligations, Mr. Gloor said.

 

Germans 'will have to learn again how to work hard. They can't have six weeks holidays and (additional) days off,' he said.

Expects improvement

Mr. Gloor said he thinks emerging markets have seen the worst, and that interest rates will remain low.

 

He expects total equity returns of 5% to 8% this year, and would be happy for 10% in the following years.

 

'But we are not pessimistic about equities overall,' he said.

 

Countries no longer can afford their expensive pay-as-you-go state pension systems, and that will force creation of private pension funds during the next 10 years, he said. Those huge cash flows will bolster global capital markets.

 

Meanwhile, the fund has been hiring external managers.

 

In 1996, fund officials handed out three emerging-markets mandates - now totaling 3.6% of international assets - that were invested in pooled vehicles. Picked were regional and country funds run by State Street Global Advisors, London; Fondvest, a Zurich-based mutual fund picker; and Warburg, Dillon Read, London.

 

The next year, officials hired SSgA to manage an equally weighted international mandate that tracks Morgan Stanley Capital International developed-market country indexex - minus the G5 markets and Switerland. That leaves 17 countries in the passively managed brief, which now constitutes 7% of the fund's international exposure, or 231 million Swiss francs.

 

And, in 1998, the Canton of Zurich fund hired four money managers to handle its U.S. small- and medium-cap exposure, now worth 495 million Swiss Francs: William Blair & Co. LLC, Chicago; INVESCO Management & Research, Boston; Montgomery Asset Management LLC, San Francisco; and Barrow, Hanley, Mewhinney & Strauss Inc., Dallas.

Disenchanted

Private equity constitutes the remainder of the fund's internal exposure. Contrary to current trends, Mr. Gloor has become disenchanted with the asset class, and plans to dispose of its small stakes in six limited partnerships, two of which are invested in William Blair funds, one in a European fund and three invested domestically.

 

Meanwhile, international bonds make up a growing portion of the fund, accounting for 21.7% of total assets. To keep the fund at the 30% regulatory limit on foreign exposure, fund officials employ a currency overlay program - run by SSgA - on the foreign bonds.

 

With the advent of the euro, however, the number of currencies has been collapsed to five from nine. Currently, exposure is in the U.S. dollar and British pound; there's no exposure to yen, the Canadian dollar or to the euro because the Swiss franc has tracked the new currency closely since it was introduced on Jan. 1.

 

Mr. Gloor also juices the bond returns through convertible bonds.That effort dates to 1995, when Jeffries & Co., New York, started to advise the fund. In July 1997, Jeffries formally was hired to manage a 90 million Swiss franc convertible bond portfolio, that has since been increased to 400 million Swiss francs.

Managers hired

Showing the fund's commitment to the asset class, fund officials just have hired two Zurich-based managers - Credit Suisse Asset Management and Fisch Asset Management - to take on additional porfolios of 50 million Swiss francs each. Those portfolios will be increased to 100 million Swiss francs each during the course of the year, Mr. Gloor said.

 

'From a risk-reward perspective, it's a very attractive category,' he said. 'It allows you to participate in equity markets but it has a cushion, an air bag.'