Publica, one of Switzerland’s largest institutional investors, is reallocating assets away from government bonds into real assets as it dynamically adjusts asset allocation due to ongoing macro-economic instability.
Publica, one of Switzerland’s largest institutional investors, will sell its remaining 2 per cent stake in petroleum over the next few years because it no longer expects the systematic positive risk premia from the allocation.
“The three main reasons why we invested in petroleum were a) positive risk premia, b) it is partly inflation linked and c) the geopolitical hedge,” lists Stefan Beiner, head of asset management and deputy chief executive at the Bern-based fund. “Due to changes in the market structure, the systematic long-term positive risk premia for petroleum is no longer there.”
Beiner adds that he is currently assessing the best exit strategy given low oil spot prices, with a staggered sale as and when the oil price rises being a likely option.
The petroleum allocation will be invested in an increased allocation to inflation-linked government bonds. Together with an existing allocation to precious metals, Beiner hopes this will achieve what the energy allocation no longer does.
The latest shift at the CHF38 billion ($38.3 billion) fund which manages an open portfolio comprising 13 pension funds, and a much smaller and separate closed portfolio for seven funds with no active members, is a consequence of what has become a regular asset liability management process: something Beiner views as essential in today’s challenging markets.
“The macroeconomic situation and the actions taken by the larger central banks has given rise to a need to dynamically steer our asset allocation,” he says.
An ongoing investment theme to emerge from the process has been a move out of government bonds into real assets because of both the enduring low-interest rate environment and darkening economic skies.
“The probability of another market downturn in the next three years is high in my opinion,” says Beiner, who believes that many of the problems blighting the Eurozone remain unsolved. Central banks have bought time for political reform, but not enough has been done, except possibly in Spain, he says.
Publica recently reduced exposure to government bonds by 4 per cent.
It reallocated to private debt, comprising infrastructure debt, where Publica co-invests with Metlife and appointed Hastings as a manager; and private placements, where the pension fund co-invests with Prudential and Metlife.
“Private debt matches our need for duration but we also get a pick-up. It brings an exposure to an additional universe of private companies we can’t access through the public debt and equity markets.”
Another 4 per cent will be taken from fixed income and invested in real estate outside Switzerland, with a further 3 per cent of the bond exposure re-portioned to emerging market government bonds in hard currency.
“Compared to other asset classes I believe emerging markets are less richly priced,” says Beiner.
The fund is currently equally split between internal and external management.
“We try to find the best manager, and only if we think we can do it better than them do we do it in house.” Beiner hasn’t decided if the new emerging market dollar denominated bond allocation will be fully externally, or partly internally managed.
“The internal advantage is cost savings and we have some of the required systems and knowledge already in place. Internal management brings you closer to the market and you can ask more specific questions. The advantage of using an external manager would be not carrying operational risk.”
Publica is also adjusting its equity portfolio.
The fund first implemented equity factor tilts three years ago and works hard to find the most efficient way to get exposure through tilts towards value, minimum volatility and market caps.
“We are now reviewing and enhancing our tilt strategy to diversify and extract greater risk premia,” says Beiner. “This year we will discuss whether to add additional tilts to small cap, quality and momentum – small caps will get most attention.”
Switzerland’s regulatory system, that only sanctions long-only strategies, stopping funds ability to leverage or go short on a look-through basis, has played to Publica’s tilt strategy.
For a table showing Publica’s strategic asset allocation 2016 click here
|Strategic asset allocation 2016
|Closed pension plan (weighting in %)
|Open pension plan (weighting in %)