Asset classes: equities positive, large regional differences in bonds and real estate

The financial markets have been highly volatile since the start of 2022, and the escalation of the Middle East conflict in October 2023 has further exacerbated the geopolitical situation. The global economic uncertainty is also leaving its mark on our investment portfolio. In this interview, Stefan Beiner, Head of Asset Management at PUBLICA, explains how the individual asset classes are faring, what the key drivers of investment performance are, whether PUBLICA will be adjusting its strategic asset allocation, and what we are doing to deal with the strong franc.
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In 2022, both equities and bonds were largely responsible for the negative performance. How are the individual asset classes faring this year?
As of mid-November, equities are delivering a positive result, but there are wide variations across the regions and sectors. The US tech sector is performing very well in comparative terms. There are big regional differences among bonds and real estate. Directly held real estate and bonds in Switzerland are making a positive contribution, but indirectly held real estate and bonds in the larger industrialised nations are negative. One important reason is the differing yield trends: the yield on 10-year government bonds in Switzerland fell from 1.6% at the start of the year to below 1% in mid-November, whereas in the leading industrialised countries it rose further – from 3.9% to 4.5% in the US, for example. That has led to losses on US bonds, because rising yields depress the price of bonds. In Switzerland, the reverse is true: interest rates have fallen, and as a result bond prices have risen.

Will the strategic asset allocation be adjusted again?
PUBLICA draws on expected risk and return assumptions from a range of experts for each asset class. We conduct what we call a strategic risk monitoring in the first quarter of each year, in which we review whether the assumptions are still correct. If we find that the risk/return assumptions have changed substantially, we review the entire strategic asset allocation. However, there was no reason to do that this year. PUBLICA is oriented towards the long term and has a long investment horizon. Weathering short-term fluctuations is part of our business.

What does that mean for active members’ pension assets?
Many of the pension plans are still underfunded as of mid-November. For that reason, I personally expect the interest rate on pension assets to be low. The parity commissions will make their decision in the coming weeks.

What about pension recipients?
The level of current pensions is secure. We’re often asked about the possibility of a cost-of-living adjustment. Under the Federal Personnel Act, a statutory cost-of-living adjustment can only be made if the fluctuation reserves are at least 15%. None of the pension plans are close to that figure, which means a statutory cost-of-living adjustment is not on the cards. Former employers may decide to implement an exceptional cost-of-living adjustment.

PUBLICA’s Asset Management has the power to deviate from the strategic asset allocation within a “tactical bandwidth”. To what extent could a larger bandwidth help to improve performance?
The most important decision is the strategic asset allocation, in other words, how the pension assets are divided up between the asset classes, such as equities, government bonds, corporate bonds, commodities and real estate. That’s been empirically proven to account for at least 90% of investment performance. A tactical bandwidth allows us to react to a range of shorter-term developments in ways that can improve the return, but also reduce it. PUBLICA’s strategic asset allocation is derived from the asset and liability management (ALM) process, which takes account of the liabilities and prescribed risk budget of the pension plans within PUBLICA. For that reason, the tactical bandwidths shouldn’t be too wide, because otherwise, tactical decisions could undermine the strategic ones.

Many investors are taking refuge in the Swiss franc – the hard currency is becoming even stronger. What impact does that have on PUBLICA?
The Swiss franc strengthened against most currencies up to mid-November. PUBLICA diversifies its investments, and invests a large proportion of its assets abroad. For that reason, handling currencies is a central concern for us. Taking on currency risks from industrialised nations does not generate positive returns over the long term. Many studies have demonstrated that. For that reason, we hedge the vast majority of the industrialised nation currencies so that we are less affected by fluctuations.