ZURICH - The merger of CIBA-Geigy AG and Sandoz AG is having an unintended side effect: the 11.9 billion Swiss franc ($9.4 billion) Canton of Zurich pension fund is more than doubling the indexed proportion of its Swiss equity portfolio to 85%.
The pending merger of the two pharmaceutical companies into Novartis AG is causing the highly concentrated Swiss equity market to become even more crowded. Together with Roche AG and Nestle SA, the three companies will comprise nearly 60% of the Swiss Market Index, the blue-chip stock benchmark.
That heavy concentration led to the Canton of Zurich pension fund's decision to boost passive management to 85% by the end of June or early July, said Daniel Gloor, head of the fund's asset management department. The internally managed fund now has 60% of its 2.4 billion Swiss equity allocation under active management.
While the passive allocation will be invested in Swiss blue-chip stocks, the active allocation primarily will be invested in small-and midcap Swiss companies.
In addition, the expected departure of portfolio manager Hans Ochsner at the end of June also affected fund executives' thinking, Mr. Gloor said. Mr. Gloor has not yet found a replacement for Mr. Ochsner, but his successor will take on the added responsibilities of managing the fund's domestic and foreign bond portfolios.
As of the end of 1995, the fund's asset mix was 20.3% domestic equities; 10.5% foreign equities; 19.5% domestic fixed income; 13.6% foreign fixed-income; 12.1% loans; 8.9% mortgages; 0.7% convertible bonds; 11% real estate; and 3.4% cash equivalents.
"I think the passive approach is gaining" among Swiss funds, although not quickly, said Dominique Ammann, a partner in Pension Portfolio Consulting, Zurich.
Some Swiss pension funds are taking an active bet only in small-cap stocks, or making allocation decisions between passive large-cap stock holdings and a small-cap fund, he said.
Robin Amacher, managing director of Frank Russell AG, Zollikon, said Swiss pension funds are increasing their use of passive management of domestic stocks, but not because of the growing concentration of Swiss blue-chip stocks.
"People realize that there are simply very few managers who can add value over time. It's cheaper to go passive and get more or less the same result," he said.
Meanwhile, the Zurich fund is continuing to boost its international allocations. For the fund's 1.27 billion Swiss francs in annual cash flow, half of which comes from contributions and the other half from maturing securities or sales, 54% will be invested in international equities and bonds.
By year-end, foreign stocks will comprise 14.2% of assets, while international bonds will equal 16.1%, running up against the total 30% foreign investment limit allowed by Swiss regulators.
Swiss pension funds can seek exemptions from the ceiling, but the Zurich fund has not yet decided upon its future course, Mr. Gloor said.