ZURICH -- The PKE pension fund will post its investment results on the Internet.
This is believed to be the first time any defined benefit pension plan has exposed its internal workings on the Internet. Coming from the traditionally secretive Swiss culture, it is all the more amazing.
The Web site also will include the fund's investment management structure, asset mix, manager mandates, performance results and volatility.
"Normally, we inform (participants) once a year with an annual report," said Franz Winkler, head of capital investments for the 5.1 billion Swiss franc (U.S.$3.4 billion) Pensionskasse Schweizerischer Elektrizitatswerke. "So I see no reason why we shouldn't publish it."
Not only is the data useful to PKE's 18,000 participants, but the figures also should help foreign managers and other service providers understand how PKE invests its pension assets.
As a former portfolio manager for Credit Suisse Group before joining PKE in 1991, Mr. Winkler is keenly aware that having full knowledge of how the pension fund operates should help external managers do their jobs better.
PKE's initiative took pension experts by surprise, coming especially from a defined benefit plan.
Trendsetter or an anomaly?
The question is: Will PKE be a trendsetter or an anomaly? Mr. Winkler thinks the fund's move will put pressure on other Swiss pension funds to follow suit.
Said Susan Douse, senior investment consultant at Watson Wyatt Worldwide, Redhill, England: "I'm sure it's the way they're going to go."
But Robert Ross, director at Frank Russell Co., London, disagreed. "I'm not sure why people would do it, to be honest." Participants might question why the fund retains an underperforming manager, he said.
The pension fund will display not only investment data, but also information on fund benefits and listings of fund-owned residential properties available for rent.
Fund officials have run into a technical snag that has briefly delayed the opening of the Web site. They are testing to make sure that personal financial data on participants, such as salary information, is safe from outsiders attempting to probe more deeply into PKE's computer system.
The site -- www.pke.ch -- will be updated quarterly to display the fund's asset allocation and manager mandates.
The data, which Mr. Winkler provided, paint a fascinating picture of the fund's investment strategy.
As of Sept. 30, the fund's asset mix was 41.8% equities, 27.2% bonds, 15.6% mortgages and 15.4% real estate.
Mr. Winkler does not break out the asset mix between domestic and international stocks because the fund largely takes a sectoral approach. Fund officials internally manage three-quarters of their total equity exposure in a highly concentrated portfolio of 40 multinational companies, such as Nestle SA or Anglo-Dutch consumer-products giant Unilever P.L.C.
A stock "can be Swiss, U.K. or Dutch. It doesn't matter in the long run," he said.
Since the multinational strategy started April 1, 1991, it has returned 23.3% on a compound-annualized basis, compared with the Morgan Stanley Capital International World Index return of 11.5%, based in Swiss francs.
In the first three quarters of 1997, the portfolio has returned 43.8% vs. 28.8% for the MSCI benchmark.
Specialist strategies adopted
During the past year, PKE officials started abandoning their external global equity strategy, which failed to keep pace with the multinational portfolio.
Instead, they have opted for specialist mandates fund officials cannot handle internally. With the exception of one manager -- an emerging markets mandate managed by SEI Investments, Oaks, Pa., started more than a year ago -- all have been put in place earlier this year.
For U.S. small-capitalization equities, the fund has SBC Brinson, Chicago, managing 43 million Swiss francs; Prudential Insurance Co. of America, Newark, N.J., 51 million francs; and Schroder, New York, 41 million francs, as of Sept. 30. (Each manager was allocated an additional 15 million francs Oct. 1 as a fourth, unnamed, U.S. small-cap manager was terminated.)
European small-cap managers are Fleming Investment Management Ltd., London, with 33 million francs, and Robeco Group, Rotterdam, with 37 million francs.
In addition to SEI for a global emerging markets equity brief, PKE uses Fleming for Eastern European equities. That mandate has just been raised to 50 million francs from 30 million francs.
For Asia-Pacific Basin (including Japan), Yamaichi Capital Management (Europe) Ltd. manages 31 million Swiss francs, while Nikko Capital Management (UK) Ltd. runs 30 million francs. While the contracts are with the managers' London offices, assets are run out of Tokyo and Singapore.
And for commodities, Zurich-based Orbitex, part of Altamira Management, manages 22 million francs.
Returns are revealing
Return data are striking. In the most notable disparity in returns, Robeco has returned 25.14% from February through September, compared with the HSBC James Capel Index (including U.K.) of 18.87%. In contrast, Fleming has returned only 11.93% during the same time period.
Fund officials expect to shortly name a manager for an additional 50 million franc emerging markets equity mandate, as well as hire a manager to run a 30 million franc European small-cap portfolio. Recommendations will go to the fund's board in December.
In addition, fund officials plan to award a 100 million franc global private equity mandate late this year or early next year, Mr. Winkler said.
Some 150 million francs in global equity and other portfolios will be liquidated to help fund the changes. Pension Portfolio Consulting AG, Zurich, is the fund's consultant.
PKE officials also internally manage their bond, mortgage and real estate portfolios.
The bond portfolio, which Mr. Winkler manages himself, has returned 3.2% for the nine months ended Sept. 30. That return is below the Swiss Bond Index's 3.5% return, but that's because Mr. Winkler has shortened its duration in the belief that interest rates are at their cyclical low. When rates rise, the portfolio will make up the difference, he said.
In the first three quarters, mortgages returned 3.11%, outperforming its 2.88% benchmark of the government bond yield plus 50 basis points.
On real estate, the fund has virtually matched its bogey, returning 4.3% vs. 4.31% for the benchmark of average 30-year inflation plus 200 basis points.
Since April 1991, the real estate portfolio has returned 5.65% on an annualized basis, slightly trailing the benchmark's 5.96% return. For mortgages, the fund has returned 5.51% a year during that period, outperforming the benchmark's 5.33% return.
Mr. Winkler's bond portfolio has returned 6.12% a year, compared with 4.95% for the benchmark.
PKE also has shifted its asset mix dramatically during Mr. Winkler's tenure. It boosted its equity exposure to 44% from 18%, in the process cutting back its real estate and mortgage exposure.
Since April 1993, when the fund updated its accounting systems, it has returned an annualized 12.71%, while Pictet & Cie.'s pension fund universe has returned 10.49%.
The shift has paid off for the fund. Assets now total 130% of liabilities. As a result, the board will consider reducing pension contributions to 10% from 15%. That means trimming employer contributions to 6% from 9% and employee contributions to 4% from 6%.
Plus, that level of surplus enables PKE officials to pursue a riskier strategy for the long run, Mr. Winkler said.