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July 26, 1999 01:00 AM

WORLDLY VIEW: NESTLE TAKES GLOBAL TOUCH WITH ASSETS

Joel Chernoff
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    VEVEY, Switzerland -- From stocks to macro funds, Nestle S.A.'s pension fund is blending a powerful mix of investments.

    While most Swiss pension funds are heavily weighted in fixed-income investments, the 6.5 billion Swiss franc ($4.1 billion) Nestle fund has more than 70% of its assets in equity-related investments -- stocks, real estate and alternative investments.

    And while most Swiss funds are invested domestically, barely more than 40% of Nestle's Swiss fund is invested at home.

    The result is a very multinational approach by one of the world's truly multinational companies -- some 98% of Nestle's sales come from abroad. And the fund has performed extremely well, earning a compound annualized return of 9.9% for the five years ended Dec. 31, 1998. The return is 10.2% when real estate is excluded, compared with an average ex-real estate return of 7.5% for Swiss private and public funded plans as measured by Watson Wyatt Worldwide, Zurich.

    While there does not yet exist a pure peer universe in Switzerland, Nestle's performance should place the fund -- which is 80% internally managed -- in the first decile of Swiss pension funds. And all of this at a cost of between one and two basis points a year for the internally managed portion, and just more than five basis points on a gross basis, figured Jean-Pierre Steiner, pension fund managing director.

    The job of managing the Swiss fund falls on the shoulders of Mr. Steiner and his team of eight investment professionals.

    In a second role as corporate pension and insurance director, Mr. Steiner also is responsible for overseeing Nestle's nearly three dozen pension funds -- with almost 20 billion Swiss francs in assets -- around the world. Nearly two-thirds of the assets, however, are held in four big funds. Besides the Swiss fund, there are the L1.8 billion ($2.8 billion) British fund, the $1.8 billion U.S. fund, and the 1.6 billion deutsche mark ($900 million) German fund.

    As if that weren't enough to do, last January Mr. Steiner also became responsible for insurance and risk management for the entire company, trying to set up overall risk management policies for the multinational company.

    The Swiss fund

    Nestle's Swiss pension fund has taken an increasingly aggressive investment posture during the 1990s. As far back as 1993, an asset/liability study enabled the fund to invest up to 60% of assets in equities. That exceeds the Swiss legal cap of 50% in stocks, but sophisticated Swiss pension funds are allowed to surpass the limit if the move can be justified.

    Now, Nestle's target equity allocation is 50% in stocks, of which about two-fifths is indexed. Nestle had moved to a Euroland plus Switzerland definition of the domestic market fairly early. Of the 3.25 billion Swiss franc equity exposure, half is invested in Euroland and Swiss stocks, roughly even split between the two.

    The reason for using the broadened area as the domestic asset class is simple: with the Swiss market heavily concentrated in about six stocks, a large weighting in Swiss-listed companies would result in a big bet on the pharmaceutical sector, Mr. Steiner said. What's more, the Swiss franc has closely tracked the euro since its inception and the deutsche mark before, creating relatively little currency risk.

    For its non-domestic stock investments, Nestle uses an unusual hybrid benchmark weighted one-third toward gross domestic product and two-thirds toward market-cap weightings. Using solely a market-cap weighting, as many pension funds do, tends to emphasize the most expensive stocks, while a purely GDP-weighted benchmark also would be tough to implement. "You can't buy Chinese stocks in proportion to the country GDP weight," Mr. Steiner explained.

    Nestle's fixed-income portfolio, at 29% of total assets, is split 50-50 between domestic and foreign bonds. The foreign bond benchmark, however, is fully hedged. Mr. Steiner has asked the pension fund board to consider investing in corporate bonds, first in the United States and then eventually in European issues as that market develops.

    While four-fifths of the Swiss fund is managed internally, Mr. Steiner does use external managers for specialist portfolios. For example, the fund employs small-cap managers for U.S. and European portfolios. The fund had terminated a Japanese small-cap manager as Japanese equities declined in value and Japan became worth only 3.5% of total assets. He declined to name the fund's external managers.

    Alternative investments

    Since the fall of 1997, the fund also has plunged into alternative investments. Fund officials have allocated 6% of assets to the area, split evenly between hedge funds and private equities.

    In fact, the Nestle fund has set up a separate company, Unigestion Asset Management Guernsey, to select hedge-fund managers. The idea is to provide positive returns and low correlations with equities, he said.

    So far, that has been successful. Even when Long Term Capital Management ran into problems last year and equity markets dropped between 10% and 20%, Nestle's hedge fund managers did not lose money.

    Most of the investments are with macro traders, including Tudor Jones, Greenwich, Conn.; and Louis, Bacon & Moore, New York. There also are investments in market-neutral, currency-trading and trend-following funds.

    In private equities, the fund is fully committed to 11 limited partnerships invested in the United States and Europe, including major funds run by The Blackstone Group, HarbourVest Partners LLC, Cinven Ltd. and CVC Capital Partners Ltd. It also is invested in an Asian fund run by Prudential Asset Management Asia.

    Mr. Steiner increasingly has been lending his expertise to Nestle's other pension funds spread around the world.

    Two years ago, he hired Stephan Chauderna as an internal consultant to advise Nestle's other funds. The fund also has issued guidance on investment matters on such topics as asset/liability management, manager selection, tactical asset allocation and derivatives.

    Officials gather

    And at least every three years, Nestle's chief financial officers and treasurers from around the world gather for internal meetings on investment issues. More focused meetings, on such topics as European economic and monetary union, take place on a more regular basis.

    In addition, either group CFO Mario Corti, Mr. Steiner or one of his two deputies serves as a trustee on all major Nestle trustee boards.

    Like some other multinational pension funds, Nestle has established a preferred provider list for external money managers to handle specialized mandates. While some funds initially were hesitant about using managers on the list, they have been embracing the concept, especially during the past 12 months, Mr. Steiner said.

    While declining to reveal names of the preferred managers, he noted international equities are divided into regional mandates. Preferred managers also exist for small-cap and emerging markets portfolios, and Nestle officials also are considering creating a hedge-fund manager list.

    Nestle's Swiss fund also has started managing money for some of the company's other funds. Nestle's Paris-based fund is almost entirely managed out of Vevey.

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