BADEN, Switzerland -- ABB Vorsorge AG is shaking up the sleepy Swiss pension market, offering money management and administration for medium-sized pension funds at low fees.
"The Swiss market is, let's put it mildly, rather dull," said Christoph Schenk, ABB Vorsorge's chief executive officer. Traditionally, midsized funds could choose pooled funds controlled by insurance companies and banks but could do little to boost performance or lower costs, he said.
Started Jan. 1, the newly created money manager for ABB AG, the Swiss half of Swedish-Swiss engineering firm Asea Brown Boveri Ltd., already has garnered four mandates totaling 72 million Swiss francs ($47 million). Wins include a real estate brief from Shell's Swiss pension fund and a private equity mandate from the City of Zurich Pension Fund. Total assets, consisting largely of ABB pension assets, are 5.3 billion Swiss francs.
Every mandate the fund manager wins helps reduce the parent company's pension costs. Already, the manager has surpassed its goal of reducing administrative costs by 15% in its first three years of operation. Costs have shrunk by one-sixth, dropping to 3 million Swiss francs from 3.6 million Swiss francs.
The medium-term goal, Mr. Schenk said, is for the money management unit to become cost-free to the company. "The dream is a contribution-free pension fund," he said.
Currently, the company contributes about 130 million Swiss francs annually to the company's defined contribution retirement plans. (In Switzerland, even defined contribution plans are required to maintain reserves, making them closer to hybrid vehicles.)
Numerous U.S. pension funds have offered investment services to other institutional investors for some time, with varying degrees of success. AMR Corp., Owens-Illinois Inc.'s Harbor Funds and GE Investments have been among the most successful, while General Motors Investment Management Corp. is gearing up to offer investment services.
In Europe, pension funds moving into money management is a newer phenomenon, led by a few funds such as Philips' Electronics NV's "Schootse Poort" BV subsidiary.
Long known as an innovator in Swiss pension circles, ABB was only the second Swiss fund to offer individual investment choice to senior managers in a defined contribution plan.
Now, ABB managers have packaged their money management and administrative services for other funds. Despite awards from major Swiss pension funds, the firm's target market is Swiss medium-sized companies, with 200-plus employees, who now have little choice in selecting managers.
"The point is," Mr. Schenk said, "what we see here is what you have seen in the U.S., the tendency to outsource certain tasks out of the company."
ABB offers a choice of 11 investment funds, each adhering to a different asset class. Nearly all of the funds are managed passively by external managers, so other pension funds are relying on ABB's knowledge and experience in selecting money managers.
"What we see is, it doesn't pay off to be an active manager. Even if you are able to establish an alpha, it goes away with transaction and other costs," said Daniel Dubach, ABB's chief investment officer.
For publicly traded securities, the only exceptions is for emerging-markets stocks run by J.P. Morgan Investment Management Inc., London, although even there ABB officials lean toward going to an indexed approach, he said.
Internally, ABB manages a mortgage program for plan participants, but that might die out over time, he said.
But the star of the program, Mr. Dubach said, has been the private equity program that is run by Frank Russell Co., Tacoma, Wash. ABB offers a North American private equity option; it added a global private equity fund in April 1998. ABB was Russell's first institutional fund-of-funds clients. Russell officials now are exploring options to expand the program to a broader client case, a Russell spokesman said.
The firm's asset mix now largely reflects ABB's own pension assets. Swiss bonds are the largest asset class, at 36.4% of assets, followed by Swiss real estate at 16.3%; global equities, 17.8%; Swiss equities, 15.4%; foreign bonds, 5.8%; emerging markets, 3%; private equity, 4%; and money market, 1.3%.
ABB officials also will work with outside experts to provide asset/ liability modeling for clients. And a full range of administrative and record-keeping services is available. Global custody is provided by Bank Julius Baer, Zurich.
ABB also is offering fees almost three times cheaper than those of its competitors, even though it charges both front-end and back-end loads. The difference is that ABB is not adding on hidden costs, such as trading and custody, but providing an all-inclusive fee. "Unbundling is key," Mr. Schenk said.
Fees are flat. For example, for a global equities portfolio, ABB charges an entry fee of 50 basis points and another 50 basis point exit fee, on top of a 20 basis point annual management fee. That compares favorably for medium-sized funds, although it would not be competitive for larger accounts.
ABB's unbundling of fees and transparency of costs also have made it tough for ABB to find distribution partners. The firm, however, has recently inked a deal with Neue Aargauer Bank, a unit of Credit Suisse AG, to market to smaller clients.