Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. PENSION FUNDS
September 02, 2019 12:00 AM

Swiss fund CIO acting to thwart volatility and hold tight in downturn

Paulina Pielichata
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Gregoire Haenni
    Robert Tjalondo
    CPEG CIO Gregoire Haenni

    After securing a recapitalization plan, the Caisse de Prevoyance de l'Etat de Geneve is turning its focus to hedging market volatility risk and protecting the 14 billion Swiss francs ($16 billion) pension fund's rate of return, its CIO says.

    A fiscal package that voters approved on May 19 will raise CPEG's funding ratio to 75%, from 60%, allowing CIO Gregoire Haenni to turn his focus to modifying the fund's fixed-income portfolio to better manage the impact of growing bond market volatility.

    Current economic conditions could result in "the first time that we could have negative yields in the U.S.," Mr. Haenni said. "The U.S. yields contracted so much that if we see more easing (from central banks), we will see negative yields," he said.

    Mr. Haenni is also closely watching global equity markets, which he expects could see more volatility later this year amid an ongoing trade war between China and the U.S.

    "The volatility (resulting from trade wars) will not be resolved soon, Mr. Haenni said.

    As long as growth and company earnings offset risks such as Brexit or Italian populism, investors' portfolios are well-balanced, he said. But it could get rapidly worse, he noted.

    The Geneva canton fund, which was created in 2012, strategically invested 23.1% of its assets in international bonds and 4.5% in domestic bonds as of June 30, 2019. And like many European pension funds, CPEG is faced with the dilemma whether or not to pay to hold bonds in its 4 billion Swiss franc fixed-income portfolio. It's not an easy task with 10-year Swiss government bond yields trading lower in August at negative 1%.

    Mr. Haenni was able to shield the fund's overall portfolio from a slump in equity markets in late 2018 because he had rebuilt its fixed-income exposure. He started with adding more U.S. Treasuries to reach 8% exposure, from 7.4%, in the second half of 2018. The fund bought 10-year U.S. Treasuries at a 3.1% yield. CPEG's overall portfolio in 2018 fell only 2.6% as a result, compared to negative 3.2% recorded by Credit Suisse Pension Fund index, which tracks the performance of all Swiss pension funds.

    CPEG's analysis of different portfolio hedging techniques showed that government bonds, in general, are still the cheapest and still the most effective way to hedge a portfolio, he said.

    CPEG's models, drawn up in June 2017 as part of the recapitalization decision process, showed risks associated with investing in fixed income were higher than risks with equity strategies. "The models proved to be right, when the Federal Reserve started to raise rates," he said.

    Due to falling yields, Mr. Haenni said the fund is not a buyer currently. But the fund still targets a 11% allocation to non-Swiss government bonds.

    However, he added: "If the government bond market corrects, we will be buyers (again)."

    Mr. Haenni thinks government bonds also can offer protection in case of a pullback of equity markets. Otherwise, equities are the most obvious way to get compensated for risk, he said.

    "At some point we will buy more equity to deliver the expected return. We think the outlook is still positive based on resilient economic expansion, modestly rising corporate profits, and still-low interest rates," Mr. Haenni said. CPEG's strategic equity exposure was 31%. The rest of CPEG's assets are invested in real estate (30.4%), private equity (4.3%), cash (3.2%), inflation-linked securities (2.8%), and mortgages (1%), as of June 30.

    A rocky road

    As recently as March 2019, CPEG's funding ratio stood at 60%, exacerbated by unfunded legacy benefits of the two public funds that predated it. Those funds were merged, with the CPEG becoming operational in 2014.

    In the May 19 referendum, voters approved a recapitalization plan that will have the Geneva cantonal government contribute between 4 billion to 5 billion Swiss francs to the fund through a combination of cash and real estate. Also in that referendum, the citizens voted to keep the fund in a DB arrangement vs. converting to a defined contribution arrangement, with a higher employee contribution rate.

    The canton's contribution will boost the fund's funding ratio to 75% starting in 2020. Plan participants' benefits will not be altered after the fiscal package is applied.

    The changes come during a period of depressed yields, making it harder to chart a course forward. While Mr. Haenni said equity market volatility could augur a need for bond portfolios, other sources said investors should be concerned as some 20% of the global bond market now trades at negative yields.

    "Over July, nominal yields in particular fell by between 10 and 20 basis points across the curve, led by a deteriorating global outlook and increasing prospects of monetary easing," notes Niren Patel, investment strategist at Aviva Investors in London. Mr. Patel said: "Pension funds are having to work harder to generate the returns they need to meet their obligations. (For example, as) the entire bund curve is negative, investors are paying to lend to the German government for 30 years."

    Still, with yields lower and few signs that the inflation is picking up, Mr. Haenni said that in these circumstances European central banks could end up purchasing equity, similar to the actions taken by the Bank of Japan. "It is an inevitability," he said. "We are moving into a notion of fundamental performance," he said, adding that over time a collection of asset classes' yields are the biggest drivers of the portfolio's performance, rather than the appreciation of financial markets.

    No matter if central banks buy equities, he said, asset owners should be exposed to the asset class.

    "Assets are richly priced but it is different than in 2000," he said, noting: "We don't see any bubbles yet."

    Tweaks to fixed income

    Having resolved how to patch the deficit, CPEG is considering adding a green bonds allocation of 2% to its portfolio for the first time.

    For the new green bond portfolio, CPEG will search for external managers, which he said will have more flexibility than the fund itself to source green bonds.

    The fund executive is also planning to end the 50 million Swiss francs senior loans allocation due to concerns over weak loan covenants.

    "You'll see more of the (senior loan) funds struggling," Mr. Haenni warned, adding there were fewer higher-yielding options at investors' disposal.

    Related Articles
    Swiss stocks trade smoothly on first day without EU recognition
    Preqin: More institutional investors think equity markets have peaked
    Draghi signals ‘worse and worse' outlook warrants ECB stimulus
    Recommended for You
    PRINT_180419916_AR_0_XLJYAJRGZSKN.jpg
    MassPRIM chief strategy officer departs
    close-up of japanese currency
    Japan's GPIF records 5.4% gain for fiscal year amid tumultuous markets
    Murphy_Phil_i.jpg
    New Jersey budget includes $6.8 billion pension contribution
    A Good Time for Trend Following
    Sponsored Content: A Good Time for Trend Following

    Reader Poll

    June 6, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Nearing the finish line: Ideas on end-state investing for corporate DB plans
    The Meaning of "Portfolio Intelligence"
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Crossroads: Politics, Inflation, & Bonds
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    July 4, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit