Stefan Beiner, Publica (Art by Edward Kinsella)Last Thursday morning, citizens in the Swiss capital city
wrapped up against the icy winter breeze and made their way to work. Most were
unaware of the whirlwind the country’s central bank had whipped up in financial
markets.
On January 14, the Swiss National Bank (SNB) announced it had removed a currency peg to the euro that had been in place for three years. As a result, the franc almost instantly appreciated by 39% against the euro.
Around the globe, banks and brokers were scrambling to pinpoint positions, to stem any losses, and to answer client phone calls. Twenty-four hours later, two online currency brokers would go bust, with a third—the world’s largest—watching its share price plummet; and titan investment banks with newly strengthened, robust risk management systems, would announce multi-million dollar losses.
However, in an office on Eigerstrasse in Berne, there was no panic. There was no scrambling to check positions, no desperate unwinding of holdings, no anxious phone calls.
“We expected something would change in the medium term,” says Stefan Beiner, head of asset management at the CHF 37 billion ($42.4 billion) Swiss public pension fund Publica. “During the last few months, the differences in fundamentals between the Eurozone and Switzerland have increased compared to September 2011 when the central bank introduced the cap.”
“We had been asked why we were paying to hedge when the SNB was doing it for us for free.” —Theodore Economou, CERN PensionOf course, Beiner and his team were not in on the decision by the SNB—a point he makes strongly—but they were ready for it.
“We were fully hedged against the G10 currencies,” Beiner tells CIO on Friday morning, as financial commentators scrabbled to make sense of the bank’s actions, “and have been for some time. Last year we would have been 3% better off had we not been, but we made this strategic decision and stuck to it.”
The decision was based on Publica’s belief that there were no risk premia to be earned in the medium term with currency exposure. Beiner outlined the pension’s plans a year ago to have a strategy highly directed by risk factors or premia.
Publica was not the only one to get it right. A two-hour train ride away in Geneva, the CHF 4 billion ($4.6 billion) CERN pension fund team was similarly unruffled. The fund was also 100% hedged.
“We had been asked why we were paying to hedge when the SNB was doing it for us for free,” says Theodore Economou, who transitions out of the CEO and CIO roles at the pension this month, “but we were doing it as a fundamental part of our portfolio construction.”
The CERN model looks to future, potential disrupting events and puts in place measures to counteract or take advantage of them despite not predicting outcomes.
But that the SNB’s move came as a surprise is something of
a… surprise to those managing these two pensions.
Theodore Economou, CERN Pension (Art by Chris Buzelli)
“We anticipated that the Eurozone was about to go through tumultuous volatility and uncertainty due the inherent contradictions in European Central Bank (ECB) policy,” says Economou.
There were two major warning bells ringing. The first was the Greek elections, which many predicted would have knock-on effects to the sovereign bond market. The ECB faced a tricky situation, CERN’s pension team believed, as either Greece would be allowed to change the terms of its bonds (effectively giving carte blanche to other struggling nations) or it would leave the Eurozone.
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The second was the announcement by the European Court of Justice that the ECB’s Outright Monetary Transactions programme was deemed legal. This paved the way for the region to either start a massive quantitative easing programme—which would hit its currency and those pegged to it—or face disagreement from one member state on the issue and risk tearing the group apart.
“It was the least worst decision that the SNB could make. They had to do it.” —Stefan Beiner, Publica PensionEither outcome of either of these points would be enough to cause huge upset in the Eurozone, the pension managers considered. So too, it seems, did the SNB.
“By retaining the peg, the SNB would drag Switzerland into the Eurozone—and the governor was aware of the potential broader implications,” says Economou, referring to the former governor’s fall from grace due in part to alleged impropriety around his wife’s currency trading. Despite no breach of regulations being found, there has been a publicity drive on the part of the SNB to get the population back onside.
“Independence is very important,” agrees Beiner. “It would have been very difficult for Switzerland to be alongside the ECB’s quantitative easing programme.”
Beiner and Economou admit it might not have been the perfect time for the peg to be removed and that the Swiss economy could now fall into recession, but they believe the country should work its way out relatively quickly. Moving swiftly and early, as the SNB has done, is better than dragging it out, they say.
“It will be tough on exports to the Eurozone,” says Beiner, “but the dollar has appreciated a lot so is close to levels seen about a year ago.”
And although it might be tough on home life, neither pension has a large concentration of Swiss equities due to their rejection of a home bias. This, however, is not a common approach in Switzerland.
“Many other Swiss pensions will have adhered to the standard default policy, which is not typically hedged and with a larger allocation to domestic equities,” said Economou, “and these will have experienced a hit.”
On the Thursday when Towers Watson estimated Swiss pensions lost an average 4%, CERN’s losses were contained to 0.27%.
Since the start of the financial crisis it has paid to be prepared—and those claiming they could not see the SNB’s decision coming were arguably not looking hard enough.
“It was the least worst decision that the SNB could make,” says Beiner. “They had to do it.”
And with that, the chat turns to holidays, pension conferences, and whether there will be snow at Davos. Those attending—many of the world’s greatest financial minds who didn’t predict the SNB’s move—will be paying enough to be there now so it should look pretty for them at least.
And for the record, Beiner and Economou are not on the guest list—but perhaps they will be next year.
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