But perceptions have changed. Research by Expert Investor Europe indicates that – partly as a result of the historic low yields available on US and European sovereign debt, and diminished confidence in the Western financial system after the sub-prime and eurozone problems – many conservative fund selectors now favour emerging market equities and bonds over developed world securities.
The shift can be seen among the Zurich-based wealth managers, private banks and family offices our research team visited in late August. Concerns about political risk and rising inflation are leading this investor group to focus on wealth preservation – as shown by its appetite for gold (see graph 1).
• Swiss investors plan to reduce their exposure to Western government debt, in favour of developed Asia Pacific and E m sovereign bonds.
• They are also upbeat on corporate debt and likely to skew their allocations to investment grade rather than high yield securities
• Appetite for European equities is muted but US, emerging market and income-focused strategies will see growing demand.
• The Swiss National Bank’s foreign currency reserves rose to a record high of chf 429.3bn in September, reflecting its efforts to enforce its franc ceiling of 1.2 per euro.
• Swiss wealth manager Falcon Private Bank has agreed to acquire Clariden Leu (Europe), a subsidiary of Credit Suisse which offers services to private clients in emerging markets.
• Zurich and Geneva both feature in the top ten most competitive global financial centres, according to the 2012 Global Financial Centres Index, published by Z/Yen.
Appetite grows for developed Asia Pacific and EM bonds
Despite their risk-aversion, Swiss fund selectors are likely to move away from another long- established safe haven – Western government debt. More than two-thirds expect to reduce their US allocations during the next year, while half plan to lower their weightings to low-yielding securities from core eurozone nations such as Germany, and other EU economies (see graph 2). Although higher yields are available in the eurozone periphery, interviewees view the region as similarly unappealing on a risk/reward basis. Indeed, only Sweden is considered attractive within the European sovereign bond universe.
Further afield, fund selectors identify investment opportunities among the developed Asia Pacific nations – specifically Australia, New Zealand and Singapore. Allocating to bonds issued by these countries additionally provides a currency hedge against future euro/ franc weakness, they note. In contrast with their general lack of appetite for developed world sovereign bonds, about two-thirds of our interviewees expect to increase their emerging market government debt allocations (see graph 3).
Securities from high quality issuers are preferred
Swiss investors are also upbeat on corporate bonds, with two in five planning higher weightings to the broad asset class. In line with their conservative approach, fund selectors are likely to focus on investment grade (see graph 4) rather than riskier, high yield strategies. This goes against pan-European fund buying patterns this year – as well as the 2011 Zurich survey, which found that more than half of interviewees expected to increase their high yield weightings (see graph 5).
Investors shun Europe for US, EM and income strategies
Following positive net inflows for Swiss-registered equity funds in the first eight months of 2012 (see graph 6), future appetite for this asset class is likely to be subdued, according to interviewees. But they spy opportunities in the US and emerging markets (see graphs 7 and 8). Fund selectors say that, despite concerns over political uncertainty surrounding November’s presidential election, US stocks are attractive, and some expect to bolster their allocations from underweight to neutral.
In emerging markets, interviewees are most interested in firms able to tap into rising demand from increasingly- affluent developing world consumers. They also seek exposure to strong brands, particularly in southeast Asia, and are keen to learn more about opportunities in Latin America.
Investors are downbeat on European equities, meanwhile, with equal proportions expecting to increase and reduce their allocations (see graph 9). Concerns over the eurozone periphery are leading interviewees to skew their exposures towards Swiss and German stocks, and larger companies.
On equities more broadly, interviewees are interested in income-focused strategies, which they say offer attractive additional returns. They also note that it is difficult to find managers who can consistently add alpha, and many are allocating larger proportions of their portfolios to exchange traded funds. However, Swiss investors retain an overall preference for actively-managed vehicles.
Commodities and catastrophe bonds are in demand
Interviewees are sceptical on hedge funds, with one investor claiming that long/short strategies are often highly- correlated with equity markets, and therefore fail to provide diversification benefits. Fund selectors are also unconvinced on Ucits absolute return products, which they say are overly restricted in terms of the methods they can use, and are best suited to the fund lists of large banks.
Given Switzerland’s status as a commodity- trading hub, it is unsurprising to find appetite for this asset class, and half of investors plan to bolster their allocations. But while they are aware of the asset class’s benefits, they are unsure how best to access it – owing to concerns about liquidity. In their search for diversification, Swiss fund selectors are also interested in catastrophe bonds, which aim to transfer the remote risk of natural disasters from insurers to capital markets.