For Migros, Real Assets Are the Antidote to Negative Rates

A few years ago a Swiss pension manager who generated a 1.6 percent return would probably be looking for a new job. Not after the events of last year, though: In January 2015 the Swiss National Bank stunned investors by abandoning its exchange rate ceiling, causing the Swiss franc to soar by more than 20 percent against the euro, stocks to drop by 15 percent and Swiss bond yields to dive deep into negative territory.

The devaluation was a rude shock to Adrian Ryser, head of asset management at the Sf21 billion ($21.8 billion) pension fund of Migros, the supermarket chain that’s Switzerland’s largest retailer. The fund hadn’t hedged much of the currency exposure on its international equities, but it since has put hedges on roughly half of its Sf4.7 billion allocation. “We want to invest abroad, but not in the currency,” Ryser explains.

Negative rates are a tougher challenge. The decline in rates helped Migros generate a 3.7 percent return on Swiss government bonds last year, but with yields so low the fund hasn’t bought a fresh piece of Confederation paper in more than a year. Like other asset owners, Ryser and his ten-person team are looking for fixed-income alternatives that offer some real yield. That means more direct lending (4.1 percent of the portfolio); shifting to more triple-B exposure in the corporate bond book, compared with the fund’s traditional double-A appetite; and adding to Migros’s hefty 30 percent allocation to real estate. “Real assets are the only performing assets,” says Ryser, 54. “Current interest rate levels push us in this direction. We know it’s risky.” The fund’s return last year trailed its benchmark, which was up 2 percent, but the performance was impressive for a year in which many Swiss pensions sported minus signs. Vigilance on cost explains some of the result. The retailer is a cooperative that competes largely on cost, and the pension fund has a similar ethos, managing 85 percent of the portfolio internally. Ryser has the chops for the job, having traded interest rate derivatives at UBS in the 1990s and run Migros’s treasury for nine years before moving to the pension fund in 2010.

“We want to do our investments ourselves,” he says. “We don’t have any consultants. We make our own decisions. We have to stand and explain them.”

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