Zurich PFF discusses interest rates and currency risks

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With more than 45 delegates attending, the InvestmentEurope Pension Fund Forum held at the Park Hyatt Hotel in Zurich has now kicked off.

Debates at the half-day event were dominated by the Swiss National Bank move to abandon the fixed exchange rate between Euro and Swiss Franc, with a a severe impact on Swiss pension funds. “Investing with low interest rates and a strong Franc” was the key theme of the event.

The presentations were kicked off by Swiss journalist and host Andreas Valda, who highlighted the growing importance of hedging currency risks.

Lukas Riesen, head of Asset Liability Management and partner at PPCmetrics said that Swiss pension funds tend to hedge currency risks exclusively on the fixed income side, while they tend to neglect risks on the equity side. He concluded that rather than focussing on a specific asset class per se, investors should always consider currency risks within the overall portfolio.

John Gentry, senior vice president, senior portfolio manager and head of the Corporate Fixed Income Group at Federated argued that if Pension Funds are overfunded, they tend to neglect their core operations. He also highlighted growing concerns that inflation pressures have built up. According to Gentry, Treasury Inflation Protected Securities (TIPS) can offer an interesting opportunity to anticipate long term inflation risks.

His presentation was followed by a panel debate on currency risks including Dominik Irninger, head of Investments at SBB Pension Fund in Bern; Olaf Meyer, president of the foundation board and member of the Investment Committee at Profond, Thalwil; Daniel Dubach, Investment and Pension expert at Zurich-based Dubach Adivsory GmbH; Ueli Mettler head of investment consulting and partner at c-alm, St Gallen and Lukas Riesen. The panel agreed that while the importance of hedging currency risks has been broadly accepted by Swiss pension funds, its real impact on returns should be assessed carefully, taking into account the time horizon and historical context in which it is measured.

Volker Bieta, doctor in financial mathematics and game theory followed up with a critical assessment of quantitative methods in risk management. He argued that the notion of objectivity in quantitative methods is naïve and fails to acknowledge that stochastic methods cannot be precise.

Torsten Hinrichs, CEO at Scope Rating Agency criticised the oligopolistic nature of Anglo-Saxon rating agencies and argued in favour of a European alternatives, which should take the complexities of the local market into account. Hinrichs stressed that rating agencies should return from  a mere focus on spreadsheets towards a more qualitative analysis.

Blanca König (pictured), director and member of the Fixed Income Portfolio Management team at BlackRock’s ETF brand iShares addressed liquidity in the fixed income sector. “Liquidity risks will have to be measured differently and will have to be compensated with different products” she argued. She highlighted that the volume of primary dealer positions in the fixed income sector increased dramatically ahead of the 2008 crisis and collapsed in the aftermath.vKönig argued that trading conditions in the fixed income market have been altered dramatically, with crucial impacts on liquidity. She concluded that a fundamental paradigm shift is required, ETF’s could play a crucial role in this changing environment, König concluded.

Further updates on the event can be found on Twitter under the hastag #PFFSwitzerland and in the next issue of InvestmentEurope.

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