Iwan Deplazes, the current market environment is disappointing for a private investor, to put it mildly. What’s your view as a professional investor?
Iwan Deplazes: It's certainly become more demanding for us as well. No one can be happy about a 12 percent decline in a broadly diversified mixed portfolio. We all know that there’s a war going on and supply chains are weighing on markets, not to mention inflation. We also have just emerged from a world where interest rates have only been going downhill for almost 15 years. Of course, many investors have been spoiled. We were even talking about a new normal.
Now the new normal looks different: isn't it more the case that we’re returning to the old normal where interest rates are positive?
(laughs) Yes, but what’s normal? 4 percent inflation – you’d have to go quite far back in Swiss economic history to encounter that again.
Inflation and an interest rate shock: what are you doing to address this issue?
Initially, it has meant losses on practically all asset classes. But, as can be seen in the US in particular, rising interest rates are also creating new opportunities – US government bonds are again trading at a yield of almost 4 percent. As painful as this correction is, a higher interest rate environment means that assets are recovering value while interest-free savings in an inflationary environment are a destruction of value.
What are institutional investors such as pension funds currently doing? Waiting around and having a tea?
Not at all. They’re also feeling the fall in bond and share prices of course, and this often also leads to reallocations. At the same time, however, bonds are opening up new investment possibilities which pension funds have been lacking for years. Institutional investors would do well to keep a close eye on the markets and stay vigilant so they don't miss the right entry point.
Pension funds must also always keep an eye on their liabilities.
Absolutely. In the second quarter of 2022, private-law pension funds saw a sharp decline in their reserves. According to our Pension Funds Monitor, these fell by an average of 9.3 percentage points to 7.8 percent. One problem is therefore decreasing value fluctuation reserves, and this affects funds’ risk capacity. As at the end of June 2022, value fluctuation reserves were again significantly below the average target value of 18 percent. So they've moved significantly away from the record highs of over 20% at the end of 2021.