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Cantonal banks can look back on a long history. For more than 200 years, they have been formative institutions in the Swiss banking landscape. Originally founded as development banks for crafts and agriculture, they still have a special legal status and are majority-owned by the cantons. Are they gathering dust? Are cantonal banks no longer in keeping with the times? The answer is clearly no. Cantonal banks combine tradition, security and future-oriented change. They have transformed themselves from specific development banks to modern universal banks that prove themselves with a strong market presence in a highly competitive environment. They provide the population with nationwide access to financial services such as payment transactions, and, through their mortgage business, help more private individuals to own their own homes than any other banking group. Furthermore, cantonal banks enable companies to conduct business efficiently and to grow economically through investment. Measured in terms of the balance sheet total of all banks domiciled in Switzerland, cantonal banks hold the highest share of domestic business at around 30% while 47% of the Swiss population trust a cantonal bank as a customer. The value of security Security is a strong asset of cantonal banks. The state guarantee is one element, but not the decisive one. Rather, the long-term oriented, profitable business model with comprehensible risks creates a high degree of stability. In terms of capitalisation and liquidity, cantonal banks are among the safest banks in Switzerland. As consistent and reliable partners, they are able to secure sufficient access to finance for their clients, even under the currently more difficult framework conditions. The cumulative annual profit at member institutions has been rising steadily for years. In 2020, it amounted to CHF 3.1bn. The cantons and municipalities as owners benefit significantly from the stable earnings situation of cantonal banks. In 2020, they received distributions of CHF 1.7bn in the form of profit transfers, compensation for equity capital, dividends, compensation for the state guarantee and taxes. Stability, trust and local roots are factors in the success of cantonal banks. These have proven themselves even in times of crisis, and they are the solid foundation on which the cantonal banks meet current and future challenges.
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Macroeconomic fears are understandable but exaggerated, says Basellandschaftliche Kantonalbank (BLKB) CIO Fabienne Hockenjos, who expects Switzerland to overcome the consequences of the pandemic in 2022. ‘Basically, we are in a very positive environment. I expect a slowdown in growth from here, and the economic momentum is currently declining. However, the stagflation fears that are circulating have no lasting justification. In my opinion, they are exaggerated.’ In her view, estimates for growth have been a little too optimistic in recent months. Issues like supply bottlenecks and delays have dampened optimism, but potential growth remains above average for next year. Price pressure in commodities, metals and semi-finished goods is still a major issue for the next few quarters, while supply difficulties could pose problems, but there are unlikely to be big setbacks. On equity portfolios, Hockenjos says she built up a strong position in industrial securities at the beginning of the year. ‘Towards the middle of the year, we took some profits in industrials, around the peak of the economic optimism and "taking chips off the table”.' Hockenjos adds that she is not necessarily wary of equity markets at this stage, but the euphoria is waning. The driving factors, such as earnings and sales, are weakening, and the sector is likely to face challenges in the coming months. But in the broader view, the economic upswing remains intact and she thinks market corrections could present buying opportunities. A resilient market In her view these dynamics highlight the defensive character of the Swiss market because they see increasing volatility returning. Consumer cyclicals still offer attractive opportunities, she adds. Hockenjos says the Swiss stock market benefits from the global nature of its constituents. ‘If you look at the sales regions of Novartis, Nestlé and Roche, you see globalised business models. The severity of the reaction to the exogenous crisis of Evergrande in September, for example, surprised us, but it is also one of the reasons why we then accumulated positions in Swiss defensive stocks. This part of the market has by no means lost its quality, and some securities have been excessively punished.’ Swiss industrials appear well positioned. The Swiss purchasing manager index is still relatively strong compared with other markets. The exposure of the Swiss index is equal to that of its global equivalent but it is much more defensive due to sector composition, Hockenjos says.
Bargain hunting She says buying opportunities keep showing up: ‘Novartis has new plans for the sale or restructure of Sandoz and the unbundling of the Roche stake. Nestlé reported very strong Q3 results. Roche continues to benefit from Covid-19 testing issues and will see further support from the upcoming cancellation of the repurchased shares from Novartis.’ Hockenjos says financial stocks are likely to become more interesting for investors again in view of a rise in interest rates and the steepening of the yield curve, even though she is currently underweight large banks and prefers alternatives. ‘‘Among Swiss stocks, we prefer Partners Group, for example, a company that will profit further from the low interest rate environment and the strong shift into the sector of alternative investments.’ ‘Insurance companies are also on our buy list, they are in part more interesting than big banks. We believe pharma companies have some catching up to do, so we upped our exposure. We invest in cyclical consumer goods,’ she says. ‘We are still finding promising investments in stocks from the basic materials sector, especially in view of the above-mentioned increase in activity in infrastructure. In the medium term, Sika and Holcim are likely to benefit.’ Green fingers When it comes to Europe’s Green Deal and the definition of sustainability rules, Hockenjos says: ‘The EU regulators may have defined the topic too narrowly. Greenwashing is and will remain a hot topic of discussion. Consumer and investor protection is important. Some of the EU's regulations seem restrictive and too detailed; I hope that Switzerland will find a good middle ground. ‘I believe that we as a financial industry are not doing ourselves any favours if we do not take investor protection into account sufficiently. There has been an inflationary use of the terms ‘‘sustainability’’, ‘‘impact’’ and ‘‘net zero’’, the danger of greenwashing is increasing immensely.’ On the subject of asset allocation and sustainability Hockenjos says: ‘We have taken a holistic approach to the topic of sustainability and sustainable development goals. We see a consideration of sustainability as part of our fiduciary duty. It helps us as an additional risk filter in our stock selection. Integrating ESG analysis into the selection process helps us build portfolios with improved risk-return results.’
Thinking thematically Just as ESG investing has undergone a boom in recent years, so has thematic investing. ‘Investments in thematics are important, they are an extremely interesting opportunity to complement diversified strategies and to reflect individual needs and beliefs. I am a strong fan of core-satellite investments and I believe that in a time of climate discussions, an exciting element in asset allocation is the fact that clients can express themselves through investment vehicles. Impact investing and thematics are investment principles that have a great future,' Hockenjos says. ‘A clear core investment should be well balanced and complemented by investments in thematics. For example, an infrastructure investment mandate can tap single stocks such as ABB, Holcim & Siemens and be supplemented by shares in a climate equity basket product, where the focus is on solution providers. Such positioning is well accepted by our customers.’ Future challenges One topic which has provoked debate in the media is an agreement by most countries that corporation tax should be a minimum of 15%. ‘I think the likelihood of a coordinated tax law for global technology and digital companies is relatively high, we've never been that far before. We have a good chance of achieving a solution this time,’ Hockenjos says. She also takes inspiration from the strong investment climate for Swiss high-tech and venture activity: ‘There are a lot of investments in the area of technology and fintech. BLKB is also very much involved with these innovative topics, the use of new technologies and the use of digital applications in our group has increased significantly.’ Through the founding of its subsidiary Radicant, BLKB has shown that the move towards becoming more digital is a step in the right direction. Starting in 2022, Radicant will offer personalised advisory and a broad variety of sustainable investment solutions. With regards to the fintechs’ impact on the asset management and advisory business Hockenjos says: ‘We offer a robo adviser, although experience has shown that clients mostly prefer a kind of hybrid service. This means that although a robo advisor mandate is being run, the clients can still fall back on an advisory service. The clients appreciate this model.’
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On the first Sunday of Lent, there are many bonfires in the canton of Basel-Landschaft. Since the 1920s, when it was launched by a group of gymnasts, the Chienbäse parade has taken place in the capital Liestal. Large fiery torches made from pine wood are carried through the town to the sound of drumming. Wagons are loaded with burning wood and children carry homemade torches. The burning carts run through the city gate and are taken on a tour until they are extinguished.
‘Usually at my age, 55, people wish they had taken more risks, although I would not say that to my own children,’ says Sandro Merino, CIO of Basler Kantonalbank (BKB). ‘Intelligent risk does not mean you act stupidly, it means you should try something new and put yourself in a position where you might get lucky.’ It is advice he shares with his staff, even in circumstances when one might not expect him to. ‘I have occasionally told my employees: “You are talented, but I cannot match your potential to a role we have available now. You should leave us, and go to a big player in Zurich or London.’’ I say this because I know in five years, they will leave anyway, and regret not having done it earlier. But if I say this now, they might come back in seven years. When that person is talking to another young person, they will say it is a great team and you should join them. If you are transparent and you want to develop people, either in-house or outside, you will benefit.’ In an environment of increasingly flexible working patterns, Merino says it is also valuable to support employees in learning new skills. ‘Someone is studying data science, and still working 20% with us, which he is very happy about. If he remains with us in the future, he will have a dynamic new area of knowledge.’ Merino himself has a very specific skill: until the age of 34, he was a professional mathematician, and still occasionally publishes papers. ‘I think I have a sixth sense for whether an argument is logically incorrect, but that is only moderately helpful.’
Streamlined success Merino acknowledges some people might want to work in more international banks, but he says he learnt the value of being agile when he worked at a small asset manager. ‘We were seven people managing CHF 2bn. After working at UBS, running an asset manager with only seven people felt like a miracle. It was an eye-opener that you don’t need scale in everything you do. If you have 50 people rather than two making a decision, egos can get in the way, which complicates it.’ This sense of flexibility is something he has taken with him to BKB. ‘I enjoy the agility, the clear mission, and the trust. My team and I are fully responsible for the investment results, and I like this clarity. When we make an investment decision, it is done in the afternoon, and implemented by noon the next day.’ There are about 50 people working in asset management at BKB. Merino says one benefit of working at a smaller company is that he can personally check through every single fund on offer to their customers, of which there are about 150. Responsibility for selecting funds is shared across a 14-person team, and the work takes up the equivalent of four full-time jobs. A one digit billion number is allocated to third-party funds. ‘My role is to review the proposals, but I have ultimate responsibility for the quality of the list.’ He does not assess its quality according to how famous the managers are. ‘We don’t believe in star managers, we think it is hype created in the big financial centres.’ Merino says he is not daunted by competing with larger firms, even for institutional business. ‘We have a small but growing book of about 140 institutional clients with a volume of CHF 3bn. Being able to satisfy these standards keeps us awake, and also demonstrates to private clients that we can compete at this level.’ Having a higher net worth may make it easier to diversify across a wider range of different investments. However, Merino says that ultra-wealthy clients do not have access to better funds than other investors. ‘You cannot buy better quality funds with higher investment volumes, even if you might get a different price for the share class.’ When it comes to alternatives, BKB does need to use partners. Merino says having clients with an average investment volume of CHF 500,000, means it isn’t worth having this expertise in-house. ‘We do need a different process to find the best-in-class hedge funds, private equity or infrastructure offerings, so we use specialised consulting firms, which we monitor.’
Talking tradition The firm also has a local spirit, which he believes has an appeal to staff. ‘I think we have more trust in the employer, and you have many people who are rooted to the region.’ This sense of regional heritage also helps to attract clients. ‘We are a 125-year-old institution, all deposits are government guaranteed and we have a AA+ credit rating. We are a very boring, stable institution, and we don’t have major scandals in the press. I think clients who have been with us for a few years find out we are able to compete with the larger players. It’s hard for us to convince people who have never banked with us, but it does help when competitors don’t do well.’ As well as the likes of UBS, BKB also has to compete with other cantonal banks, for example neighbour Basellandschaftliche Kantonalbank. ‘It’s not fierce competition, they are related to us. We work pretty closely together on a strategic level and we don’t have secrets or try to hide ourselves from other cantonal banks.’ However, there is one thing which makes BKB stand out from its cantonal siblings. ‘No other cantonal bank has another bank in the group that is active in the whole of Switzerland, which we have with Bank Cler. We have two drivers of growth. One is the limited geographical area, which means it is natural to try to find a way to expand. The other is that banks of the future need a multi-channel digital dialogue, and it doesn’t make sense to build a digital bank for a small geographic area.’ In fact, Merino thinks the different mentality in Basel can help it differentiate its product from multinational competitors. ‘Basel is a region that is underestimated on the global scale. It is not like Milan, Paris or Frankfurt, but this creates a different culture which may look more towards long-term success. We are growing in asset volumes, and I think it is proof that our approach is more quiet, systematic, long term and is paying off.’
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The Basel Carnival, or Dame Fasnacht as it is known locally, is three days long. This is the largest carnival in Switzerland, and is on Unesco’s Lists of Intangible Cultural Heritage. It starts on the Monday following Ash Wednesday at 4am in the dark, at which point hand painted lanterns are lit to illuminate the city. Thousands of pipers and drummers march through the city until 4am on Thursday morning. The next event starts on 7 March 2022.
As its name implies, Banque Cantonale de Genève (BCGE), also known as Geneva Cantonal Bank, has close ties to the city, but the sheer extent to which they are intertwined might surprise you. Constantino Cancela, head of its asset management division, says: ‘One company out of three in the canton has a relationship with us and almost a third of the population living in Geneva has a relationship with us.’ Nevertheless, the influx of new clients continues. Since December 2020, an additional 255 companies have joined the bank, bringing the total to 20,864 businesses. ‘It is part of our mission to help develop the economy of the canton of Geneva,’ Cancela says. According to BCGE’s 2021 half-year results, the bank has granted loans worth CHF 18.2bn to companies and private individuals. ‘We play an important role in financing, savings and also real estate, not only for private clients and corporates but also for public entities,’ he says. Analysis and selection Cancela heads the asset management division, which is divided into three pillars. ‘The asset management covers everything to do with managing assets on behalf of our clients, from forecasts to portfolios. It is the largest of the three by number of employees; we have 20 staff in Geneva and four in Zurich,’ he says. The other two pillars are wealth solutions, which covers wealth planning for clients, and sales. ‘Starting from an analysis of macro and micro factors we go on to analyse products and select the best,’ he says. ‘Then there is the management of the portfolios themselves. We manage around 6,200,’ he says. This includes 37 funds grouped under the name ‘Synchrony’. ‘Today the funds represent around CHF 3.8bn,’ he says. When it comes to fund selection, Cancela says they look at long-only equity managers globally. ‘We want them to have a very active approach, no passives, no ETFs. The people we select generally specialise in one region, we do not base the choice on specific sectors. The idea is that when we allocate money, we follow a top-down approach based on the different regions of the world we want in our baskets. This is why we do not have any global funds for example,’ he says. Cancela says transparency is key to his selection process. ‘We want to understand where performance came from during different market phases,’ he adds. As well as the due diligence process, he says he asks about the people who manage the fund, its history, style, figures and the holdings.
Results In 2021, the bank increased assets under management and administration by 5.1% to CHF 33.4bn compared with the end of 2020. Equity capital also grew to CHF 1.7bn. In addition, the bank increased revenues by 12%, which all its business lines contributed to. ‘For the portion of assets managed by the bank, we benefitted from growing markets in the first half of 2021,’ Cancela says. ‘In more general terms, we benefitted from private and institutional clients bringing their money in. The fact that we are Swiss and a cantonal bank makes us a safe place and clients like it,’ he says. Despite the results, Cancela says: ‘It is a very competitive market, it is difficult to gain market share.’ According to the Geneva Financial Center, there are 92 banks in Geneva.
Not just local BCGE has international ties too. The bank’s main presence outside of Switzerland is its French subsidiary. ‘It was set up more than 28 years ago and it specialises in financing real estate and private banking,’ Cancela says. The bank also has offices in Dubai and Hong Kong, which are mostly linked to its activities in trade finance. ‘We wanted to be ready to help our clients here in Geneva to do business in this part of the world. To do that, we need well-developed banking resources in these places.’ With 400 commodity trading companies, according to the Geneva Financial Center, the city plays an important role in this field. The bank does not just have an international presence when it comes to offices, it has international clients too. ‘Around 30% of our revenues are denominated in dollars and euros,’ he says. Outlook ‘We believe equity markets have potential to grow a little because the economy is recovering, the results of most companies are good and there are not many alternatives. The volatility of the past few weeks has not changed our opinion on this,’ Cancela says. At the time of writing, he allocates about 40% to US equity, 33% to Europe (excluding Switzerland), 16% to Switzerland and 11% to the rest of the world. When it comes to fixed income, Cancela expects interest rates to remain low and even negative in certain areas. ‘If we take our balanced mandate, we have around 46% in equities, around 15%-16% in cash and the rest in bonds,’ he says. Zooming in on Switzerland, he expects the economy to grow by around 3.3% this year and around 3% next year, with Geneva above the national average. ‘For Geneva, which is far more international than other parts of Switzerland, our forecast for this year is 4% GDP growth and 3.5% for next year,’ he says.
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In December Geneva celebrates the Fête de l'Escalade, which commemorates the brave citizens who repelled an assault on the city’s ramparts by the Duke of Savoy on 11-12 December 1602. The celebrations feature costume parades with alberdiers, arquebusiers, horsemen and historical characters. It is also common to eat chocolate pots filled with marzipan vegetables, in a nod to Mère Royaume who, according to legend, threw a pot of hot soup on the Duke’s soldiers.
Cryptocurrency and sustainability are gaining popularity among investors, and Aurélien Michaud, head of markets at Banque Cantonale du Jura (BCJ), is no exception. ‘We have a long-term approach and we favour themes we identify in the markets which are based on structural changes,’ he says. When it comes to ESG, Michaud says he combines exclusion - ruling out industries such as weapons and tobacco - with best-in-class approaches. On cryptocurrencies, Michaud says: ‘At the moment we do not offer direct access to it for technological reasons, we use exchange-traded products. ‘At the end of last year we started to have a small pocket of allocation to cryptocurrencies, which is roughly 1.5% in clients’ portfolios. We think it is a good way of optimising the risk-return profile of the portfolio,’ he says. The demand for this kind of offering did not come from clients, Michaud says. ‘We had someone in the team who is very knowledgeable about the subject and this gave us the confidence to offer such services.’ Allocations Digital assets and sustainable investing are longer-term trends, but Michaud has also been adjusting clients' portfolios based on his perception of the current economic cycle. ‘We have changed our allocations recently and reduced our equity risk exposure, especially in foreign stock markets. We did it independently of the seasonality which tends to be good during the months of November and December. ‘This allowed us to increase cash pockets in clients’ portfolios in order to be able to seize opportunities when the situation becomes clearer. ‘At the moment we are in a transitional phase of the economic cycle, but I am not convinced we are going to see a stagflation episode like the one the economy experienced in the 1970s, although we may go through a phase of lower growth. For me the most important factor is how central banks will manage their monetary policies against market expectations. We will have to continue to watch the yield curve and this should tell us where the markets will go.’ Michaud says he hopes central banks will communicate their plans clearly to the markets and remains cautious in the meantime. ‘It is necessary to be selective and to favour diversification when it comes to both the source of risk and of return.’ Michaud is also cautious when it comes to growth stocks. ‘We think this sector will be sensitive to the evolution of real rates, which could challenge the excessive valuations in this space.’ Another sector which could suffer is commercial real estate as the pandemic has led an increasing number of companies to offer home office solutions to their employees.
Navigating a sea of options As the bank does not offer its own funds, the selection process is key. ‘There are more than 10,000 funds available to Swiss investors, which means choosing the right ones can be challenging,’ Michaud says. To make the process easier, the bank has developed a proprietary fund rating model based on three pillars. The first is performance persistence in time, the second is risk/reward and the third is price, meaning the total expense ratio of the fund. ‘This allows us to establish a ranking between funds within the same asset class.’ But this is not to say that selection is strictly based on the ranking. ‘It’s also important to meet the manager to get a feel for their investing style,’ he says.
Looking ahead In its half-year results, the bank reported an increase in its balance sheet to CHF 4.1bn, compared with the end of December 2020, while operating profit increased to CHF 9.7m. Michaud says these results are partly due to the re-opening of the Swiss economy as well as strong market performance. ‘The progress of the vaccination programme and the agility of the economy should be enough to keep the risk of a recession away. Leading economic indicators point to a solid growth in the coming months while the expected decline in unemployment rates should support consumer spending. The Swiss franc will continue to show strength.’ When looking at the bank’s plans for the future, Michaud says there are three main challenges he is preoccupied with. ‘The first one is to keep finding solutions in portfolio construction. On the one hand, building bond allocations when you have negative interest rates is an issue, on the other, high equity valuations make the asset class unattractive as an alternative.’ The second challenge for Michaud is to make the bank’s offering completely sustainable. ‘At the moment only our discretionary mandates are,’ he says. Digitalisation is also important for the bank going forward. ‘So far we have made progress with our internal IT infrastructure, but we need to improve this aspect when it comes to our clients. For example, we need to figure out how advisory clients can easily access their portfolios through efficient apps.’
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The canton of Jura holds street fairs and markets called braderies. According to the Swiss Federal Office of Culture, in the 1930s, merchants would cut their prices on these occasions to boost the economy. These fairs have evolved over the decades and now attract a number of local sports and cultural associations and people gather and party. In most places, the fairs take place every two years at the end of summer, but in Biel they are held at the start of the season.
The optimism about the markets catching up post Covid seems to have faded as the growth slowdown becomes more evident, says Schwyzer Kantonalbank (SZKB) CIO Thomas Heller. However, he does not think recession is on the cards. ‘The economy peaked in the second quarter of 2021. Easing measures, progress on vaccinations and - year-on-year - the base effect due to the 2020 slump ensured high growth figures. That this would slow from these levels was to be expected,’ Heller says. ‘The supply bottlenecks prevailing in some areas put additional pressure on growth rates. However, growth will level off again at a somewhat lower level. We are far from stagnation or even recession. The slowdown in growth comes as no surprise but demand remains intact. The economy will continue to recover, particularly if the situation with supply chains is eased.’ Heller thinks that from an economic point of view, the recovery should cover the entire spectrum of investments, provided there are no further containment measures in view of the rising number of Covid cases. ‘In the equity market, less cyclical sectors are likely to perform better than more cyclically sensitive ones.’ Moving on to the recent German elections, Heller says that a SPD-led coalition would not harm the European house and confidence in fiscal stability. He says: ‘An SPD-led coalition seems more conducive to stronger European integration. ‘For the markets, the formation of a government is a non-event - unless it unexpectedly fails because, once again, someone would rather not govern than govern wrongly.’
Inflation to peak soon On the rising inflation trend, Heller says that the US October inflation figure of more than 6% was surprising and believes this rapid rise is largely due to base effects and special factors, at least so far. In Germany, for example, inflation can be attributed to the increase in value added tax, which was reduced last year as a relief measure. In the US, the rise in the price of used cars and energy commodities, with a weighting in the basket of goods of just over 7%, have recently contributed almost 50% to overall inflation. The increase in freight rates due to global supply difficulties also spurred the trend. ‘These effects will weaken or even disappear. I do not expect us to embark on a sustained higher inflation path - even though the risks of this have increased - but rather that inflation rates will decline noticeably, perhaps not exactly to the central bank's target of 2%, but well below today's more than 6% for the US or 4% for the eurozone,’ he says. With respect to President Joe Biden’s programme for infrastructure and the economy, Heller says: ‘The immediate growth effect is likely to be small. The package runs for 10 years. Nevertheless, it will have a stabilising effect. If the planned infrastructure investments are actually implemented, this could have a positive impact on US long-term growth potential.’ Swiss equities Discussing the impact of the global equity correction in September on the Swiss market, Heller says it was partly due to the weak performance of index heavyweights from the pharmaceutical sector, which have suffered from possible plans to reduce drug prices in the US. Some Swiss companies such as Swatch or Schindler, on the other hand, are heavily exposed to China and have suffered from the country’s regulatory crackdown and its implications. Heller, however, believes this setback was atypical as the Swiss stock market has a defensive character due to its sector composition. When it comes to client reactions on the market dip, Heller says: ‘Client behaviour was manageable. We have increased the weighting of Swiss equities in our discretionary mandates and our funds because we believe that the defensive qualities of the Swiss equity market may again be in great demand given current market uncertainties and the risks of a stronger-than-expected growth slowdown. On the other hand, the Swiss equity market was disproportionately affected by the recent correction and, in our view, has corresponding catch-up potential.’
Thinking ahead Looking at 2022, Heller says: ‘In the short term, I don’t see significantly higher prices. If anything, this is more likely at the beginning of the year, when investors who did not want to take any more risks at the end of last year deploy their "dry powder". Usually such a bull market lifts all boats. Overall I see more defensive sectors at an advantage over more cyclical ones.’ The question of monetary policy is likely to overshadow the markets: ‘The fact that half of the Fed members actually see a first rate hike as early as next year in their September rate projections came as something of a surprise. The market is now pricing in two rate hikes by the end of 2022. ‘I still don't expect a first hike until 2023. But ultimately, the timing is not so crucial. The roadmap has been drawn. Tapering starts now and runs until the summer of 2022. Whether the first hike then takes place in 2022 or not until 2023 isn’t so important. ‘The situation would be different if the environment needed a faster tapering and earlier rate hikes. However, I do not expect this to happen at present,’ he says. Credit markets are reacting sensitively to inflation and budget news. Heller also expects the US 10-year yield benchmark to keep moving up until the end of 2022. ‘For the time being, upward pressure on bond market yields will remain subdued, provided the assumption is correct that growth will continue at a slower pace and inflation rates will decline noticeably next year. We are unlikely to exceed a level of 2% to 2.25% that significantly,’ Heller says. In his view banks and insurance companies should benefit: ‘Banks, which generate the greater part of their earnings in the investment business, benefit comparatively less than credit-heavy institutions, while life insurance companies benefit more than non-life insurers. In the financial sector, however, these effects are often overshadowed by other company-related factors.’
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Schwyz is known for its cherry trees and blossoms. Walking along Kirschstrasse, which connects Merlischachen to Brunnen, visitors can find centuries-old distilleries and try a range of products made from cherries.
‘The majority of our clients were invested too conservatively, when you could earn more than 1% on Swiss private bonds,’ says St. Galler Kantonalbank (SGKB) CIO Thomas Stucki. Many clients were happy earning a modest income from bonds, but he says they could have had a better return, in keeping with their risk profiles, by adding more equities. Now Stucki thinks relationship managers are having to become more interventionist. ‘For the relationship managers, it was better to have their clients in a risk bracket that was too low, to avoid years when you have to explain why they lost 5%.’ Stucki says that many of SGKB’s clients have a home bias. They would therefore have benefitted from the fact that Citywire’s Equity - Switzerland category delivered an average total return of 174.2% over the last 10 years to the end of October. However, the investment vehicles they use to access Swiss securities vary significantly depending on which division of the bank they belong to. ‘Smaller clients rely almost 100% on our own funds. Private banking clients prefer single securities over funds, but will sometimes buy our own or third-party funds.’ SGKB offers third-party funds from large asset managers, which are vetted by the bank’s analysts and required to have a good track record. In addition to providing exposure to the domestic economy, Stucki says Swiss stocks can enable Swiss investors to tap emerging markets while feeling comfortable with their decisions. ‘Swiss investors know Swiss companies, they do not know Chinese companies, for example. But, most Swiss companies have some business in China, so it is quite a good way to invest in the emerging markets.’
Fleeing bonds In contrast to strong equity performances, the dwindling interest rates from Swiss franc bonds, combined with a reluctance to take advantage of bonds from abroad, have led to an exodus. ‘In portfolios the clients manage by themselves, bonds have more or less disappeared, apart from some high yield funds. They don’t have an incentive to buy CHF bonds, and they don’t like foreign currency bonds because they lost so much on the currencies in recent years.’ Some clients have been sitting on cash, but there is now little incentive to do this either. ‘We had to start charging clients negative interest rates on cash accounts above CHF 1m that were not being used to invest, if they did not have other products with us. Until perhaps last year, some of them would try to find another bank, but that is difficult now. So, a lot of them will buy a second house to rent out, or stocks, instead.’ Stucki has publicly clamoured for central banks to tighten monetary policy more aggressively than they did after the financial crisis, and believes clients’ reactions to negative rates are having wider repercussions across the Swiss economy. ‘I speak about the negative side-effects of negative interest rates. The SNB complains that house prices are too high and that this is dangerous. But as long as interest rates are negative, this will continue. I see pension funds that have to earn 2% a year moving into equities or real estate, and the increased risk may not be sustainable for them.’ He says that his time at the central bank, which ran from 1997 until 2006 and saw him rise to head of asset management, has been helpful when setting investment policy at SGKB. ‘I know a lot of people involved in the monetary policy decision process, and I know how they think,’ he says. In line with SGKB’s clients, the central bank also increased its exposure to equities. ‘The equity portfolio was under my responsibility. We started it in 2004 because we had about CHF 50bn in currency reserves and CHF 50bn in gold. We decided that the best hedge against gold was equities,’ Stucki says.
International appeal Stucki says a safe reputation and cantonal guarantee are attractive to clients who want to hedge their bets, even for those who are not Swiss. Some private individuals who bank with SGKB have been let down elsewhere. ‘We have a lot of clients who are very disappointed with the large banks,’ he says. The bank attracted net new money of CHF 2.9bn in the first half of 2021, with CHF 1.9bn from private banking, to which institutional investors contributed CHF 0.5bn, and CHF 0.9bn from retail banking. ‘One of the main selling points of a cantonal bank is still security. We have a lot of German clients, and based on their past experience, Germans are cautious of everything: the government, the euro, higher taxes,’ he says. About 10-15% of SGKB’s clients are now German. Contributing factors include geography, with the canton of St.Gallen near Germany, and the fact that many Germans study at the University of St. Gallen. However, the bank has courted clients from the country with its SGKB Germany subsidiary, which has offices in Munich and Frankfurt. The bank offers its full range of services to clients from Germany, Austria and Liechtenstein. Clients from some other nations are welcome too, but they are not acquired actively and are limited to managed accounts. The Swiss clients who are not local to the canton are normally based near Zurich, where the bank has a private client office. Stucki is actually speaking from Zurich himself, as he heads the bank’s 35-person investment centre which is based there in Stauffacher. ‘In Zurich, it is easier to hire people, go to presentations from companies and meet fund managers.’ It certainly seems to work for him. ‘I have been here for 15 years now, and I like it, it is a good role,’ he says. Despite its ties outside the region, the canton of St. Gallen retains 51% ownership, and still offers a government guarantee, although this does not extend to business relationships with the German subsidiary. SGKB has been a stock corporation since 2001. Consolidated profit was CHF 93.9m in H1 2021, 12.4% higher than the previous year, but its stock value is yet to recover to its level in early 2020. With managed assets up 10.9% to CHF 53.9bn in the first six months of the year, Stucki feels optimistic about the bank’s future and investing in young clients is key to this. ‘Our private banking clients are CHF 500,000 and above. Over 80% became a client as a child or young adult. I always compare us with a football club. We want to be first place in the top league, and to do this we have to recruit youth, which comes at a cost. We might lose money on this part of the business but it’s easier for them to grow with the bank than it is to acquire them later.’
The alpine processions in Toggenburg, part of the canton of St Gallen, climb up the mountain and end with a celebration on Alp Sellamatt. The parades feature goats, boys and girls in traditional dress, local herdsmen and cattle drivers. A cattle dog can also be included, as well as a cart. Central to the processions are cows wearing large bells, which ring in unison. Similar parades take place in the neighbouring canton of Appenzell.
The value of an investment in the fund, and any income from it, can fall as well as rise and investors may not get back the amount invested. Major changes in the healthcare industry are casting their shadows. Marina Record, investment manager at Baillie Gifford, shines a light on the next big thing and explains why she feels spoilt for choice. Why do you believe we’ve entered a golden age of medicine? We have arrived now at a point in time where converging technologies have allowed us to understand human biology at its most granular level. Not only are we beginning to understand the biological mechanisms and causes of disease, we now have the tools to access them. This will allow us to develop personalised treatments which leverage the power of our own biology and allow us to run hospitals, surgeries, and clinics far more efficiently. What does your approach to healthcare investing look like? It’s an extension of Baillie Gifford’s generalist investment approach looking for highly ambitious companies that can transform - in this case - human health and healthcare systems around the world. We sit at the centre of an ecosystem in human health and are closely attuned to developing trends and themes as technology converges. We think our key differentiator is supporting our companies for far longer than other managers, and developing our investment hypothesis based on what the company could become 10 years from now if things go right. The Worldwide Health Innovation Fund has delivered a strong performance in the past twelve months. What’s your secret? There isn’t really any secret, we just do what we have always done. We think deeply and speak broadly to those in academia, science and private markets. This has helped us develop a clear hypothesis about what the future of human health will look like, and our network helps us connect with those brilliant minds who will deliver this. We are finding that, in the trends in which we invest, we are spoilt for choice with exciting high growth companies, as the great convergence of medicine continues to accelerate. What impact do discoveries like the mRNA breakthrough have on the fund? Science fiction keeps becoming reality, and this is accelerating. With mRNA we are very excited about how we can shift from traditional vaccines that rely on building immunity by exposing the immune system to weakened strains, to those that instruct and code our cells to deliver immunity. This has the potential to protect society not only from future pandemics but also from common diseases that have defeated medicine such as the flu and cold. The possibilities for the use of mRNA as a delivery mechanism are unlimited versus what is currently available with prophylactic vaccines. This breakthrough also has important applications in other fields. There is an obliquity to the innovations that are happening in healthcare at the moment, as the breadth of application becomes understood once the fundamental science makes them a reality. This is what we want to invest in, companies who can repeat the success of their innovation, and provide solutions to many patients and disease types. Baillie Gifford defines itself as an Actual Investor. What do you mean by that and how does it impact your investment process in the healthcare space? We strongly believe in long-term investment horizons. This is particularly true in healthcare, where our approach allows the companies we invest in to focus on what really matters. Patience as shareholders, allows them to protect the breadth of their opportunities rather than having to focus on one area, and to reduce risk by investing in the hardest areas rather than avoiding them. We want companies that can deliver multiple drugs rather than one blockbuster, and companies that can transform healthcare instead of simply improving on what we already have. We think this approach is also best for patients, as it helps drive innovation in the most difficult or overlooked areas that don’t generate that much revenue in the short term. Which companies are accelerating our understanding of healthcare? Some of the most influential companies in the next decade would be Illumina, which is democratising the tools to understand DNA, 10X Genomics, which is doing similar things for the processes in cells, and Berkeley Lights, which is developing the tools to manipulate the cell. These three are creating the infrastructure that will help the transition to more personalised treatments leveraging our own biology. Of course, there’s also Moderna, which is well known for its COVID-19 vaccine, but in being the first to develop mRNA as a delivery mechanism we also think they will be able to utilise this in many fields outside of prophylactic vaccines. They currently have 23 drugs in the pipeline and we are very excited about what they can do. What have you learned from the pandemic? The pandemic has shown how much things can and need to change for patients. The speed at which the vaccine was developed has many encouraging signs for how we can develop all drugs, and the potential of our own biology. Can we cure cancer, cardiovascular disease, and degenerative brain disease? We hope yes, and we think that this shift to these new generations of drugs is seismic. What trends are you currently seeing in the healthcare sector? Technologies that allow us to sequence and understand our biology at the genetic and cellular level, such as 10X Genomics and Illumina, have a very important part to play in the transformation of the sector. By being able to alter, edit and delete genes, we can see a very different type of medicine emerging over the next decade. One of the biggest drivers of the two-fold increase in lifespan over the past 150 years, has been the adoption of clinical hygiene, the reduction of infant mortality and the use of antibiotics to fight infection; it is these technological advances that have allowed humans to become outliers. We strongly believe we are on the cusp of another of these shifts. If we imagine how our understanding of genetics could transform population health through screening, detecting, and treating illness long before symptoms present, then it could lead to an increase in quality lifespan, akin to the changes brought about by antibiotics for example. What will healthcare look like in five years? We would hope very differently. Perhaps by then we will be screened genetically in a single blood draw for the disease to which our mapped DNA has identified we are most vulnerable, meaning that we can start to treat these illnesses before we experience symptoms. Perhaps we will detect these diseases at home, using tools such as ultrasound, urine testing or monitoring our own blood chemistry. That would all be linked to our smart phone and connect us to a medical professional without having to visit a hospital or clinic. It is difficult to say which of these will occur first, but one thing is certain: in the last five years, we have seen fiction become reality, and we think this trend will continue. Baillie Gifford Worldwide Health Innovation Fund Annual Past Performance (%) to 30 June each year
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Health Innovation Fund MSCI ACWI Index
2020 43.3 4.1
2021 52.4 32.5
Source: StatPro, MSCI. euro. Net of fees. Class B EUR Acc, 10am prices. Index: MSCI ACWI Index, calculated using close to close. Not annualised. Share Class Inception date: 1 October 2018. Past performance is not a guide to future returns.
