How do you buy billions of dollars-worth of company shares — including in some of the biggest US companies — without anybody noticing?
That is the conundrum facing the Swiss National Bank, one of the world’s largest public investors, with foreign currency holdings at the end of March worth SFr595bn. Some SFr120bn, or a fifth of the total, was invested in equities — in Europe, the US and emerging economies.
But the SNB is no normal investor. “We consider ourselves first and foremost a central bank,” Andréa Maechler, governing board member, told the Financial Times. “Our balance sheet expansion is the direct reflection of our monetary policy actions. That is the key point which differentiates us from a sovereign wealth fund.”
That has required a different approach which avoids any interference with its role in steadying the Swiss economy or actions that might undermine its political independence. As a result, the SNB has a noticeably lower profile than Norway’s $ 850bn oil fund, which has publicly voted against some of the world’s biggest companies.
“You don’t want a Swiss public institution interfering in strategic decisions at companies in other countries,” says Maxime Botteron, economist at Credit Suisse. “It is a Swiss institution, it has to be neutral.”
The SNB seeks a clear separation between investment and monetary policy decisions. Although board members set long-term strategy, day-to-day management is delegated to a division which has no knowledge about possible interest rate moves.
When the SNB stunned financial markets and sent the currency sharply higher in January 2015 by abandoning its cap on the franc’s value against the euro, those managing its investments were reportedly as shocked as outsiders.
External managers help the SNB, providing benchmarks against which its performance can be judged. But the differences with normal investors are clear. Top of its priority list is that its portfolio remains highly liquid. At some point, the SNB might want to reverse its monetary policy — selling foreign currencies and buying back Swiss francs. “Nobody really knows how fast they might have to get rid of reserves again,” says Dominik Studer, economist at UBS.
The SNB has a big disadvantage compared with conventional investors: it cannot hedge against currency swings, which increases the volatility of its reported investment returns. “Any hedging of that risk would require us to take a position against the Swiss franc, which would go exactly against our monetary policy,” explains Ms Maechler.
“How do we deal with that? The key risk management tool we have is diversification so that if anything happens in one currency, in one instrument, you have counter pressures through a well-balanced and well-diversified portfolio.”
The need for diversification, as well as a desire to boost overall performance, explains why the central bank has pushed increasingly into equities — a move made possible by a change in Swiss law in 2004.
In its annual report for 2015, the SNB revealed it held shares of about 1,500 mid- and large-sized companies and roughly 4,400 smaller companies in advanced economies, and about 800 emerging economy companies.
Details are not revealed — except in the US, where Securities and Exchange Commission rules require the SNB to disclose its holdings. These show it owns $ 1.5bn of Apple and $ 1bn of Microsoft at March 31, 2016.
But the Swiss central bank says it does not “stock pick”. Instead its investments are allocated in line with a selection of market indices, without revealing precisely which indices.
When it comes to exercising shareholder rights, “the general concept we have is that we take our role as a large investor seriously”, says Ms Maechler. “We exercise our shareholder rights as long as they don’t draw us into political debates.”
The SNB started exercising its votes at eurozone shareholder meetings last year. A next step will be to vote at other European companies’ meetings — and perhaps later in other regions.
It has drawn up its own guidelines based on establish corporate best practice. Although not published, the guidelines include the principles of linking executive pay to performance and that at least half of company board members are independent.
In theory, the latter should have meant the SNB joining Norway’s sovereign wealth fund in expressing concern, for instance, about corporate governance at Volkswagen. Norway’s fund has even joined a class action against VW.
Quite how the SNB votes at individual companies is not revealed, however, although Ms Maechler notes the SNB never joins class actions.
The SNB will follow internationally established standards — but not set them, Ms Maechler says. “In grey areas, we just abstain,” she says. “We don’t want to be part of political discussions. We try to go as far as possible without creating a risk from a monetary policy perspective.”