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Swiss equity funds hit on Swiss bank Franc move

The Swiss Central Bank's exit from the euro peg was like "ripping the lid off a pressure cooker" when an intermediate solution would have been more sensible, said Simon Cox, investment strategist at BNY Mellon Investment Management.
by Fund Selector Asia
Market panic ensued after the Swiss Central Bank moved to end the Swiss currency’s peg to the euro. The value of the Swiss franc soared, European equities were hit hard, and UBS warned Switzerland was in store for a “significant deflationary shock”.
 
“If the Swiss central bank was concerned about the euro depreciating too much, it could’ve shifted to a currency basket, putting more weight on the US dollar and less on the euro,” Cox explained.
 
“The thing about a pressure cooker is that you don’t take the lid off in one go, you let the pressure off gently.
 
“I’m not saying Hong Kong should or will ever exit its peg [to the US dollar], but if it did, my guess is that it would want to do it in a more calibrated way than we’ve seen from the Swiss National Bank.”
 
Monetary pegs between currencies have typically fallen apart on the weak side. Usually, a country’s foreign exchange reserves become overwhelmed and drop precipitously as a result.
 
The Swiss exit of the euro peg, which was on the strong side, is less common. 
 
Cox explained that defending a cap on a currency is completely different from defending a floor.
 
“The Swiss National Bank was entirely capable of defending the cap if it wished to do so.
 
“So what we’ve seen is not market forces overwhelming the power of a central bank. The central bank’s power to issue its own currency is unlimited. It just decided that the original justification for the cap – the overvaluation of the Swiss franc — became less compelling as a result of the depreciation of the euro.
 
“There are interesting lessons to be drawn from this in Hong Kong if exiting a peg on the strong side.”

Fund reaction

Only two funds registered for sale in Hong Kong and Singapore out of a sample of 12 funds investing in Switzerland equities registered a positive return for the period from 13 January to 15 January, according to FE Analytics.

The top two funds were from UBS Global Asset Management, namely the UBS Equity Swiss Income and the UBS Equity Small Caps Switzerland, which showed returns of 0.45% and 0.44%, respectively.

The portfolio details of the top performing UBS Swiss Income Equity Fund were not available.

The investment mandate of the UBS Equity Small Caps Switzerland fund is in small-cap companies, which have a market capitalisation of less than CHF4bn ($4.6bn).

As per the latest available portfolio, the ten largest equity holdings of UBS Equity Small Caps are in semiconductor manufacturer Ams (4.3% weighting), Forbo Holding (4.2%) and Dufry (4.2%), a travel retailer company. Its portfolio was skewed to favour allocation in financials, electronics and engineering companies.

Laggards

The hardest hit funds were the BlackRock Global Funds Swiss Small & MidCap Opportunities, which had a net asset value decline of 9.95%.

Fidelity Switzerland and Schroder ISF Swiss Equity A were among the laggards, with their NAVs falling by 9.87% and 9.26% respectively.

The Luxembourg-domiciled BlackRock fund seeks to invest at least 70% of its assets in small and mid-cap companies domiciled in, or exercising the predominant part of their economic activity in, Switzerland. 

The fund’s criteria for choosing small and mid-cap companies are those which, at the time of purchase, are not members of the Swiss Market Index.

The top three holdings of the BlackRock funds are: Sika  (7.1%), Partners Group (6.9%) and Lindt & Spruengli (6%). The sector allocation was oriented toward financial, healthcare and industrial companies.

The Luxembourg-domiciled Fidelity Switzerland had its top holdings in investments in Novartis, Roche Holding and Nestle. But, the fund is underweight in all the three top stocks, compared with its benchmark index MSCI Switzerland. Financials, healthcare and industrial companies dominated the sector orientation. 

The Luxembourg-based Schroder fund also had underweight positions in its top holdings: Novartis, Roche Holding and Nestle. In terms of sector allocation, the Schroder fund was overweight in industrial and financial companies.

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