Zero Interest Rates and Volatility: The Evolution of Active Wealth Management in Switzerland

With interest rates set by the Swiss National Bank (SNB) at 0.00%, and the material risk that they could be reduced to negative levels, Swiss asset managers face a challenging financial environment, which could require a profound review of asset allocation. When the expected returns of low-risk assets are very small or even negative, traditional strategies become less effective and the search for new sources of return becomes necessary, contingent on the clients’ risk profile.

GianLuigi Mandruzzato Senior economist, EFG Bank

First, the low yield to maturity of the Swiss Confederation bonds and of corporate bonds with investment grade ratings at the short-end of the yield curve could push money managers to increase exposure to riskier assets. This search-for-yield would be a rational reaction to an environment in which the validity of traditional management models clashes with the risk of a loss of value at the clients’ expense. However, the increased portfolio volatility resulting from this approach would require a careful monitoring of the portfolios active risk to keep it in line with investors' risk profile.

Another option available to asset managers is to lengthen the duration of bonds to capture cash in a higher yield. This strategy is not without pitfalls either: a sudden change in inflation expectations or a future normalisation of interest rates could lead to significant capital losses, as happened in the 2021-22 period.

Furthermore, interest in alternative and illiquid investments could increase. Real estate, hedge funds, private credit, infrastructure and absolute return strategies represent opportunities for diversification and potential returns, especially in a context where traditional 60/40 portfolios (stocks/bonds) may no longer offer attractive returns for the same level of risk.

Portfolio diversification, in fact, remains an essential tool to mitigate volatility and to reduce the idiosyncratic risk of individual assets or sectors. Combining uncorrelated assets allows to smooth out the impact of any market shocks and build more resilient portfolios, capable of generating more stable returns over time. Furthermore, in an environment of compressed interest rates, diversification can help identify opportunities not accessible through traditional assets, taking advantage of the different cyclical, geographical and structural dynamics of global markets. However, the illiquidity and complexity of these instruments require careful due diligence, rigorous selection of managers and a longer investment horizon, consistent with the strategic nature of the diversified approach.

Negative rates also impact the profitability of financial institutions. Banks see their lending margins between deposits and loans eroding, while pension funds face increasing pressure to try to keep actuarial commitments. For these players, asset allocation becomes an increasingly sophisticated exercise, which would benefit from the inclusion of dynamic strategies and more active management.

Finally, the currency impact must be considered. In a context of uncertainty and risk aversion, the safe-haven status of the Swiss franc could cause it to strengthen despite Swiss interest rates being lower than in other major countries. For Swiss managers with exposure to non-domestic financial assets, currency hedging is therefore becoming a key element to manage portfolio risk.

The situation in the coming quarters could therefore resemble the period between 2012 and 2019 when SNB interest rates were negative. During that period, Swiss asset managers have already deployed adaptive strategies that are now extremely relevant again. In that context, there was a marked increase in equity exposure, with a particular focus on defensive stocks with stable dividends. At the same time, alternative assets such as hedge funds, private equity and infrastructure have been progressively integrated, considered valuable tools for balancing risk and return. The bond allocation has shifted towards corporate and high yield bonds, while currency management has become central, especially after the removal of the EUR/CHF floor in 2015, an event that prompted many managers to implement systematic hedges against the appreciation of the franc. The experience gained in those years provides today a useful reference for Swiss asset managers to best face the challenges of the coming months.

In short, a zero or negative interest rate environment requires Swiss asset managers to reconsider their traditional approach and adopt a more flexible, careful and creative strategies. Diversification, the search for yield through unconventional instruments, and careful risk management become not only desirable, but essential to navigate a complex and ever-changing financial environment.

Biography

GianLuigi Mandruzzato è Senior Economist e Strategist presso EFG Bank a Lugano. Prima di entrare in EFG, ha lavorato come Economist e Multi-Asset Strategist presso BSI Bank a Lugano e Banca Intesa e Banca Commerciale Italiana a Milano. Ha conseguito un Master con lode in Economia presso la School of Economic Studies dell'Università di Manchester e si è laureato in Economia con 110 e lode presso l'Università di Trieste. I suoi principali interessi sono i cicli economici e di politica monetaria globali, con particolare attenzione all'area dell'euro e alle economie svizzere, nonché ai mercati valutari e delle materie prime.

More information: gianluigi.mandruzzato@efgam.com