Zimmermann Explains How Swiss Fund Compenswiss Finds Comfortable Real Estate
Christoph Zimmermann often thinks about real estate these days. One reason is surely what Zimmermann, the head of external investments at compenswiss saw around him in Geneva recently: “A month ago, when I went into the office, I had the sense that I was the only one in Geneva. There was no one in the streets, and the offices were all closed.” But he also thinks about real estate because compenswiss, which manages the finances of the Swiss social security system, is deeply involved in real estate investing.
Although real estate represents only about 10% of compenswiss’s $36 billion portfolio, it looms large in the fund’s thinking because of what else compenswiss has invested in – and what it has avoided. The about 25% of assets invested in equities are mostly passively managed. “I think it is very difficult to find good active managers,” he says. So is 40% of the foreign fixed income portfolio, which totals about 40% of AUM. Meanwhile, Zimmermann says he’s not interested in most alternative investments. “If somebody contacts me about hedge funds, I say, ‘Call back in eight years, because I’ll be retired by then” he says. Zimmermann thinks fees are too high, but in addition, he explains, “For hedge funds, and for private equity and infrastructure, our time horizon is not long enough.” compenswiss is not really a classic actuarially based pension fund; rather, it aggregates on a pay-as-you-go basis the contributions to the Swiss old age and disability benefits program, and pays out benefits; the excess of revenues over benefits produces the compenswiss portfolio.
Real estate fits well into this framework, he says: For starters, compenswiss needs liquidity, and “If you go into real estate, you have cash flow.” Moreover, property also offers security: “People have to live somewhere,” he says, so rain or shine, “You have income from what might be a boring asset class but an asset class which is going to be around in a hundred years.” Compenswiss has been investing in Swiss real estate since 2000, and like many big investors in small countries, as its portfolio grew, it began worrying about being exposed to too many properties in close proximity. “That was the reason in 2003 we started to diversify out of Switzerland,” he says. Compenswiss now has about $1.5 billion invested in Swiss property and an equal amount abroad. They started in Europe and went on to Asia, where compenswiss now works with a half dozen real estate managers. It has largely skipped the U.S. market for tax reasons, according to Zimmermann, who came to compenswiss in 2003 after working in private banking for Capi SA, Lehman Brothers, and Merrill Lynch.
In addition to diversifying his real estate through geography, Zimmermann has diversified by relying on REITs or other commingled funds. “We’re too small to invest directly in buildings,” he says. “You need to be CALPERs in order to do that.” Diversification is also “why we only have sector mixed funds. So we might have lost some money on hotels, but on the other hands, logistics properties are working very well – Amazon and those guys need these properties.”
These days, compenswiss real estate managers are hunkered down: “You cannot go and do due diligence on an office building in Singapore right now, so this is on hold.” But he adds, “It’s not necessarily that bad that some investments are postponed because the entry prices will be lower than last year.” To be sure, Zimmermann has other things on his mind besides property. For example, “Like many pension fund schemes, we are analyzing the Chinese equity market to see whether to invest on a standalone basis,” he says. Right now, the Chinese exposure comes through emerging market investing. But Zimmermann says, “We believe in the Chinese market, and we have seen the possibility for active managers, which we don’t see in the U.S. large cap market or in the European large cap market.”
However, compenswiss is not rushing in. Zimmermann says, “We are not a speed boat. We are more a tanker on the ocean,” and tankers turn slowly. While “We do try to implement new things,” he says candidly, “It’s not like we decide today and implement tomorrow. We might decide today and then it takes a couple of years to fully implement a new strategy.” That’s how real estate unfolded, and that’s the motto for other asset classes as well. That also means that when the markets tanked in early spring, Zimmermann says, “We did not do too much. We did sell a little bit, mostly in fixed income – whether it was U.S. Treasuries or agencies or corporate bonds – in order to increase our liquidity.”
Whenever securities markets are churning, Zimmermann takes comfort in real estate. While the streets of Geneva may have been pretty deserted a few weeks ago, these days they’re “almost back to normal,” Zimmermann says, and activity is picking up in the Vieille Ville, the old town, where buildings date back hundreds of years – far longer than the names of companies on stock certificates and corporate bonds.
Christoph Zimmermann is a member of II Network, to discuss the content of this article and further engage with him, comment below.