Questions and answers on asset management

  • In addition to monetary policy, the SNB is also tasked with managing the currency reserves. What does that mean exactly?

    In order to implement its monetary policy, the SNB carries out monetary policy operations which affect the size and composition of its balance sheet (Questions and answers on the SNB's balance sheet). The assets side of the SNB's balance sheet is primarily composed of the currency reserves; these are mainly the gold and the foreign exchange reserves. Swiss franc bonds represent a very small proportion of the assets. The SNB manages the currency reserves and the Swiss franc portfolio, i.e. it invests on the financial markets.

  • In what form are the gold and foreign exchange reserves held?

    The gold reserves chiefly consist of ingots and, to a lesser extent, coins. The foreign exchange reserves consist of bonds, equities and deposits at central banks and the Bank for International Settlements in foreign currency. The term 'foreign currency investments' is often used. In addition to the items listed above, foreign currency investments also include sight deposits from foreign currency repo transactions, which can be concluded for management of the foreign exchange investments. The associated liabilities are included on the liabilities side under foreign currency liabilities and result in a balance sheet expansion.

  • Where are the rules for the SNB's investment policy laid down?

    The provisions describing the mandate, the permitted investment operations and the responsibilities are set down in the National Bank Act (NBA; arts. 5, 9, 42 and 46). The 'Investment Policy Guidelines' of the SNB detail the transactions described in the NBA which the SNB may carry out in order to perform its investment policy tasks. These guidelines set out the investment policy principles, the investment instruments and the investment and risk control processes, and are issued by the Governing Board.

  • Who monitors the SNB's investment policy?

    The Bank Council is responsible for the general oversight of the investment and risk control process (Questions and answers on the SNB as a company). It assesses the underlying principles and monitors compliance with them. The Risk Committee - which is composed of three members of the Bank Council - supports the Bank Council in this task. In particular, it monitors risk management. Internal risk management reporting is made directly to the Governing Board and the Risk Committee in the form of quarterly risk reports.

  • Who conducts the SNB's investment policy?

    The Governing Board decides on the composition of the currency reserves and other assets. It also defines the requirements with regard to the security and liquidity of investments, and the universe of eligible currencies, asset classes (e.g. bonds and equities) and issuers (e.g. governments or companies that issue bonds).

  • How does the Governing Board draw up the investment policy?

    The SNB's investment policy is oriented towards high liquidity and broad diversification, with two main objectives: The first is to ensure that the balance sheet can be used for monetary policy purposes at any time. The second is to preserve the value of currency reserves in the long term. The Governing Board sets out the investment strategy, which is based on requirements specific to central banks as well as comprehensive risk/return analyses. The investment strategy covers the allocation of investments to the different currencies and asset classes, and determines the scope for active management at operational level. The Governing Board generally decides on the investment strategy once a year.

  • How is the SNB's investment strategy implemented? Are external management mandates also awarded?

    At operational level, the internal Investment Committee decides on the tactical allocation. In other words, over the course of the year - and within the defined parameters - it adjusts the variables such as the currency weightings, bond durations and allocations to the different asset classes to take account of changing market conditions. The management of the individual portfolios is the responsibility of the SNB's Asset Management division, which handles the majority of the investments. Mandates are awarded to external asset managers, first if there is an efficiency gain in doing so and, second, because they can be used to benchmark internal asset management.

  • How are risks addressed in asset management?

    A system of reference portfolios, guidelines and limits is used to manage and mitigate risks. All relevant financial risks associated with investments are identified, assessed and monitored continuously. The risk analyses take account of the fact that the SNB adopts a long-term investment horizon. To assess and manage credit risk, information from major rating agencies, market indicators and in-house analyses is used. Concentration and reputational risks are also factored in when determining risk limits. Compliance with the guidelines and limits is monitored daily.

  • What is the return on the SNB's investments made up of, and how is it recorded in the accounts?

    It consists of interest income and dividends, as well as valuation adjustments resulting from exchange rate movements and market price changes. The resulting profit or loss is recorded in the statutory income statement of the SNB. The profit distribution is based on the provisions of the NBA and the applicable profit distribution agreement with the Confederation (Questions and answers on equity capital and profit appropriation).

  • Is the SNB's asset management aimed at achieving the highest possible return?

    No, that is not the case. Monetary policy has priority, so the liquidity and security of investments are more important. A high degree of liquidity is ensured by investing the bulk of the foreign exchange reserves on the world's most liquid government bond markets. The criterion of security is taken into account by structuring investments so that at least the real value is preserved over the long term. Nevertheless, sufficient returns are required if the investments are to retain their value in Swiss francs in the long term. Government bond holdings in the foreign exchange reserves are therefore supplemented with other asset classes. When selecting the latter, however, care is taken to avoid conflicts with the conduct of monetary policy.

  • What kinds of conflict can arise between monetary policy and investment policy?

    In order to fulfil its monetary policy mandate, the SNB needs to be able to adjust its balance sheet at any time without restriction, and without having to take investment policy considerations into account. For example, from an investment policy perspective it might seem appropriate to switch assets from one currency into another. However, this might bring the SNB into conflict with its monetary policy goals. In such cases, monetary policy always has primacy.

  • As a central bank, the SNB has special knowledge about the Swiss economy and currency developments. How does the SNB ensure that this knowledge is not used improperly for asset management purposes?

    The investment and risk control process is structured so as to avoid conflicts of interest between monetary policy and investment policy. Responsibility for monetary policy and investment policy operations is therefore separated as far as possible. First, no insider knowledge acquired by virtue of the SNB's central bank status may be used in its investment activities. Second, investment activities may not create unintentional monetary policy signals. For this reason, the SNB does not invest in Swiss equities or in bonds issued by Swiss companies.

  • Does the SNB's asset management distort the financial markets?

    The SNB takes care to avoid its investments having any impact on the markets and currency developments in other countries. It therefore always acts in a prudent and market-neutral manner. The short-term absorption capacity of individual markets is an important criterion for the SNB. If foreign exchange market interventions result in high inflows, for example, the SNB holds part of these funds on deposit at other central banks so as to prevent market distortions.

  • Which currencies and assets make up the SNB's foreign exchange reserves?

    The majority of the SNB's foreign exchange reserves (75%) are in government bonds, bonds issued by foreign local authorities (e.g. provinces and municipalities) and supranational organisations, as well as corporate bonds, or are placed at other central banks. The proportion of equities is 25%. Of the foreign exchange reserves, around 39% are denominated in US dollars and 37% in euros. Other important investment currencies are the yen, pound sterling and Canadian dollar. In addition, the SNB holds smaller investments in the Australian dollar, Singapore dollar, Hong Kong dollar, Swedish krona, Danish krone, South Korean won and Chinese renminbi. In its equity portfolios, the SNB has holdings of other currencies. It publishes the investment structure of its foreign exchange reserves on a quarterly basis.

  • Why are the foreign exchange reserves structured like this?

    Since liquidity and security are the main priority for investments, the majority of foreign exchange reserves are held in government bonds. At the same time, the SNB aims to achieve the broadest possible diversification of its foreign exchange reserves as regards currencies, issuers and instruments. This allows it to achieve higher returns over the long term, without having to accept major fluctuations in earnings. Thus, for some time now, the SNB has also invested in corporate bonds and foreign-issued equities and, in recent years, has expanded the universe of investment currencies.

  • Where can I find information on the current size and composition of the SNB's foreign exchange reserves?

    The SNB's balance sheet items, which include information on the current level of foreign exchange reserves, are published on a monthly basis at the end of the following month on the SNB's data portal. Figures for the currency reserves are published shortly after the end of each month, as part of the data issued under the IMF Special Data Dissemination Standard. These figures are, however, provisional. Moreover, the foreign exchange reserves recorded in the SNB balance sheet items may vary slightly from those reported according to the IMF standard, owing to differences in definitions. One month after the end of each quarter, the SNB publishes its interim results for that quarter, and under foreign exchange reserves and Swiss franc bond investments the breakdown of its foreign exchange reserves by currency, asset class and rating of fixed income asset. More information on the foreign exchange reserves can be found in the SNB's Annual Report.

  • Does the SNB manage all of its investments from Switzerland?

    No. Given the sharp expansion in foreign exchange reserves and the growing importance of the Asian financial markets, in 2013 the SNB opened a branch office in Singapore. This ensures a more efficient management of the SNB's Asian investments by locally based internal portfolio managers.

  • Does the SNB hedge the currency risk on its foreign exchange reserves?

    Currency hedging would directly influence monetary policy, since any hedging would be equivalent to a purchase of Swiss francs against foreign currency and would thus generate upward pressure. Consequently, the SNB does not hedge the currency risk on its foreign exchange reserves, and has to bear the risk associated with exchange rate fluctuations. For this reason, diversification and the limitation of risk concentrations in foreign exchange reserves are very important for the SNB.

  • Is the SNB planning to diversify its portfolio further?

    In this regard, the SNB is continuously evaluating new asset classes, currencies and investment opportunities in advanced economies and emerging markets. The aim is to avoid risk concentrations. For example, in recent years, the SNB has enlarged its investment universe of equities to include companies from emerging economies and has continuously increased its investments in Asia (e.g. in renminbi and South Korean won).

  • How are these equity holdings compatible with the investment criterion of security?

    By ensuring the broadest possible diversification of its foreign exchange reserves, the SNB can reduce its currency risk and achieve higher returns over the long term, without having to accept major fluctuations in earnings. These equity holdings improve both the potential return and the risk profile of the assets overall.

  • What principle does the SNB apply in the selection of equities in its portfolio?

    The SNB pursues as market-neutral and passive an investment approach as possible by replicating individual equity markets in their entirety and thereby diversifying its investments as broadly as possible. In principle, the SNB does not engage in stock picking, nor does it overweight or underweight particular sectors. As a result, the SNB holds equities in the various economic sectors based on market capitalisation. This approach ensures that the portfolio's exposure to different risks is similar to that of the global universe of listed companies, and that structural changes in the global economy are also reflected in the SNB's portfolio.

  • Can the SNB deviate from the principle of full market coverage?

    Yes, it does not apply the principle in two instances. First, owing to its special role as a central bank, the SNB refrains from investing in shares of systemically important banks worldwide. Second, the SNB is committed to respecting Switzerland's fundamental standards and values in its investment policy. Consequently, it does not invest in either shares or bonds of companies whose products or production processes grossly violate values that are broadly accepted at a societal level.

  • What does the SNB mean by "values that are broadly accepted at a societal level"?

    It means that the SNB does not purchase securities issued by companies that seriously violate fundamental human rights, systematically cause severe environmental damage or are involved in the production of internationally condemned weapons. Condemned weapons include biological and chemical weapons, cluster munitions and anti-personnel mines. Moreover, the SNB does not purchase any equities in companies involved in the production of nuclear weapons for countries that are not among the five legitimate nuclear-weapon states as defined by the UN. Individual companies are excluded under the criterion of systematically causing severe environmental damage if they, for example, systematically pollute waterways or the countryside, or seriously damage biodiversity through their production operations.

  • Why does the SNB not use its investment policy to promote important social issues, such as climate protection, by supporting promising economic sectors and no longer financing those that are lagging?

    The constitutional and legislative authorities have deliberately not tasked the SNB with using its investment policy to selectively influence the development of certain economic sectors. The SNB therefore does not pursue structural policies geared to advantaging or disadvantaging specific economic sectors via positive or negative selections, or inhibiting or promoting economic, political or social change. The SNB does, however, take climate-related issues into consideration by applying the environmental criterion to also exclude companies with a business model primarily based on the mining of coal for energy production, as there is a broad consensus in Switzerland in favour of phasing out coal for energy production.

  • How does the SNB identify companies to be excluded?

    The SNB reviews the whole investment universe on a regular basis in order to identify the companies concerned. A specialised external service provider reviews the SNB's investment universe to specifically identify companies involved in the manufacturing of condemned weapons. With regard to companies that focus on the mining of coal for energy production, the SNB bases its assessment on a classification by a specialised index provider. Companies that fall under other exclusion criteria are identified in a two-phase process. The first phase consists of examining and processing public information in order to identify companies whose activities are very likely to fall under the exclusion criteria. During the second phase, a detailed assessment is performed on each identified company to ascertain whether it should be excluded or not. The SNB relies on the recommendations made by specialised external service providers in deciding on the exclusion of companies and reviews its decisions on a regular basis.

  • Does the SNB exercise the voting rights from its shares?

    The SNB exercises its voting rights, focusing on mid-cap and large-cap companies in Europe. For this purpose, it works with external service providers. When voting, the SNB concentrates on aspects of good corporate governance. In the long term, good corporate governance helps companies - and hence the SNB's investments in them - to perform favourably. The voting procedure is based on the SNB's internal guidelines for exercising voting rights. The external service providers are tasked with interpreting the guidelines for exercising voting rights and applying them to the proposals being put forward at the shareholders' meetings. The SNB is in regular contact with the external service providers and monitors the correct interpretation of the guidelines for voting rights.

  • Would it not be in Switzerland's interest to transfer part of the foreign exchange reserves into a sovereign wealth fund, in order to achieve a better risk/return ratio and reduce exchange rate risk?

    The SNB is not in favour of a sovereign wealth fund. When engaging in investment activities, the SNB must take account of monetary policy needs, and retain the flexibility to define the size and composition of its balance sheet. The assets in a sovereign wealth fund would be exposed to the same exchange rate risk as the SNB's currency reserves; even a much higher proportion of 'real' investments such as equities would offer no protection against value fluctuations. By investing part of the currency reserves in a well-diversified range of equities and corporate bonds, the SNB is able to exploit the positive contribution of these asset classes to the risk/return profile. At the same time, it retains the flexibility to adjust its monetary and investment policy to changing requirements.

  • What is the SNB's Swiss franc bond portfolio made up of?

    This portfolio is invested passively, in bonds with high credit ratings. The bond holdings therefore more or less reflect the composition of the market. The portfolio is made up of bonds issued by the Confederation, the cantons and municipal authorities. In addition, the portfolio also contains bonds from other sovereign issuers, Swiss Pfandbriefe, bonds issued by international organisations headquartered in Switzerland, and foreign corporate bonds denominated in Swiss francs. Confederation bonds are purchased on the secondary market and must not be bought from an issue on the primary market (Questions and answers on the SNB's independence and its relationship with the Confederation). All other bonds may be purchased on both the primary and secondary markets. The entire Swiss franc portfolio represents less than 0.5% of the SNB's assets.