The SNB's investment policy: options and limitations
Fritz Zurbrügg, Member of the Governing Board
Money Market Event, Zurich, 27.03.2014
The National Bank Act of 2004 gave the Swiss National Bank (SNB) new options in investment policy. The SNB used these for a consistent and comprehensive further development of that policy. In particular, the risk/return profile of foreign exchange reserves was significantly improved through a number of diversification measures, with equity investments playing an important role.
However, in the case of the SNB, the diversification effect of the equity investments is less than in the case of many other investors. This is because equity prices often correlate negatively with the external value of the Swiss franc while, at the same time, the SNB cannot hedge the currency risk against the Swiss franc. It refrains from hedging because of its monetary policy objectives, which always have precedence over investment policy. Monetary policy influences both the size of the SNB's investments and the criteria and principles applied in managing them. Thus, options in the SNB's investment policy are limited in various areas by the primacy of monetary policy.
The SNB's investment on the stock markets is passive. This means that, in essence, the SNB does not engage in any selection of equities. Instead, it uses rule-based procedures to invest in a very broad equity universe. However, there are two areas in which it limits its investment universe in a selective manner. First, it excludes mid and large cap banks from the portfolio in order to avoid conflicts of interest. Second, it does not include companies that are in gross violation of ethical principles.
The limitations imposed by the primacy of monetary policy are sometimes reflected in the annual results. Even though investment policy has continually been extended, thereby improving return opportunities, there have occasionally been years in the past with negative results. However, the success of the SNB is not measured in terms of its annual results but by the fulfilment of its mandate, which is to ensure price stability while taking account of the development of the economy. In order to fulfil this task, the minimum exchange rate of CHF 1.20 per euro retains its validity.