Profes­sio­na­lism and volatility

Crises send stock markets reeling. But a long-term investment strategy and professionalism on the part of the Foundation Board will help weather the storm.

The Swiss Phil­an­thropy Perfor­mance Index SwiPhiX ente­red 2022 in the red. It shows how the invest­ments of 67 foun­da­ti­ons have deve­lo­ped. The first quar­ter recor­ded nega­tive growth of ‑4.3 percent. Hans­jörg Schmidt, Foun­da­ti­ons Mana­ger for Zürcher Kanto­nal­bank, main­ta­ins that compa­ra­ble indi­ces – of pension funds, for exam­ple – are expe­ri­en­cing simi­lar deve­lo­p­ments. At the same time, he says the vola­ti­lity, though ongo­ing and substan­tial, beco­mes rela­tive over a longer period. ‘In the past year, the SwiPhiX achie­ved posi­tive growth of 9.5 percent.’ (Go to the Index:


Fonda­tion Botnar is pursuing a long-term stra­tegy with a 50-year invest­ment hori­zon. ‘It means we can with­stand vola­ti­lity and have a high tole­rance for risk,’ says Chief Invest­ment Offi­cer at Fonda­tion Botnar Sushant Sharma. Fonda­tion Botnar holds around 50 per cent in equi­ties and real estate. ‘In the last five years, this has led to solid, posi­tive returns for the foun­da­tion,’ he adds. And the current varia­bi­lity due to the pande­mic and the war has not pres­su­red Fonda­tion Botnar into making any short-term adjus­t­ments. ‘Working with stra­te­gic band­widths has paid off in every asset class,’ says Sushant Sharma. A mini­mum and maxi­mum share of the port­fo­lio is set for every asset class. In the event of deve­lo­p­ments resul­ting in the share of an asset class excee­ding the upper or lower limits of the band­width, Fonda­tion Botnar would reba­lance the port­fo­lio. ‘This is a typi­cal coun­ter-cycli­cal approach for insti­tu­tio­nal inves­tors,’ explains Sushant Sharma. ‘It has served us well in the long-term manage­ment of invest­ment risks.’ Luzius Neubert, part­ner at the consul­ting firm PPCme­trics, is of a simi­lar opinion. ‘For profes­sio­nal inves­tors, like foun­da­ti­ons, it’s worth pursuing this kind of invest­ment stra­tegy, in order to be able to with­stand a major crisis without having to change your stra­tegy.’ If the stra­tegy is based on risk appe­tite and risk tole­rance, a foun­da­tion can, in times of crisis, under­take a reba­lan­cing exer­cise. If shares have gone down in value and, corre­spon­din­gly, their share of the port­fo­lio based on value has decreased, it can be worth buying addi­tio­nal cheap shares. 

«Ther­e­fore, we can with­stand volatility»

Sushant Sharma,
Chief Invest­ment Offi­cer Fonda­tion Botnar

Widely diver­si­fied

The best way to with­stand crises, accor­ding to Luzius Neubert, is to have a widely diver­si­fied, cost-effi­ci­ent invest­ment stra­tegy that reflects both risk appe­tite and risk tole­rance. This should be pursued in the long term. Luzius Neubert menti­ons another, purely tech­ni­cal hedging oppor­tu­nity with opti­ons or futures. ‘But this almost always comes with high costs and uncer­tain­ties,’ he says. ‘In other words, you pay a higher hedge premium in the event of a crisis or forego profits in the event of a reco­very. As a rule, neither is recom­men­ded.’ Higher-risk invest­ments have, howe­ver, taken on grea­ter importance for foun­da­ti­ons, driven by nega­tive inte­rest rates and a lack of return poten­tial with bonds. If foun­da­ti­ons don’t earn enough on their invest­ments, their only alter­na­tive would be to use their assets or not make any more allo­ca­ti­ons, explains Luzius Neubert. In most cases, both go against the foundation’s goal. Hans­jörg Schmidt is also noti­cing this shift to higher-risk invest­ment cate­go­ries. ‘Previously, it was rare to see foun­da­ti­ons inves­t­ing in micro-finance or private markets,’ he says. Such invest­ments are rather complex and vola­tile. This shift is happe­ning not just out of neces­sity, because of the lack of return poten­tial, howe­ver. Rather, Hans­jörg Schmidt is seeing a profes­sio­na­li­sa­tion of foun­da­tion boards. This could also have happened earlier, but nobody wanted it. Mainly because foun­da­tion boards often didn’t know these invest­ment cate­go­ries and thus were rather reti­cent. Sushant Sharma adds: ‘In theory, foun­da­ti­ons have a higher risk tole­rance than many other insti­tu­tio­nal inves­tors. Howe­ver, that depends a great deal on the risk appe­tite of the Foun­da­tion Board, which allo­ca­tes the risk budget.’ Also important is the ratio between the annual grant budget for the foundation’s funding acti­vi­ties and the extent of its assets. The Fonda­tion Botnar also makes sure that it can pursue a long-term funding stra­tegy, with a budget that is not directly subject to the vaga­ries of the market. To this end, in 2019, the foun­da­tion intro­du­ced a fluc­tua­tion reserve. This will be built up as a buffer in years of strong asset development.

«Last year, SwiPhiX achie­ved a plus of 9.5 percent.»

Hans­jörg Schmidt,
Foun­da­ti­ons Direc­tor at Zürcher Kantonalbank


Sustaina­bi­lity is the hot topic at the moment. ‘We apply sustaina­bi­lity crite­ria to our invest­ments,’ says Sushant Sharma. The foun­da­tion does so by apply­ing the prin­ci­ples of respon­si­ble inves­t­ing (inclu­ding ESG and SRI prin­ci­ples). The foun­da­tion avoids asset clas­ses in which sustaina­bi­lity approa­ches are not viable, such as natu­ral resour­ces or hedge funds. In terms of equi­ties, it follows a best-in-class approach by exclu­ding parti­cu­larly contro­ver­sial sectors. Howe­ver, he adds: ‘We see no corre­la­tion between sustaina­bi­lity and vola­ti­lity.’  Luzius Neubert doesn’t see any direct corre­la­tion, either. Nevert­hel­ess, he points out that a sustaina­bi­lity stra­tegy can influence yield deve­lo­p­ment. Because the ability to diver­sify can be limi­ted, depen­ding on which sectors or secu­ri­ties are excluded in the stra­tegy. ‘Having a small, concen­tra­ted port­fo­lio is a track­ing error, i.e. the devia­tion in perfor­mance from a broad market index, and ther­e­fore the market as a whole, is grea­ter than if you have a diverse range of secu­ri­ties in your portfolio.’ 

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