Category: Blog Articles

Reading Time: 10 minutes

Companies are constantly on the lookout for efficient financing options to maintain their growth trajectory. In doing so, they often encounter challenges with traditional sources of financing. Private debt provides suitable financing solutions for emerging companies.

The asset class also strikes a chord with many investors who are looking for promising return opportunities and want to further diversify their portfolios. Having long been the preserve of institutional investors, this credit marketplace is increasingly opening up to private investors.

In this article, you will get an overview of private debt, what added value this asset class offers and how this form of investment differs from other investment classes. Furthermore, different types of private debt are explained and which risks have to be considered for this private market investment.

The most important facts in brief

• Private debt is an internationally growing asset class in a non-public market.
• Corporate financing as a private market investment promises high returns.
• Studies predict double-digit growth in Switzerland as well.
• Everon enables private investors to invest in a market that was long reserved for institutional investors.
• Investors should understand the distinction from other financial instruments before investing.

Private Debt: Definition and Explanation of a Private Markets Asset Class

The term private debt describes the extension of corporate credit to companies by non-public institutions such as banks or investors. In contrast to public debt, where companies issue bonds on the public markets or receive loans from banks, companies receive debt capital from private lenders. Private debt has gained in importance in recent years and is used by both institutional investors and wealthy private investors.

Compared to traditional bank loans, private debt often offers more flexible terms and tailored loan arrangements. This enables companies to take advantage of alternative financing solutions, especially when they have difficulty obtaining loans from traditional banks.

Private debt investors, in turn, can diversify their portfolios and achieve attractive returns by investing in corporate lending.

Differentiation from other financial instruments

Private debt differs from other financial instruments available to retail investors in several key ways.

Some important differences and distinctions are explained below, based on some common investment products:

• Public Bonds: Unlike public bonds, which are issued by corporations or government institutions in public markets, private debt is a non-publicly traded security. Private debt investors invest directly in loans to companies and receive interest payments in return and possibly also a share in the company’s profits (mezzanine).
• Stocks: Private debt contrasts with stocks, which represent ownership interests in a company. While equity holders benefit from price increases and dividend payments, private debt investors receive fixed interest payments and are usually not entitled to company shares.
• Private Equity: Private debt also differs from private equity, in which investors invest equity in companies. Private debt investors, on the other hand, provide debt financing and are creditors of the company. They have priority over equity investors in the event of insolvency or restructuring.

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Private debt: a rapidly growing asset class worldwide

Over the past decade, the private debt market has expanded rapidly due to long-lasting low interest rates and high investor demand. The success of private debt is a result of the special market conditions following the global financial crisis. Private debt opens up liquidity opportunities for expanding private companies as well as higher return opportunities for investors compared to public debt instruments. Private debt is therefore often already regarded as an asset class in its own right , having originally been considered a subcategory of private equity. This is also due to the fact that private debt investments are often used to finance leveraged buyouts, i.e. leveraged takeovers of companies.

The international private debt market is one of the fastest growing private markets and is now the third largest private market after private equity and real estate. On average over the last ten years, the private debt market has grown by 13.5 percent annually. This compares with growth of 11.5 percent for private equity and venture capital and 9.1 percent for real estate over the same period. According to forecasts by the British information service Preqin, the private debt market is expected to continue expanding and even reach assets of USD 2.7 trillion by 2026.

Private debt: market size in Switzerland

The market for private financing solutions is also growing in Switzerland, not least due to the general economic conditions. However, as it is a non-public market, statistics are often based on estimates. However, the Lucerne University of Applied Sciences and Arts has already proven the growing importance of corporate financing with private debt in a study in 2019.

The key findings from the study:

• The Swiss private debt market volume is around three billion Swiss francs.
• The global growth of private debt will continue.
• Although banks will remain the main lenders, alternative forms of financing such as private debt are growing.
• Analogous to the growth rates of private equity, double-digit growth rates are expected to continue.
• Investor interest in private debt is strong and will remain strong.

Banks are observing the development and will participate in platforms.

An interesting investment opportunity is now also opening up for private investors

For many years, private debt was reserved almost exclusively for institutional investors. But in recent years, the private market for corporate loans has become increasingly democratized. Triggered by the ongoing low-interest-rate policy, investment opportunities are gaining in importance for private investors as well as the traditional capital markets. For an increasing number of investors, private debt comes at the right time to further diversify their asset structure.

Thanks to innovative asset managers such as Everon, smaller investment sums can now be invested in this attractive asset class in the digital world. Depending on the project, investments as low as 10,000 Swiss francs are possible with Everon. Read more about asset management at Everon if you are interested.

Private debt is primarily suitable for investors with a long-term investment horizon who are not dependent on short-term availability. This requires not only appropriate expertise, but also a certain risk capacity. In return, investors optimize their asset structure and receive an investment with ongoing cash flow. Private debt thereby shows a risk with low correlation to listed securities such as stocks or bonds.

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These opportunities open up for investors

The basic principle of private debt is that private lenders bear the risk of financing a company or a project. As a reward, they receive a decent return that is significantly higher than that of publicly traded investments. Depending on the investment strategy, returns of around 3 to 15 percent per year are achievable for private debt investments, and in some cases even higher. The prerequisite for an effective investment is a well-founded selection as well as control of all selection options. Investors are rewarded for the extra effort with above-average return prospects.

Apart from the usual advantages of alternative asset classes – such as attractive returns, diversification and a low correlation with public markets – private debt brings additional specific benefits:

• Less risk: compared to private equity and real estate, debt is less risky. This is because returns are fixed and investors’ claims in the event of default are prioritized.
• Predictable returns: Returns are predictable and contractually fixed based on an interest rate.
• Close relationship with borrowers: private lenders typically maintain closer relationships with borrowers than standard loans. This results in a more efficient process and often contributes to the success of the business in question.
• Expanded investment opportunities: private debt gives investors access to a variety of economic sectors that would otherwise be inaccessible to them. These include renewable energy, investment in early growth stage companies, and investment in an area otherwise reserved for banks.

These are the risks investors should watch out for

It is important that private investors carefully assess their risk appetite and seek professional advice before investing in private debt. This is the only way they can arrive at a suitable investment approach. Private debt investments involve specific risks for private investors.

The main risks that can occur with private debt investments are:

• Illiquidity: private debt investments are often long-term exposures with limited liquidity. Unlike publicly traded securities, private investors may have difficulty selling their investment early. This is due to the fact that the secondary market in private debt is comparatively underdeveloped.
• Credit risk: Private debt investments carry an increased risk that the debtor will not be able to meet its obligations. This can happen due to payment problems, insolvency or other economic challenges. The risk depends not least on the ranking of the debt instruments in the event of insolvency (senior or subordinate to other claims).
• Concentration: Private debt investments can often be concentrated on specific companies, sectors or regions. This increases risk, as a negative performance in one company or sector can have a significant impact on the entire investment.
• Lack of Information: Unlike publicly traded securities, private debt investments as private market investments often offer less transparency and information about the company, the borrower, or the specific terms of the investment. This can make it difficult for private investors to conduct a comprehensive risk assessment and make appropriate investment decisions.
• Barely regulated: Compared to publicly traded securities such as stocks or bonds, investors cannot rely on government regulation to review investment guidelines. In-depth financial knowledge, especially in the area of credit financing, is required.
• Interest Rate Risk: Private debt investments may be tied to variable interest rates. Although floating rates allow investors to benefit from rising interest rates, they also increase credit risk for borrowers because they can strain their liquidity. Today, most private debt portfolios have a predominance of floating rates, often with an interest rate floor to provide investors with a minimum return.

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Private debt: the complex asset class requires expert knowledge

Private debt is a complex asset class that requires specific expert knowledge. Private investors usually do not have the expertise and access to the necessary information to successfully manage this asset class. Therefore, it is important that experts in the form of professional fund managers or specialized asset managers are involved in the management of the private debt portfolio.

Challenges of the financial markets

Financial markets face many challenges, such as inflation, global economic developments, political conflicts and high debt levels. These factors can have a significant impact on the performance and risk profile of private debt investments. Experts with in-depth knowledge of the markets can correctly interpret these factors and make informed decisions to best position the portfolio.

Market analysis

Analyzing and evaluating private debt investment opportunities requires specific know-how. Selecting suitable borrowers, assessing credit risk, evaluating repayment ability, and negotiating loan agreements require expertise and experience. Private debt experts are able to assess the quality of borrowers and their business models, keeping the goals of capital preservation and return in mind.

Professional asset management

Managing risk and implementing appropriate diversification also play a critical role in managing private debt investments. Professionals can help diversify the portfolio across borrowers, industries, geographies and instruments to spread risk and increase the chances of positive returns. They have access to a broad network of borrowers and can provide a balanced mix of different types of private debt investments, such as senior secured loans or mezzanine capital.

Access to expert research

Involving expert asset managers in the management of the private debt portfolio allows private investors to benefit from their expertise and experience. Experts typically have access to extensive information and resources to effectively manage the portfolio and ensure appropriate risk management.

Reading tip: Private financial planning – how to achieve your individual goals

Different investment strategies and financing instruments

The majority of private debt investments are in unlisted private debt funds. These funds differ both in terms of their strategy and the debt instruments offered.

The financial instruments are mainly divided into the following areas:

• Loans withsenior collateralization (senior secured loans)
• Loans with subordinated or no collateralization(junior unsecured loans)
• Mezzanine instruments (ranking behind other loans)

Combinations of the various instruments are also conceivable.

The main strategies of private debt funds are described in the following sections.

Direct Lending

In this form of financing, specialized private debt funds grant loans directly to companies. This is done without syndication by a bank. Direct Lending investors enable loans to be structured quickly and flexibly. Among other things, they can waive interest payments for a certain period of time or handle credit ratings more flexibly. Direct lending investors are remunerated for these flexible components with a comparatively higher interest rate.

Distressed debt

As a rule, distressed debt refers to bonds or loans issued by companies that are in financial difficulties. They may be facing insolvency or may already be insolvent. This debt often trades at a price lower than its face value as investors consider the increased risk and uncertainty associated with repaying the debt.

With distressed debt, investors invest in companies that are struggling. However, these have the potential to recover and generate attractive returns once the financial problems are overcome.

Mezzanine capital

Mezzanine capital is a form of financing that combines characteristics of equity and debt. It is ranked between equity and debt in the capital structure.

Mezzanine capital is typically used to supplement a company’s equity and provide additional financing for specific purposes. These include acquisitions, growth investments, capital increases or corporate restructuring. It can also be used in situations where traditional bank loans are unavailable or insufficient.

Compared to traditional equity, mezzanine capital has a higher interest rate, but also involves a higher risk for the investor. Mezzanine capital investors often have the right to share in the profits of the company or to convert their receivables into equity at a later date.

Private debt fund of funds

This strategy is comparable to a traditional fund of funds. Depending on the strategy, the private debt fund of funds invests in several debt funds and thus offers investors greater diversification.

Special Situations

Private debt funds that specialize in so-called “special situations” look for opportunities to provide capital and help companies overcome their specific challenges.

The potential occasions for special situations investments can be many and varied. Examples include companies that are planning an expansion or an acquisition in a certain market segment and require specific financing solutions.

Venture Debt

Venture debt refers to a specific form of financing in which venture capital companies or start-ups raise additional debt to support their growth. Unlike traditional debt financing, venture debt is a form of financing specifically targeted at early stage or growth stage companies. These are typically supported by venture capitalists.

Reading Time: 8 minutes

Unemployment can affect anyone. In times of economic uncertainty in particular, it is important to be prepared for the changed situation in terms of finances and pension protection. With the right management of your pension fund assets, you are protected even in difficult situations.

With the following information on the consequences of unemployment, how to handle your pension fund assets, and how to continue your insurance, you can make the right decisions for you.

The most important facts in brief

• Almost half of today’s professions will disappear in the next twenty years.
• Digitization and robotics are the key issues in the future world of work.
• Unemployment can affect anyone – pension fund options should be used wisely.
• Optimal handling of the pension fund in the event of unemployment secures retirement provisions.

Unemployment in Switzerland: Anyone can be affected at some point in their working life

In Switzerland, a total of 92,755 people were unemployed in March 2023, which corresponds to an unemployment rate of two percent. In the individual cantons, the figures vary widely, ranging from 0.6 percent in Obwalden to 3.7 percent in Geneva.

For many people, technological development has increased the likelihood of becoming unemployed at least once in their working lives. According to a study by the University of Oxford, nearly half of the professions will become redundant in the next two decades, as they are largely taken over by robots. Many of the remaining jobs will also be automated.

The positive perspective: Wherever new technologies emerge, skilled workers will be needed in new fields of activity. In addition, there will be an increased demand on the labor market in the next few years as the baby boomers of the 1950s and 1960s retire.

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You can expect these financial effects

When wages are eliminated, the financial losses are enormous. After all, unemployment insurance only provides temporary basic security. When looking to the future, you should also keep an eye on your pension fund if you are unemployed. After all, saving for retirement with the pension fund is an essential building block.

The basic security: Unemployment benefit

Unemployment benefits are applied for at the local municipal administration or at the responsible unemployment placement center (RAV). While receiving benefits, specified obligations must be fulfilled. These include applying for jobs and participating in programs that improve employability.

The essential conditions for receiving unemployment benefits in Switzerland are:

• You were employed at a gross wage of at least 500 francs before becoming unemployed.
• Contributions have been paid to the unemployment insurance fund for at least the period of one year in the past two years. If children under the age of ten were raised, it is sufficient to have paid contributions for one year within a four-year period.

In some special cases, you are also insured against the consequences of unemployment for up to one year without having paid contributions:

• You cannot work during pregnancy.
• Work is not possible because of an accident, illness or psychiatric treatment.
• A course of study prevents you from taking up work (provided that you have been resident in Switzerland for at least ten years).
• As a Swiss citizen, you are temporarily living in a country outside EFTA or EU.

In principle, unemployment benefits amount to 70 percent of your last salary. However, it is important to note that the maximum salary of 12,350 francs per month is taken as a basis.

In the following cases, you can receive unemployment benefits of up to 80 percent of your last salary:

• There are dependent children.
• In case of disability (from a degree of disability of 40 percent).
• If the last monthly wage was below 3,797 francs.

The following table shows the period of entitlement to unemployment benefits:

Contribution payments	Age and maintenance obligation	Other conditions	Unemployment insurance Daily allowances
12 to 24 months	up to 25 (no maintenance obligation)		200 months
12 to 18 months	from 25		260 months
12 to 18 months	from 25 (with maintenance obligation)		260 months
18 to 24 months	from 25 (no maintenance obligation)		400 months
18 to 24 months	from 25 (with maintenance obligation)		400 months
22 to 24 months	from 55		520 months
22 to 24 months	from 25	for invalidity pension, from degree of invalidity of 40 percent	520 months
22 to 24 months	from 25 (with maintenance obligation)	with disability pension, degree of disability at least 40 percent	520 months

If you become unemployed within four years before reaching retirement age, you will receive unemployment benefits again for 120 working days.

BVG payments: What happens if I become unemployed?

If you become unemployed, this means, to a certain extent, a withdrawal from the pension fund. This means that your retirement assets with the pension fund must usually be transferred to a vested benefits institution.

The following options are available for investing your vested benefits:

• Vested benefits policy: the capital is well protected and the insurance claims are guaranteed. Often, a lump-sum death benefit is also insured in addition to the endowment capital. However, costs are incurred for the insurance benefit. Depending on the personal situation, insurance may not always make sense, and the solution is often not worthwhile, especially for short terms.
• Vested benefits foundation: Here, the money is invested with a bank. The interest rate is not particularly high. Nevertheless, a comparison is worthwhile, and attention should also be paid to the fees.
• Fund investments: For investment periods of more than ten years, experience has shown that investing in the stock market is a more effective option. Here, digital investment advisors offer interesting investment opportunities even for manageable sums.

Those who do not give their pension fund instructions on the whereabouts of their pension assets when they become unemployed will automatically receive their vested benefits account from the BVG-Auffangeinrichtung. This foundation was established by the federal government to ensure that pension assets are preserved in any case.

The compulsory disability insurance and survivors’ insurance of the pension fund is continued in the event of unemployment via the BVG-Auffangeinrichtung. This insurance automatically continues as long as unemployment benefits are drawn. The premiums are paid in equal parts by the policyholder and the compensation fund.

Tip: More about vested benefits at Everon

Check option: Continuation of BVG payments

In the event of unemployment, the options with the pension fund should be considered and used depending on the personal situation. The aim is to maintain the standard of living in retirement.

The paths described below can be taken.

Voluntary continued insurance with the Stiftung Auffangeinrichtung BVG (BVG Contingency Fund Foundation)

As long as unemployment benefits are being drawn, the mandatory insurance against disability and death continues with the Auffangeinrichtung, as described above. Note that coverage is maintained for only one month after the last daily allow ance has been paid.

There is also the option of voluntary insurance for up to three months after leaving the previous pension plan. This allows both risk protection to be maintained and additional savings contributions to be made for old age.

Since budgets are tight when people are unemployed, voluntary insurance is out of the question for many unemployed people, since they have to make the contributions on their own. In addition, vested benefits accounts with the supplementary institution offer only a modest return. On the other hand, it is interesting to have the option of buying into the new pension fund in the event of temporary unemployment when taking up a new job, thus closing the gaps due to missing contribution periods.

Voluntary continued insurance with the previous pension fund

If you are at least 55 years old and your employer terminates your employment, you have the option of continuing to be insured with the employer’s pension fund. The prerequisite for this is that you do not belong to a new pension fund. It is important to observe the 90-day deadline for registration.

If the contribution based on the previous salary is too high, the relevant salary can be reduced in consultation with the pension fund. Only the BVG entry threshold must be observed. This gives you the option of flexibly adapting your pension provision to your financial possibilities. The contributions are also tax-deductible.

Reading tip: Change of employer: How to secure your pension fund entitlements

Check another option: Advance withdrawal of pension fund assets

In some cases, early withdrawal of retirement assets from the pension fund can also be an alternative.

This is possible in the following situations:

• Financing of residential property: in addition to the purchase, this also includes the repayment of mortgage loans. The prerequisite is that it is the main residence. However, the full capital can only be withdrawn up to the age of 50, after which the amount is limited.
• Taking up self-employment: This can be the basis for setting up a business if you are unemployed.
• Leaving Switzerland for good: However, drawing the obligatory amount is only possible when emigrating to countries outside the EU and EFTA.
• Early retirement: This is usually possible at the age of 58. However, some pension schemes provide for retirement at the age of 60 at the earliest. The early withdrawal creates an income gap, the amount of which depends on the conditions of the pension fund. In most cases, you can expect five to eight percent per year of early withdrawal.

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What else you should bear in mind

The topic of unemployment and pension funds is very complex, and your personal situation determines which measures make sense in each case.

Depending on your initial situation, you should therefore consider the following points:

Starting a new job

When you start a new job after an interruption, you are obliged to transfer all existing vested benefits to the new pension fund. Any surplus can only remain in a vested benefits account if the capital exceeds the complete regulatory benefits.

Self-employed persons

Self-employed persons have no coverage against unemployment and therefore do not receive unemployment benefits. However, the possibilities of early withdrawal in the case of business start-up, as described above, must be taken into account.

Optimal investment of vested benefits: investment horizon is decisive

The pension fund assets can be transferred to up to two accounts of different providers. In this way, you not only spread the risk, but also have the advantage of possibly being able to withdraw the assets at different dates.

Although most providers pay interest on the money in vested benefits accounts at a preferential rate, interest accounts are hardly recommended for long-term investment. Currently, the funds there earn between 0.01 and 1.25 percent interest, depending on the provider. At 0. 01 percent, the interest on the vested benefits account of the Auffangeinrichtung is one of the lowest-interest accounts.

In addition to conventional interest-bearing accounts, banks and vested benefits foundations also offer securities solutions with different proportions of shares and bonds. Experience has shown that, over the longer term, the return is significantly higher than with interest-only accounts. However, if share prices fall during the investment period, the vested benefits balance may also be reduced. In order to compensate for price fluctuations, an investment in securities is therefore particularly advisable for a longer investment horizon. Today, digital investment advisors already offer sound asset management for manageable sums. Here, professionals take care of the optimal mix of securities funds.

Reading tip: Vested benefits for occupational retirement provision: Tips & FAQ

Reading Time: 3 minutes

In our Market Update for the month of May 2023, you will find current developments on the financial markets and an assessment of current events. Our aim is to give you an overview of the latest developments in the global financial markets.

Key interest rates and inflation

At the beginning of May, the U.S. Federal Reserve decided to raise the key interest rate by another 25 basis points. This was in line with the expectations of market participants. What was received as very positive, however, was the fact that the Fed held out the prospect of an interest rate pause in June. Given the disinflationary trend and the instability of the U.S. regional banks, it would seem to make perfect sense to put the brakes on a bit and wait to see the effects of the high interest rate level.

For April, U.S. inflation continued to decline, with the core rate still at a high level of 5.52%. The U.S. labor market was surprisingly robust and consumers also continue to seem to know nothing of a recession, as retail sales, after two months of decline, also rose again in April. Currently, it is expected that the FED will not raise interest rates in June, but it is quite possible that this will be made up for in July.

Reading tip: Factor Risk Premia: Value, Momentum, Size, and Quality

Raising the debt ceiling in the USA

The big topic this month was the controversy over raising the debt ceiling in the US. As has been the case several times before, the decision was used by Republicans and Democrats to blame the other party for the plight.

The threat of default weighed on the stock markets and the prices of short-dated US Treasuries also fell. At the end of May, a compromise was finally reached, which was approved by the U.S. Senate at the beginning of June.

Interest rates and inflation in the euro zone

The picture in the euro zone is similar: a declining trend in inflation with robust core inflation data, a robust labor market and improved retail sales. However, economic indicators such as the Purchasing Managers Index and the business climate are becoming increasingly gloomy.

The ECB also raised interest rates by a further 0.25% in May, which represents a clear reduction in aggressiveness after previous increases of 0.75% and 0.5%. Unlike the Fed, however, the ECB made it clear that it was not planning to pause interest rates.

Inflation in Switzerland

In Switzerland, inflation fell to a comfortable 2.6% for the month of April, which is only slightly higher than the general target of 2%. Nevertheless, the SNB recently made it clear that further interest rate hikes are not ruled out.

In Switzerland, economic indicators also clouded over slightly, although the unemployment rate is lower than it has been for more than 10 years.

Reading tip: Market review 2022 and outlook 2023

Trend: Artificial intelligence

Another important topic is the stock indices in the U.S., which are currently driven by one topic in particular: Artificial Intelligence. The big tech giants like Nvidia, Apple, Google, Meta and Microsoft are driving indices like the S&P 500 and Nasdaq, due to the great potential seen here in the field of AI. According to an article from Nasdaq.com, 10 stocks are responsible for over 80% of US index profits.

This is referred to as narrow market breadth, where a few companies are responsible for the majority of the market movement. This is because, as can be seen on the chart above, more than half of the companies have negative performance. As a result, even the broad-based S&P 500 can no longer be considered representative of the U.S. equity market. However, this fact has not yet entered the perception of many investors in this way. We consider this development to be extremely alarming and continue to focus on well-diversified portfolios.

Reading Time: 6 minutes

In today’s turbulent financial climate, the advantages of a reliable and steady source of income are becoming more relevant again. After years in which the stock markets knew almost only one direction, we are currently in a phase in which this direction must first be found again. Due to the current interest rate development and the correction in the area of growth stocks, a well-tried investment strategy is coming back into focus: the income strategy.

This article looks at the intricacies of income strategies and examines their structure, advantages and disadvantages, suitable investor profiles and a comparison with non-income strategies.

What is an income strategy?

An income strategy refers to an investment strategy that focuses on generating consistent income from your investments. Typically, this is achieved through dividends from stocks, interest from bonds, and rents from real estate investments.

The main goal is to create a predictable income stream that can be used to cover living expenses, supplement retirement income, or reinvest for continued portfolio growth.

Structuring an income strategy

The core of an income strategy is diversification, which includes multiple asset classes and sectors. Bonds, stocks (especially high-dividend stocks), real estate investment trusts (REITs), and high-yield savings accounts are popular asset types.

• Government and corporate bonds are generally preferred because of their relatively lower risk and consistent payouts. While bonds have hardly been able to generate any income in recent years, especially from good borrowers, this has changed as a result of the increase in key interest rates. This asset class is thus once again becoming an essential component of any income strategy.
• Stocks of companies with solid dividend payouts offer a growth component while generating income. Where dividend stocks were one of the most important sources of income in recent years, however, they are currently losing a bit of their appeal compared to bonds, as the latter now offer attractive coupons with lower volatility again.
• Last but not least, REITs offer participation in real estate income without the need for direct real estate ownership. High-yield savings accounts and money market funds offer modest returns, but bring consistent income and liquidity to the portfolio.

The specific allocation among these options depends on the investor’s goals, risk tolerance, and market conditions.

Advantages and disadvantages of an income strategy

Advantages:

• Stable income: This is the key advantage. Income strategies provide steady, predictable cash flow, which can be especially beneficial in retirement or during financial downturns.
• Risk mitigation: income-generating investments often have lower price volatility, providing a buffer during times of market turmoil.
• Accumulation: If income is not needed immediately, it can be reinvested, accelerating portfolio growth through the compound interest effect.

Disadvantages:

• Limited capital appreciation: compared to growth strategies, income strategies may generate lower total returns over the long term because they focus more on income than capital gains.
• Inflation risk: fixed income from bonds may lose real value if inflation exceeds interest rates.
• Interest Rate Sensitivity: Bond prices are inversely related to interest rates. Rising interest rates can depress bond prices, resulting in capital losses for holders. However, these losses are only realized if the bond is sold before it matures.

The ideal investor for an income strategy

Income strategies are particularly beneficial for investors seeking a regular income, such as retirees or those nearing retirement. They may also appeal to risk-averse investors who prioritize preserving capital and earning regular income over chasing high growth.

However, it is important to remember that a well-rounded portfolio should include a mix of income and growth investments, regardless of the investor’s life stage. The ratio may change depending on the individual’s needs and market conditions, but having both components helps maintain balance and potential returns.

Reading Tip: Retirement planning in Switzerland: How your financial security works

Income-oriented strategy vs. non-income-oriented investment strategy

When comparing income strategies to non-income strategies, two main aspects are examined: returns and volatility.

• Returns: Over long periods of time, growth strategies can generate higher total returns due to the compound interest effect of capital gains. However, during economic downturns or volatility, income strategies may perform better because they continue to deliver returns despite market conditions.
• Volatility: Income strategies generally have lower volatility than pure growth strategies. The steady returns act as a buffer against price fluctuations, making these strategies more stable over time.

Performance Comparison

To illustrate, we look at the Swiss SPI® Index, which includes almost the entire Swiss stock market, over the 9-year period. For this purpose, we have selected three ETFs , each of which tracks the entire SPI® Index, only the mid-sized companies (SPI® Mid Cap Index) and finally only the highest dividend paying stocks (SPI® Select Dividend 20 Index). For the sake of comparability, we consider so-called return indices, i.e. dividend distributions are reinvested and are thus included in the performance of the indices.

• As can be seen in the chart below, mid-sized companies perform better in times of positive market trends. This would be comparable to a more growth-focused strategy. The broad market and dividend strategy perform very similarly during this market phase.
• During negative market phases, the growth strategy reacts the most, with the dividend strategy correcting less sharply. Thus, over different market phases, dividend strategy and growth strategy offer different advantages and disadvantages, with the former having lower volatility.
• Although the total returns of the dividend strategy and the growth strategy appear very similar over the entire period under consideration, it is important to note that dividends are assumed to be reinvested here, again generating returns. Since in a traditional income strategy, cash flows are typically paid out and consumed, the return will be lower over the entire period. However, it makes up for this with the stable and regular income.

This is a simplified illustration using Switzerland as an example. This relationship may behave differently in other markets with different sector breakdowns. However, it illustrates well the basic characteristics of income and growth strategies.

Reading tip: Market review 2022 and outlook 2023

Everon’s income strategy

Everon’s investment strategy uses stocks, bonds and real estate, as their income suitability has already been mentioned. Fixed income and Real Estate are inherently asset classes that tend to generate income streams. We select the products that are best in terms of value stability, income generation and Fees are best.

On the equity side , our proprietary selection process is applied. The key metric for high-yielding stocks is dividend yield. However, looking at this metric alone can lead to suboptimal decisions because it takes into account dividend and price data. A high dividend yield may indicate a high dividend amount relative to the price, but the low price may be so low for a reason. This situation can pose the risk of what is known as a“value trap.” This is where favorable market-to-book ratios are used to incorrectly conclude that an investment instrument is undervalued, which can ultimately lead to a loss.

Everon’s approach analyzes many criteria in addition to dividend yield to determine which stocks offer stable, above-average and slightly growing dividends with reasonable price volatility. This ensures not only stable income generation, but also stable portfolio value.

Reading tip: Factor Risk Premiums: Value, Momentum, Size and Quality in recent years

Conclusion

An income strategy can be an important tool for investors seeking regular income and lower volatility. However, like all investment strategies, it carries potential risks and may not be suitable for everyone. A well-diversified portfolio that combines elements of income and growth strategies can help investors weather varying market conditions and achieve their financial goals.

It is important for investors to understand their financial needs, risk tolerance, and investment goals before choosing an investment strategy. A well-designed income strategy can be a source of stability in an uncertain market and provide a lifeline of regular income in a turbulent sea of economic change.

Ultimately, the most successful investment strategy is one that is carefully tailored to your personal financial situation and goals. Not only will you be able to maximize your investment returns, but you will also have the peace of mind that your financial future is secure. Whether you’re approaching retirement or simply want to diversify your investment approach, an income strategy could be a wise choice.

Reading Time: 9 minutes

In today’s globalized world, the decision to emigrate from one’s home country is not uncommon. It is no different for the Swiss. Emigrating from Switzerland is a life-changing event that requires thorough planning, including financial security and retirement planning.

The Swiss pension system is designed to provide financial stability. However, moving to another country can raise questions about the future of these benefits. What happens to AHV when I emigrate and how do I safeguard my pension fund assets?

This guide focuses on AHV and pension fund when emigrating from Switzerland. You can use it to draw up your own personal checklist of what you need to bear in mind to safeguard your pension assets abroad.

The most important facts in brief

• Leaving Switzerland requires sound retirement planning.
• Depending on your future citizenship and the country of emigration, different regulations apply.
• Switzerland has concluded social security agreements with many countries in order to secure the retirement provisions of the Swiss even after emigration.
• If there is no social security agreement with Switzerland, the previous contributions can be paid out if necessary and the old-age provision can be completely rebuilt.
• Voluntary insurance in the AHV is possible in certain cases.

Leaving Switzerland: Clarify finances with these questions

There are many financial aspects to consider when emigrating from Switzerland. The most important questions you should clarify before you take the step abroad are:

Emigrating or another temporary center of life?

Depending on whether the move is permanent or temporary, this will affect pension rights, health insurance and taxes. For temporary stays, different rules may apply than for a permanent move abroad.

What happens to real estate and household effects?

Depending on the living situation in the destination country, selling or renting out the real estate you previously used yourself may be an option. Whether you are a tenant or an owner, consider whether it makes sense to sell or give away parts of your household goods. It is advisable to draw up a plan for dealing with the various valuables at an early stage. Finally, space constraints as well as a different climate may necessitate the purchase of new furnishings.

What are the future financial needs?

Determine your financial needs for moving and living in your destination country. Consider ongoing living expenses, rent, insurance and possible unforeseen expenses. Detailed financial planning will help you get a realistic estimate of your needs and be financially well prepared for your move abroad. Important: The cost of living and housing expenses vary from country to country. Furthermore, there are higher costs for mobility in territorial countries such as Norway.

What is the composition of income in the country of emigration?

Research job opportunities and find out about local salary structures. If you are continuing your life in another country, you should also be informed about employment opportunities if employment is currently fixed. In this context, check whether you may be able to draw on income from assets or inheritances.

How is pension provision organized in the new home country?

Not all countries organize pension provision for life in old age in the same way as Switzerland’s 3-pillar principle. In the USA, for example, occupational pension provision is voluntary and investment in the stock market is widespread. In Germany, for example, the tax treatment of occupational pension provision is organized, but the employer is not generally obliged to contribute to it. Furthermore, there are various implementation channels. A pension system comparable to the 3-pillar principle in Switzerland exists in Sweden.

Swiss pension plan: Use options for early withdrawal or continue?

This fundamental question can only be answered once the retirement provision options in the country of emigration are known and compared in detail. The tax implications both in Switzerland and in the destination country must also be taken into account.

Essential: What health insurance options are available in the new home country?

It is essential to check the health insurance options in the destination country before emigrating from Switzerland. In some countries there is compulsory insurance, while in others private or voluntary insurance is available. Furthermore, there are mixed systems, such as the insurance of civil servants in Germany.

It is therefore important to understand the insurance coverage in the destination country to ensure you are adequately covered. Often, private health insurance is required to ensure comprehensive coverage.

Emigrating to an EU or EFTA country

Switzerland has signed agreements with several countries. These regulate the social security status of people who move their residence or employment from Switzerland to one of these countries and vice versa.

The most comprehensive in this context is the Agreement on the Free Movement of Persons with the EU, which regulates social security with all EU member states. There is also a corresponding agreement with EFTA, which, in addition to Switzerland, consists of the member states Iceland, Liechtenstein and Norway.

Switzerland has concluded further bilateral social security agreements with the following countries:

• Australia
• Bosnia
• Herzegovina
• Brazil
• Chile
• China
• India
• Israel
• Japan
• Canada
• Kosovo
• Macedonia
• Montenegro
• Philippines
• Republic of San Marino
• Serbia
• South Korea
• Tunisia
• Turkey
• Uruguay
• United States

Social security agreements with destination country: AHV and emigration from Switzerland

The aim of the social security agreements is to maintain the state pension scheme for people who leave Switzerland. You are therefore entitled to a pension if you have paid contributions to the AHV for at least one year and move to a country with which there is a social security agreement.

Two cases must be distinguished:

• Posting by Swiss employer: persons who are posted by a Swiss company to an EU or EFTA country and are paid by this company remain compulsorily insured in Switzerland as Swiss abroad. In the case of a posting of longer than 24 months, the employer must apply for an extension.
• Leaving Switzerland for good: If you emigrate to a country with which Switzerland has concluded a social security agreement, you are covered by the social security system of the country of emigration. As a result, when you retire, you will receive an additional pension from the social security system of the destination country in addition to the AHV pension (corresponding to the contributions paid in).

The Swiss Compensation Office (SAK) is responsible for applying the social security agreement. This is also where the pension is determined and paid out. An advance pension withdrawal is also applied for at the compensation office.

Social security agreement with destination country: What happens to the pension fund assets?

The obligation to contribute to the second pillar ends with the termination of the employment relationship in Switzerland. If there is coverage against the risks of death, disability and old age in the countries with social security agreements, only the non-compulsory portion can be withdrawn. The compulsory part remains in a vested benefits account Vested benefits account and can therefore be withdrawn no earlier than five years before the regular retirement date.

Exceptions to the early withdrawal of the pension fund balance exist for the following cases:

• Financing of owner-occupied residential property
• Taking up self-employment

Early retirement: The earliest retirement age for most pension funds is 58. At this age, insured persons can access their retirement assets, either as a lump-sum payment or as a monthly pension. From this point on, residence no longer plays a role. It can therefore be either in Switzerland or in another country.

Emigrating from Switzerland: Emigration country not a country of the EU or EFTA

If you emigrate to a country without a social security agreement with Switzerland, you must consider the following consequences:

• There is no entitlement to an AHV pension.
• In certain cases it is possible to get back already paid AHV contributions without interest.
• The entitlement to supplementary benefits or to unemployment assistance for persons who are dependent on help, support or care will cease. Only persons with permanent residence in Switzerland are entitled to these benefits, regardless of their nationality.
• If necessary, there is the possibility of voluntary insurance in the AHV to close gaps in contributions.

Financial start in the new country: payment of AHV contributions

If you have the nationality of a country that has not concluded a social security agreement with Switzerland, a refund of your AHV contributions is possible when you leave Switzerland permanently.

Furthermore, social security agreements with certain countries also allow for the refund of contributions. These include Brazil, Australia, China, India, South Korea, Uruguay, Tunisia and the Philippines.

The following conditions apply for reimbursement:

• You have made contributions for at least a one-year period.
• You have left Switzerland permanently with your family members (spouse as well as children under the age of 25) or demonstrably intend to do so.
• If children between the ages of 18 and 25 remain in Switzerland, they must have completed their education.

Provided that confirmation of departure is available, you can submit the application for reimbursement before you leave. As soon as you are living abroad, the payment can be made.

Important: The application for reimbursement must be made within five years of reaching retirement age (alternatively death).

AHV refund when emigrating from Switzerland: Taxes

Withholding tax is calculated on the refund of AHV contributions. The total amount of the refund is considered as income. The tariff code D is used for taxation. The tax rate is determined by the Canton of Geneva and can be viewed on its website.

Pension fund payout after emigration

If you emigrate to a country outside the EU/EFTA and there is no social security agreement with this country, you can also have the compulsory part of the second pillar paid out.

Withdrawal of pension fund capital upon emigration: taxation

When you withdraw your pension fund assets, capital gains tax is due in Switzerland. If you have emigrated, however, as a Swiss national living abroad you will pay withholding tax on the paid-out assets, as capital gains tax can no longer be levied.

Your advantage: the withholding tax is usually lower than the capital gains tax, but it also varies from canton to canton.

It is therefore worthwhile, before deregistering from Switzerland, to transfer the capital to a pension fund that is domiciled in a canton with the lowest possible tax rate. In addition, there are double taxation agreements with various countries which provide for the reclaiming of withholding tax. In these cases, the described detour via a tax-friendly canton is not necessary.

Caution: Not all double taxation agreements provide for the reclaiming of withholding tax. In some agreements, the right of taxation is assigned to Switzerland. This means that the withholding tax paid is not refunded.

Continue to pay AHV after emigration: When voluntary payments into the AHV are possible and make sense

If you want to ensure that you receive your full Swiss pension after retirement, you may be able to take out voluntary AHV insurance and pay contributions. This way, you will continue to be covered against the risks of death and disability. The voluntary AHV/IV is individual. This means that the declaration of membership must be submitted by each family member.

The following requirements must be met:

• Citizenship of Switzerland or a country of the EU or EFTA.
• Residence not within the EU or EFTA.
• Contributions must have been paid to the AHV/IV for at least five consecutive years prior to termination of the compulsory AHV/IV.
• Voluntary membership must take place within the first year after compulsory AHV/IV has ended.

Since five percent of the contributions are charged for the administration of the voluntary insurance, voluntary membership must be well considered. However, it can make sense, especially for protection , depending on the personal family situation.

This is to be considered with the assets from the pillar 3a

As a rule, individuals receive their credit balance from the voluntary third pillar paid out when they leave Switzerland. The payout is independent of the nationality or the country of destination. Similar to the early withdrawal from the pension fund, the final withdrawal from the third pillar must be reported and proven to the pension fund.

A withholding tax is levied on the lump-sum payment, which may be reclaimed under a double taxation agreement or credited in the new country of residence. Here, however, it depends on the details of the double taxation agreement.

Take advantage of tax benefits and choose the right time to emigrate

Often opportunities arise spontaneously and the time to leave Switzerland cannot be freely planned. However, if this is possible, the right time can also help to optimize the financial situation. Therefore, below are a few more tips that you should consider depending on your personal situation:

• Deregister your residence: Deregister your residence in Switzerland to ensure that you are no longer eligible for Swiss capital gains tax.
• Tax advice: get professional help from a tax advisor to make sure you know and take into account all the necessary tax aspects for the country you are emigrating to.
• Pre-draw pension fund assets: Many pension funds allow lump sum withdrawals starting at 58 or 60, which may be the start-up capital you need.
• Withdrawingcapital after emigration: If you plan to cash out your pension fund or other investments, the withholding taxes due after emigration are often lower than the Swiss capital gains tax.

Advance pillar 3a assets: Similar to pension fund balances, withholding taxes due after emigration are often more favorable than taxation in Switzerland, even though Pillar 3a withdrawals are taxed at a privileged rate.

Reading Time: 7 minutes

In today’s fast-paced financial landscape and fueled by the recent economic developments, market volatility has become a constant companion for investors. When faced with unpredictable market swings, it’s crucial for long-term investors to maintain a disciplined approach and remain focused on their investment goals.

In this article we point out important techniques and approaches professional investors use in order to navigate through times of uncertainty.

Understanding Market Volatility

The risk of financial instruments and financial markets can be measured in many dimensions. The most common risk definition of a financial instrument or market is its volatility. This statistical measure is called standard deviation and indicates how much a variable, like a price, deviates around its mean.

This deviation can be positive or negative. The positive deviation is the desired deviation to earn returns, while the negative deviation is the undesired one which can cause losses. This is also the reason for the high-risk-high-reward relation.

Market volatility arises from a multitude of factors, including economic conditions, geopolitical events, and investor sentiment. It is vital for investors to understand the causes and effects of market volatility, as well as its inherent nature. By recognizing that volatility is a normal part of investing and also to some extent desired, investors can adopt a mindset that allows them to make rational decisions during turbulent times. These are the times where course is set for future growth.

Reading tips:

• Stock market crash – how should you react?
• Turbulence in the banking sector 2023

Sector Rotation – Taking advantage from non-cyclicality

Non-cyclical sectors are also known as defensive sectors and refer to an industry where the demand is sticky and independent from the overall economic cycle. Examples are consumer staples (basic goods like food or hygiene products) or utilities. The demand in these sectors is very stable as it provides the satisfaction of basic needs like food or heating.

In times of market volatility, it can be beneficial to rotate towards an overweight in non-cyclical sectors and an underweight in cyclical sectors (e.g., luxury goods, automotive industry or airlines), to minimize the negative effect on the portfolio.

Reading tip: Factor Risk Premia: Value, Momentum, Size, and Quality in Recent Years

Staying Disciplined – The Foundation for Long-Term Investing

Humans act emotional and so do financial markets. During periods of heightened market volatility, emotions can run high, leading to impulsive decision-making. However, successful investing requires discipline and a steadfast commitment to long-term objectives.

By staying disciplined, investors can resist the temptation to react to short-term market fluctuations and focus on the fundamental principles of sound investment strategies. This includes having a clear investment plan, sticking to a long-term horizon, and avoiding the urge to make hasty portfolio changes based on market noise or temporary setbacks.

Reading tip: Private financial planning – how to achieve your individual goals

Diversification as a Risk Management Tool

Diversification serves as a potent risk management technique, enabling investors to mitigate the impact of market volatility. By spreading investments across different asset classes, sectors, and geographies, investors can reduce the vulnerability associated with a single investment. A well-diversified portfolio can help cushion the impact of market downturns, as different investments may respond differently to market conditions.

This approach allows investors to capture the potential upside of certain investments while minimizing exposure to the downside risks of others. A high degree of diversification leaves a portfolio only vulnerable to broader market moves, which are indicated by changes in macroeconomic conditions. However, this is the risk well-diversified investors get compensated for with positive returns in the long run.

To implement effective diversification, investors should consider a range of asset classes, including stocks, bonds, cash, and alternative investments. Within each asset class, further diversification can be achieved by investing across different sectors and geographic regions. By allocating assets in a manner that aligns with their risk tolerance and investment goals, investors can create a diversified portfolio that is better equipped to weather market volatility.

Reading tip:

• Investing money in Switzerland: investment strategies and the 1×1 of investing
• Investment Strategy in Focus: The Power of Income Strategy

Rebalancing – Maintaining Optimal Portfolio Alignment

In volatile markets, asset classes may experience divergent performance, leading to imbalances in the portfolio’s asset allocation. Regular portfolio reviews and rebalancing are essential to ensure that the investment strategy remains aligned with the desired risk profile. Rebalancing involves periodically adjusting the portfolio’s asset allocation back to the target allocation. This disciplined approach forces investors to sell assets that have appreciated and buy assets that have underperformed, thereby maintaining the desired risk-reward balance.

When rebalancing, investors should consider their long-term investment objectives, risk tolerance, and the specific characteristics of the assets in their portfolio. It is important to strike a balance between maintaining the desired asset allocation and incurring excessive transaction costs or tax implications. By adhering to a disciplined rebalancing strategy, investors can capitalize on opportunities presented by market volatility, buying undervalued assets and selling overvalued ones. As a result, investors automatically act countercyclically.

Dollar-Cost Averaging – A Strategy for Volatile Markets

Dollar-cost averaging is a time-tested investment strategy that offers unique advantages during volatile market conditions. By consistently investing fixed amounts at regular intervals, regardless of market highs or lows, investors can mitigate the impact of short-term volatility. This approach reduces the risk of making large investments at the wrong time and eliminates the need to time the market accurately.

With dollar-cost averaging, investors benefit from purchasing more shares when prices are low and fewer shares when prices are high. Over time, this strategy can lower the average cost per share and potentially enhance long-term returns.

Implementing dollar-cost averaging is relatively straightforward. Investors can set up automatic investments at regular intervals, such as monthly or quarterly, into their chosen investment vehicles. By consistently investing, regardless of short-term market movements, investors can take advantage of market downturns to acquire more shares at lower prices.

Furthermore, dollar-cost averaging instills discipline and helps investors overcome the emotional bias of trying to time the market. It encourages a systematic and consistent approach to investing, which is key to long-term success.

Risk Management Techniques for Volatile Markets:

Beyond diversification and rebalancing, there are additional risk management techniques available to investors seeking to navigate volatile markets. These techniques can help protect investments during market downturns and limit potential losses. Here are a few risk management tools to consider:

• Stop-Loss Orders: A stop-loss order is a predetermined price at which an investor instructs their broker to sell a security. By setting a stop-loss order, investors can limit their downside risk and protect against significant losses. If the price of the security falls to the specified stop-loss level, the order is triggered, and the security is automatically sold. It must be mentioned however, that stop-loss orders are not a guarantee of a fixed maximum loss. When markets are very volatile, it is possible that prices don’t move in a continuous way but can show so called gaps. This is for example when a price jumps directly from one price to the other without any increments in between. When the stop-loss price is set somewhere in between, the stop-loss order is executed at the lower price, causing a larger loss as indicated by the stop-loss price.
• Trailing Stops: A trailing stop is a dynamic stop-loss order that adjusts as the price of a security rises. It sets a specific percentage or dollar amount below the security’s peak price. If the security’s price declines by the specified percentage or amount, the trailing stop is triggered, and the security is sold. Trailing stops allow investors to protect profits and limit losses as the security’s price fluctuates.
• Options Strategies: Options provide investors with a range of strategies to manage risk. Protective put options, for example, can be used to hedge against potential declines in the value of a portfolio or individual securities. Put options provide the right to sell a security at a predetermined price within a specified timeframe. By purchasing put options, investors can limit their downside risk and protect their portfolio from significant losses. This can be seen as an insurance against downside risk, for which the seller of the insurance must be compensated for. If this kind of protection makes sense or not is highly dependent on the actual price of these insurance contracts. Using options or derivatives in general is only recommended for experienced investors as they inherent as well different kinds of risk.
• Risk-parity portfolio construction: The risk-parity approach is a method of how to determine the weights of each individual instrument within the portfolio. An investor chooses a target volatility of the portfolio according to his risk appetite. Then each instrument is weighted according to the relation between its volatility and the target volatility. Through this method, more volatile instruments are weighted down while less volatile instruments are weighted up. Since this approach is based on historical or implied volatilities, which may differ from the future realized volatility, the realized portfolio volatility can also differ from the target volatility. However, this is still a good an approach to keep portfolio volatility controlled within a certain range.

Conclusion

Effectively navigating volatile markets is an essential skill for long-term investors. By embracing a disciplined approach, understanding market volatility, and implementing robust risk management strategies such as diversification, rebalancing, dollar-cost averaging, and employing risk mitigation tools, investors can thrive amidst market fluctuations.

Remember, successful investing is a journey that requires patience, resilience, and a commitment to long-term goals. By adopting these strategies, investors can confidently steer their portfolios towards enduring financial success and the achievement of their wealth objectives.

It’s important to note that while these strategies can help mitigate the impact of market volatility, they do not guarantee profits or protect against all losses. Investors should carefully consider their risk tolerance, investment goals, and seek professional advice before making investment decisions.

Ultimately, by maintaining a disciplined and informed approach, investors can navigate volatile markets with confidence, stay focused on their long-term objectives, and position themselves for long-term investment success.

Reading Time: 9 minutes

A change of job often means significant changes, not only with regard to your career, but also with regard to your pension plan. Typically, when you change employers, your pension fund also changes. This can mean changes to your pension plan and risk coverage. Therefore, find out about the new conditions early on and make sure that your financial future is still well secured. After all, the change of job should have a positive effect on your future asset situation and retirement provision. The first step is to transfer your pension fund assets.

Whether you are making a transition to a new pension fund, taking an initial career break or venturing into self-employment, this article will inform you about the options and necessary steps.

The most important facts in brief

• A change of job usually also means a change of pension fund.
• The transfer of retirement assets is regulated by law.
• The pension funds in Switzerland each have their own regulations.
• If the retirement capital of the previous pension fund is not sufficient, a purchase into the new pension fund is possible.
• A change of employer provides an opportunity to review the current pension situation.

This is how the funds are transferred to the new pension fund

Employees in Switzerland are insured in a pension fund from an annual income of 22,050 francs (as of 2023). The second pillar account is managed by the employer, who also pays the contributions. Provided that no pension case such as disability has occurred, the accumulated credit is transferred to the pension fund of the new employer when you change employer. Usually, the new pension fund will ask you to transfer your vested benefits when you change employer. But in your own interest, it’s best to be proactive about transfer ring your vested benefits.

Federal law regulates transfer of retirement assets when changing employer

According to the Vested Benefits Act (FZG) the accrued credit must be transferred from the pension fund of the previous employer to the new pension fund in the event of a change of employer within Switzerland.

Transfer of pension fund assets: Procedure

To ensure a smooth process, the pension funds provide forms on which you enter the data of the new pension fund. In this way, the parties involved have the necessary data at hand in any case.

The procedure is then as follows:

Step 1:

The previous employer informs the AHV compensation fund, the pension fund, the accident insurance and the daily sickness benefits insurance about the change of employer.

Step 2:

The new employer handles the re-registration with the insurance companies.

Step 3:

The previous pension fund calculates your termination benefit.

Step 4:

After the calculation, the capital is transferred to the new pension fund.

The payment is shown as a vested benefit on the pension certificate (pension fund statement) of the new pension fund. The pension certificate will therefore continue to form the basis for determining the benefits to which you are entitled.

Secure your financial provision when changing employer

To ensure that you are optimally positioned financially after changing employer, you should pay attention to the following points.

What to look out for when switching pension funds

Nowadays, it is advisable to check the status of the new pension fund before changing jobs – if you have the opportunity to do so. A beneficial employee benefit plan is an essential part of your compensation package. So if you’re considering a job change, it’s important to check not only your salary, but also your pension fund benefits. In doing so, make sure that the job change will at least allow you to maintain your current benefits.

When checking the new pension fund, the following key figures are essential:

• Funding Ratio: The funding ratio serves as a benchmark for evaluating the financial health of the pension fund by comparing the accumulated capital to the liabilities. A coverage ratio of 100 percent means full coverage of these obligations. However, a coverage ratio of less than 100 percent is a cause for concern, as it indicates a possible impending restructuring. The pension fund is therefore financially sound if it has a funding ratio of at least 100 percent.
• Technical interest rate: This interest rate determines the interest rate at which the invested capital can earn interest during the payout period. The pension fund must therefore earn this interest on the actuarial reserve in order to be able to fulfill the promised benefits. The interest rate must therefore not be too high.
• Conversion rate: The retirement pension is calculated by multiplying the pension fund assets by the conversion rate. For the mandatory part, the minimum conversion rate is fixed and is currently 6.8 percent (as of 03/2023). For the non-mandatory part, however, the pension funds can set this rate themselves. And there are definitely differences here.
• Proportion of employer contributions: This is also something to consider when changing employers. Some employers pay two-thirds of the contributions instead of the mandatory 50 percent.
• Extra-mandatory benefits: Here there are differences between the individual pension funds. Some also provide for differences in benefits for over-50s in their regulations.
• Cohabiting partner coverage: The conditions for pension payments to cohabiting partners in the event of death also vary.
• Early retirement: If you are thinking about early retirement, the conditions for this must be clarified. Some pension funds allow you to purchase benefits shortly before retirement.

Is the termination benefit sufficient for the new pension fund?

When you change jobs, the previous pension fund calculates the termination benefit, which is then transferred to the new pension fund. It may turn out that this is too low for the new pension fund. This means that the pension fund cannot meet the defined benefits with the capital. There may also be cases where the withdrawal capital is too high and thus a portion remains.

In these cases, the transition can be ensured as follows:

• Withdrawal capitaltoo low: You should consider making voluntary payments in order to buy into the new pension plan with this capital.
• Withdrawal capital too high: You can open an account with a vested benefits foundation with this excess pension capital. Alternatively, the vested benefits foundations offer securities solutions.

Recommended reading: How to get ahead in the Financial Industry as a young Professional

Vested benefits account: New employer not in sight for the time being – park money safely

People who are no longer able to pay into the mandatory pension scheme must transfer their vested benefits credit, by which is meant the accumulated credit with the pension fund, into a vested benefits institution. This may be necessary in situations such as unemployment, maternity leave, extended period of further training, or unpaid leave. If the salary falls below the minimum limit or if the insured person becomes self-employed, an alternative solution must also be found for the BVG credit in this case.

In the event of unemployment, every insured person is compulsorily insured for the risks of death and disability in the BVG supplementary pension fund. The unemployed and the unemployment fund share the premiums.

Inform now: Vested benefits with Everon!

Secure investment in vested benefits account

In the event of unemployment, the BVG assets are transferred to a vested benefits account instead of to a new pension fund Vested benefits account account of the insured person. The maintenance of the insurance coverage is guaranteed, since the account balance can only be withdrawn as cash under fixed conditions and is thus secured.

If the insured person fails to notify his or her new form of investment for the vested benefits credit, it will be transferred to the federal BVG accumulation institution within two years. In the case of a new job, the vested benefits institution transfers the capital to the pension fund of the new employer.

Starting your own business: opportunities, possibilities and obligations

Anyone embarking on the path to self-employment needs not only innovative ideas and courage, but also the appropriate capital to start up. In addition, founders generate little turnover in the initial period and must also pay for their living expenses during this time. After years as an employee, it is just right to be able to make an early withdrawal from the capital saved in the pension fund.

Advance withdrawal for self-employment: conditions

The withdrawal of capital from the pension fund is generally subject to the following conditions:

• Proof of self-employment
• No affiliation to a pension fund
• Compliance with a period of 12 months

Proof of self-employment

Confirmation of self- employment must be obtained from the relevant AHV compensation fund. Corresponding documents must be submitted to this office. The activity must be demonstrably carried out under one’s own name and for one’s own account. Furthermore, the independence must be recognizable and that the work is carried out at one’s own financial risk.

For the OASI Compensation Fund, evidence such as the employment of staff, the purchase of equipment or goods, as well as investments already made such as machinery or vehicles, count in the examination.

Documents such as a business plan, entry in the commercial register or purchase contracts for materials should therefore be submitted to the AHV compensation fund as proof.

No connection to a pension fund

As long as you are subject to the compulsory pension fund as an employee, you are not allowed to withdraw money from the pension fund. This means, for example, that if you set up a corporation (for example, a limited liability company ), you are legally dependent as a managing director. You must then insure yourself with a pension fund, like all employees, starting at the fixed minimum wage.

In principle, it is possible to start as a sole proprietorship, draw the pension capital and convert the company into a corporation at a later date. However, caution is advised here, as according to rulings of the Federal Supreme Court a certain amount of time must have passed. Therefore, to be on the safe side, check with your cantonal tax administration in such a case before converting your sole proprietorship into a corporation.

Compliance with a time limit of 12 months

The early withdrawal of pension fund assets due to the commencement of self-employment must be made within 12 months at the latest. After that, the lump-sum withdrawal is no longer possible. Also note that in the case of married business founders, the spouse must consent to the withdrawal.

Think about rebuilding your personal retirement provision in good time

In order to secure the financial means for retirement as far as possible, the options for early withdrawal are considerably limited under the state pension system. One of the limited options for accessing funds before reaching retirement age is to become self-employed. The rationale behind this is that owning a business can be a long-term investment with the potential for appreciation.

However, entrepreneurship comes with risks. If the business idea does not bring the desired success, the founders not only lose their invested capital, but also the pre-drawn retirement assets from the pension fund are lost. Therefore, it is existential, even as an entrepreneur, to start building up the retirement provision again in time.

Use the instruments of the 3-pillar system for this purpose:

• AHV obligation: every gainfully employed person in Switzerland is subject to AHV obligation. This means that you also pay AHV contributions as a sole proprietor.
• Voluntary insurance with a pension fund: With voluntary contributions to a pension fund, you provide for your old age and save taxes at the same time.
• Private pension provision with Pillar 3a: If you are not a member of a pension fund, you can pay a maximum of 20 percent of your net income into the Pillar 3a account each year. Currently, the maximum amount is just under CHF 35,280 (as of 2023).

New job: Identify pension gaps now and close them optimally

When changing pension funds, it is a good idea to take a look at the current status of retirement assets and, in particular, to identify contribution gaps.

These can arise from various situations:

• Stays abroad
• Child break
• Part-time work with low income
• Unemployment

The pension fund certificate informs you about existing contribution gaps and whether and to what extent you can buy into the pension fund. It also provides information about the value of your retirement assets and the expected pension.

The possibility of buying into the pension fund voluntarily depends on the regulations of the pension fund and the current retirement assets. Purchasing is not possible after reaching the regular retirement age.

With a purchase, you increase the benefits in the event of death and disability as well as the pension amount. The tax deductibility is also advantageous. Important: This means a ban on lump-sum payments or early withdrawals for residential property within the next three years. In addition, all previous advance withdrawals for residential property must have been repaid in order to buy into the pension fund.

Insurance check when changing employer: Are the risks still covered?

The pension fund certificate provides information in particular about your retirement assets and contains forecasts of benefits in old age and in the event of early retirement.

At the same time, the information allows insured persons to check whether the coverages against risks are still adequate.

These are:

• Survivors‘ benefits: in the event of death, your spouse, registered partner or children will receive the amounts indicated in the PF statement. If you live in a cohabiting relationship, you should ask your pension plan whether the benefits upon your death also apply to cohabiting partners and whether a beneficiary declaration is required.
• Disability benefits: In the event of total disability due to illness, you will receive the benefits shown. In the event of accidental disability, the pension fund will only pay supplementary accident insurance benefits.

Daily sickness benefits insurance: The premiums for daily sickness benefits insurance may be financed by the employer or shared between the employer and the employee. In some cases, there is also no collective insurance by the employer. Since daily sickness benefits insurance is not mandatory, you should inquire about premiums and benefits of any new collective insurance.

Reading Time: 3 minutes

As a digital asset manager, we are often faced with the question with our clients of whether an existing securities portfolio should be transferred when switching to us or whether it would be better to sell it and transfer the cash. Of course, this mainly depends on the quality of the respective securities and also whether it is worthwhile in terms of costs for the value of the portfolio. However, many people are not aware that securities can be transferred at all.

This process, known as a securities transfer, can seem daunting, but it is actually a straightforward process that can be completed relatively quickly and easily.

In this article, you’ll learn how securities transfers between banks in Switzerland work, how much they usually cost, and what you should keep in mind.

What is a securities transfer?

A securities transfer is the process of transferring securities from one bank or broker to another. This can involve the transfer of stocks, bonds or other types of financial instruments. During the transfer, the ownership of the securities is updated so that they are in the name of the new owner at the new bank or broker.

Reading tip: Cancel & switch pillar 3a: This is what you should bear in mind

How does a securities transfer work?

The process of a securities transfer usually involves three steps:

1. Initiation: the customer contacts the receiving bank or broker to initiate the transfer process. The customer must provide information about the securities to be transferred, including the name and number of securities, current custodian, and account numbers.
2. Authorization: once the receiving bank or broker receives the transfer request, he/she contacts the current custodian and requests authorization to transfer the securities. The current custodian usually requires a written authorization from the client, which may need to be notarized.
3. Transfer: once approval is received, the receiving bank or broker initiates the transfer of the securities. This may involve sending physical certificates or updating ownership records electronically. However, in today’s world, the latter is more likely to be the case.

How much does a securities transfer cost?

The cost of a securities transfer can depend on a number of factors, including the type of securities being transferred, the size of the transfer, and the fees charged by the banks or brokers involved.

In general, the cost of a securities transfer can range from a few hundred to several thousand Swiss francs. The costs are often charged per position to be transferred, which is why a portfolio with fewer positions is always cheaper than a portfolio with several positions, regardless of the number of securities. The costs are therefore proportional to the number of positions and not to the size of the portfolio, which is why it is generally only worth transferring several positions for larger portfolios.

What should you consider when transferring securities?

If you are considering a securities transfer, there are some important things to keep in mind:

• Timing: Transferring securities can take some time, so it’s important to plan ahead if you need to transfer your securities by a certain date.
• Cost: As mentioned earlier, the cost of transferring securities can vary widely. Make sure you know all the costs involved before you initiate a transfer.
• Risks: Although securities transfers are generally safe, there is always a risk that something will go wrong. Be sure to choose a reputable bank or broker to minimize the risk of problems.

Conclusion

In summary, securities transfers between banks in Switzerland are a common and straightforward process. While there are costs and risks involved, these can be minimized with careful planning and a little diligence.

If you are considering a securities transfer, be sure to do your research and choose a bank or broker that can provide the support and advice you need. And if you are looking for a digital asset manager to help you manage your investment portfolio, we are here for you!

Reading Time: 9 minutes

To take account of demographic change, the pension system will have to be adjusted in the future. These changes mainly concern the financing of pensions. However, it remains a challenge to maintain the current pension level in the 1st and 2nd pillars in Switzerland’s 3-pillar system.

To ensure a secure financial retirement, it is therefore crucial that individuals take personal responsibility and plan accordingly. Voluntary saving in the 3rd pillar has therefore become a cornerstone of personal retirement planning.

Pillar 3a serves as a solution to close pension gaps in the 1st and 2nd pillars. However, the large number of investment options makes the decision a complex one. We have therefore compared the various pillar 3a investments for you in terms of potential returns, risks and fees. The comparison will help you find your personal investment strategy.

The most important facts in brief

• Pillar 3a is the private pension plan in Switzerland and is becoming increasingly important.
• Tax savings are achieved with payments into pillar 3a pension products.
• 3a interest accounts currently offer about 0.40 percent interest (as of 03/2023).
• A comparison of investment products should take into account term, performance and fees.
• With a higher risk, higher returns can be achieved in the long term.
• Experience shows that competent asset managers with an individual investment strategy offer an optimal mix of risk and return.

Pillar 3a comparison: Here’s what you should look out for when making a comparison

Whether savings account, securities savings or fund account: If you are looking for the best investment for you, you first need to know which points to compare. These differ depending on the type of investment.

Savings account

With some providers, opening a pillar 3a savings account is generally only possible if other products are taken out with the bank (such as a private account). In addition, regional banks sometimes only offer 3a savings accounts to customers who live in the bank’s region.

In addition, the following points should be taken into account when making a comparison:

• Interest: In general, a savings account is a safe investment, but the returns are very low. Nevertheless, the comparison is worthwhile, because the interest rates for 3a savings accounts range from about 0.10 to 1 percent.
• Account fees: Normally, no account management fees are charged. However, there are differences among the providers in the other fees. These are incurred, for example, in the event of closure on retirement and can amount to up to 100 francs.
• Fees for provider change: This is usually carried out free of charge. However, some providers charge up to 100 francs.
• Fees for early withdrawal: There are sometimes considerable differences between providers. The reason for the early withdrawal (e.g. due to new self-employment, acquisition of owner-occupied property or moving abroad) plays a major role. The amount of the fees ranges from 0 to about 600 francs. In particular, moving abroad is associated with high fees for some providers and can cost as much as 950 fran cs. Read more about this in the article on the 3a payout.

3a funds or 3a securities solutions

Those who pay attention to returns with their 3rd pillar will invest in shares. After all, this is the result of a long-term comparison. When looking for the optimal investment strategy, it is important to keep in mind that investing in individual stocks is not possible in the pillar 3a. This means: no trading as in a free custody account. Since pension assets must be invested in a diversified manner, only 3a funds or 3a investment strategies can be considered.

With 3a funds, performance and fees are responsible for success. The following details should therefore be compared when making a selection:

• Performance: Successful investments in the stock market require a long-term investment horizon in order to be able to compensate for price fluctuations. The performance of 3a funds in the period 2012 to 2022 was approximately between -0.90 and +4.7 percent annually. The wide range makes it clear that a comparison is worthwhile. It should be noted that the funds with slightly negative performance are exclusively funds with a minimum equity allocation.
• Total Expense Ratio (TER): This key figure reflects all costs of the fund that are incurred outside of the front-end load. The TER of 3a funds ranges from about 0.60 to 1.50 percent annually (as of 03/2023).
• Issue fee and redemption fee: Even if these fees are only incurred once, they have an impact on the total return. Here, fees totaling 0 to 1.5 percent can be expected.
• Custody fees: The provider market has been on the move in recent years. With custody account fees currently at around 0 to 1 percent annually, a comparison is therefore also recommended here.

The pillar 3a account with interest: You can count on this

As already stated in the section above, the interest rates for 3a savings accounts currently average around 0.40 percent (as of 03/2023). Interest rates significantly higher than this tend to be the absolute exception. Investors receive the average value of 0.40 percent, for example, at the Luzerner Kantonalbank or Raiffeisenbank (as of 03/2023).

With an inflation rate of around 2.8 percent as of February 2023, the current interest rate on 3a savings accounts thus represents a real loss in value. The ratio is unlikely to change much in the long term, as falling inflation is likely to result in even lower interest rates. Even with the current rise in interest rates, interest rates on savings accounts adjust only with a time lag.

The advantage of 3a interest accounts is thus limited to the benefit of a low-risk investment. A noteworthy return can therefore only be achieved with a certain degree of risk. Long-term comparisons show that with sufficient diversification and an investment horizon of more than ten years, investments in the stock market have always produced a positive return.

How a pillar 3a investment performs

The differences between the various forms of investment become particularly clear in practical examples. For better orientation, you will therefore see below a comparison of the development of an investment of 10,000 francs in different investment forms and maturities.

Payout after term of ..	Interest account (average interest in the respective terms)	Fund defensive (up to 15 percent shares, example Zürcher Kantonalbank)	High-opportunity fund (up to 45 percent equities, example Zürcher Kantonalbank)
5-year term (2017 to 2022)	10’000	9’827	11’757
10 years maturity (2012 to 2022)	10’513	11’521	15’883
20-year term (2002 to 2022)	12’213	15’101	18’536

The equity component – return for pension provision

The above comparison illustrates in particular the following past results:

• Interest accounts are suitable for keeping funds safe in the short term. If liquidity is needed in the near future, there is no risk of having only a reduced capital available due to price drops.
• From an investment horizon of 10 years, taking into account the inflation rate, there is usually a loss with interest investments.
• The level of the equity component is a key factor in determining possible returns.
• Low proportions of equities and high proportions of fixed-income securities do not protect against price losses in the case of short maturities.

Also with Investment strategies it is helpful to look at the past. This is no guarantee for the future. It does, however, show how successful an asset management company has been in recent years. However, comparison is made more difficult here by the fact that not all providers openly communicate their performance.

Providers, products, risk or taxes: Other points that are important when comparing pillar 3a offerings

As developments in Switzerland’s neighboring countries also show, the pension system is facing further necessary changes. These include an increase in the retirement age. The pension funds also have to face the challenges. The conversion rate essentially determines the amount of the retirement pension. The pension fund balance is multiplied by this rate to calculate the pension. In the meantime, however, many pension funds have been forced to reduce the conversion rate.

Private pension provision is therefore becoming the key to a financially secure retirement. To ensure that the return on investment is right, it is crucial to compare pension products and providers. Below, as further assistance, are basic points to look out for when comparing.

Provider: Bank or insurance company – key differences

For many years, life insurance was considered an essential component of a private pension plan. However, the market has changed seriously and thus the importance of 3a insurance policies has decreased accordingly.

The reasons for this are:

• Insurance policies are currently unable to generate any appreciable returns on the invested capital due to their investment regulations.
• All insurance benefits have to be financed by contributions, which are an additional burden on the return.
• The costs of an insurance policy are less transparent than those of bank products.
• Separate coverage of risks is usually cheaper than a combination of insurance and savings.

Bank products are focused on asset growth. The focus is therefore on how much capital will be available at retirement, and how securely.

Which products in the portfolio fit my personal investment strategy?

Strategies are not necessarily good or bad. Rather, they must fit the personal requirements. The choice of products is therefore something crucial.

The main differences between the products are:

• 3a retirement account as an interest account: It is the simplest solution with a high degree of security. If you are frugal, you will choose this simple form of investment. There are very low returns, but investors at least generate tax savings. Although the assets are not covered by the deposit guarantee, they fall into the second bankruptcy class in the event of bankruptcy (maximum 100,000 francs per insured person). This means investors are served immediately after wages and PF contributions and before all other creditors. 3a savings accounts are a suitable solution, especially for investors with a short-term investment horizon, in order to take advantage of tax benefits.
• 3a funds: Funds offer investors with a longer investment hor izon higher return prospects and tax-free dividends.
• 3a investment strategies: This provides investors with asset management within pillar 3a. The portfolio in an asset management can also be implemented with direct securities on the stock market. Innovative digital asset management already allow an investment from assets of CHF 30,000.
• 3a insurance: The policy combines insurance protection (for example in the event of death) and a savings investment for old age. As already described in the section above, today the separation of insurance coverage and retirement savings is much more efficient and transparent in terms of costs.

Risk and retirement provision

How do sound retirement provision and investment risk go together? The investment options within pillar 3a are also associated with different risks. In principle, the same applies here as is generally the case with all investment strategies: more opportunities for returns also mean increased risk. However, avoiding all risk is not always the best approach. Rather, investment risk must match the personal risk profile. Asset management companies offer tools to help find the right investment strategy.

In principle, however, it can be said: The longer the investment horizon, the lower the investment risk associated with price fluctuations and the better the return. Finally, experience has shown that price slumps are generally offset again for maturities of around ten years or more with appropriate diversification. However, the closer retirement approaches, the more one should switch to low-risk strategies.

Individual asset strategy

3a investment strategies such as those offered by Everon allow for an optimal match of personal wishes and needs. In this context, sustainable investments (ESG), for example, have gained in importance.

Domicile of the pension company

It is well known that the tax rate is largely determined by the cantons. Therefore, foreigners should consider the domicile of the pension company. If they leave Switzerland before retirement, the tax rate of the canton in which the pension company is domiciled will apply.

Pillar 3a in comparison: Are there alternatives?

If you are a trader on the stock market, you will not be able to do much with the investments on the capital market within pillar 3a. However, this does not argue against pillar 3a, but rather for an optimal division of assets and retirement planning.

• Take advantage of tax benefits with pillar 3a: Tax savings are an essential part of retirement planning. These tax advantages, which are missing with free investments, would first have to be earned there. Furthermore, the different marginal tax rates in the different phases of life are optimally exploited. This means that tax advantages are particularly effective in periods of higher income, i.e. during working life. Tax burdens, in turn, are mitigated by a low tax rate when income is lower, as in retirement.
• Take advantage of extended return opportunities with free investments: Of course, there are plenty of desirable goals before retirement. And the capital market always offers innovative investment opportunities. Since the use of Pillar 3a is limited to a maximum annual amount, it is also important to use free capital investments to save capital for later years. This can be for retirement provision or for other purposes.

Interest rate trends for savings accounts – suitable for a long-term investment soon after all?

Even if the interest rate development is currently pointing upwards again: Interest rates on savings accounts continue to be well below the rate of inflation. A look at the past also shows that pure savings accounts have only generated satisfactory returns for short-term or at most medium-term maturities. However, with current economic developments, the real interest rate will remain negative for some time to come. For this reason, capital market investments for long-term asset accumulation belong in every pillar 3a solution.

Reading Time: 5 minutes

Factor investing is the basis for Everon’s investment strategy.  The fundamental premise of this investment approach is to identify specific factors that explain asset returns beyond traditional market risk. These factors, such as Value, Momentum, Size, and Quality, have been widely studied and recognized as drivers of asset performance.

This article analyzes the recent developments in Value, Momentum, Size, and Quality factors using data from the Kenneth R. French Data Library. By doing so, it aims to provide valuable insights regarding the dynamic nature of these factors and their potential impact on portfolio management and risk assessment.

Kenneth R. French is a researcher in the area of factor investing and provides precalculated factor data on his website. He became famous for the publication of the “Fama and French Three Factor Model” together with the Nobel Laureate Eugene Fama in 1992.

The factor data is constructed as long-short portfolios with the intend to extract the pure factor without effects driven by the market. This is the academic approach of factor construction and gives a good indication of the factor itself. However, in practice factors are used slightly differently in portfolio construction.

Value Factor

Value investing involves buying undervalued securities with the expectation that they will appreciate over time. The Value factor has historically been one of the most prominent factors in explaining asset returns, but has lost importance within the last decades. Recently, however, the Value factor has experienced a resurgence of interest, as investors question the sustainability of growth-oriented strategies in the face of changing market conditions.

Using data from the Kenneth R. French Data Library, the Value factor has exhibited a notable shift in recent years. From 2015 to 2019, the Value factor underperformed, but in 2020 and 2021, it experienced a remarkable comeback. This can be attributed to several factors, including the market’s reaction to the COVID-19 pandemic, the subsequent economic recovery, and the reorientation of investor focus towards value-oriented strategies.

This orientation towards value remained strong in 2022, as the insecurity about the impact of the higher interest rate regime on the economy persisted. With the beginning of this year, we see already a shift back from value towards growth again. Even though the factor was on average negative for the last decade, value is still the go-to factor in times of crisis. Therefor it should still find its consideration in an asset managers investment decision.

Momentum Factor

Momentum investing involves taking long positions in assets that have exhibited strong recent performance and short positions in assets that have underperformed. The Momentum factor is based on the notion that assets with strong past performance tend to continue outperforming in the short term. The Momentum factor has been well-documented in academic literature, and it has been a popular strategy among both individual and institutional investors.

The Momentum factor has been relatively consistent over the past decade with a positive premium on average. Despite short-term fluctuations, the Momentum factor has generally maintained its ability to generate excess returns for investors. However, the factor has experienced some periods of underperformance, such as during the market turmoil induced by the COVID-19 pandemic.

Especially when markets exhibit high volatility with fast change of directions, momentum becomes instable. Since mid-2021 to the end of 2022, momentum was a strong factor, but with the tech rally in the first months of 2023, the overall momentum factor weakened again.

Size Factor

The Size factor, also known as the small-cap premium, posits that smaller companies tend to outperform larger companies on a risk-adjusted basis. This factor has been extensively studied and has shown to be a persistent driver of asset returns. However, the Size factor has experienced some fluctuations in recent years, raising questions about its long-term stability.

The Size factor has shown mixed performance over the past decade. While small-cap stocks have generally outperformed large-cap stocks, the premium associated with this factor has diminished in recent years.

Several explanations for this trend include increased competition among investors, better access to information, and improved risk management practices. However, during the recovery in 2020/21, Size was an outperformer compared to other factors. Data suggests that Size is especially attractive during times of economic recovery.

Quality Factor

The Quality factor focuses on companies with strong fundamentals, such as high return on equity, low leverage, and stable earnings growth. Quality investing has gained prominence in recent years, as investors seek to mitigate risk and identify companies with sustainable business models. The Quality factor has been shown to be a valuable addition to multi-factor portfolios, offering diversification benefits and potential for outperformance.

The Quality factor has performed well over the past decade, with a generally stable premium. This suggests that the Quality factor has been relatively resilient, even during periods of market turmoil such as the COVID-19 pandemic.

The strong performance of the Quality factor can be attributed to various factors, including investors’ increasing focus on companies with sustainable business models, greater emphasis on environmental, social, and governance (ESG) factors, and the recognition of quality as a source of long-term value creation.

Implications Investors

The analysis of the Value, Momentum, Size, and Quality factors provides valuable insights for asset managers and investors seeking to capitalize on factor risk premia. The following points summarize the key takeaways from this study:

• Value: Despite a period of underperformance, the Value factor has experienced a resurgence in recent years. Asset managers should remain vigilant and adaptive to changing market conditions to capitalize on the potential return premiums associated with this factor.
• Momentum: The Momentum factor has generally been consistent in generating excess returns, but it is not immune to short-term fluctuations and periods of underperformance. Investors should understand the potential risks associated with Momentum investing and incorporate appropriate risk management strategies.
• Size: The Size factor has shown mixed performance in recent years, with the small-cap premium diminishing over time. Asset managers should remain cautious in their reliance on the Size factor and consider potential changes in its efficacy when constructing portfolios.
• Quality: The Quality factor has demonstrated strong and stable performance, suggesting its resilience and potential for long-term value creation. Investors should consider incorporating the Quality factor into their investment strategies to enhance portfolio diversification and capitalize on the benefits of quality investing.

Changes in factors over time:

We have seen that factors evolve differently over time and perform differently during specific market environments. Correlations between the considered factors suggest, that it is beneficial to combine them as some exhibit negative correlations to each other. 

By doing so, the outperformance of one factor can make up the underperformance of another factor. If we then continue to apply weightings to the factors according to their short-term momentum, we can even minimize the impact of the underperformance by some factors in order to achieve an overall superior result.

	Market	Size	Value	Quality	Momentum
Market	1	0.347	0.082	-0.568	-0.326
Size	0.347	1	0.272	-0.222	-0.363
Value	0.082	0.272	1	0.183	-0.181
Quality	-0.568	-0.222	0.183	1	0.111
Momentum	-0.326	-0.363	-0.181	0.111	1

Conclusion

The development of factor risk premia, particularly for the Value, Momentum, Size, and Quality factors, has significant implications for asset managers and investors. By closely monitoring the evolving relationships between these factors and adapting the investment strategy accordingly, asset managers can better manage portfolio risk and potentially improve investment performance.

As markets continue to evolve, understanding the dynamics of factor risk premia will remain crucial for successful portfolio management and risk assessment in the field of factor investing and beyond.