Swiss National Bank is the world's largest hedge fund

2024 Author: Seth Attwood | [email protected]. Last modified: 2023-12-16 15:55

Swiss Central Bank Strengthens Equity Positions of Leading American Corporations

Switzerland is a unique country in many ways. Its central bank, the Swiss National Bank (NSB), is also unique.

The principal feature of the Swiss central bank is that it has the status of a joint stock company. There are, of course, central banks in the world in the form of joint stock companies. For example, the US Federal Reserve System (American Central Bank), whose shareholders are several thousand American banks, but this is a closed joint-stock company. And NBSh is an open joint stock company. This means that some of the 100,000 shares issued by the Swiss central bank are traded on the free market. With a strong desire, any investor can acquire a “piece” of the NBH and become a co-owner of the central bank.

The Swiss central government does not participate in the capital of the NBS at all. Most of the shares (about 45%) belong to the cantons of Switzerland. Another 15% goes to cantonal banks. The remaining 40% of the capital is owned by private companies and individuals (about 2200 shareholders in total). Among the private owners, a group of 30 leading shareholders has been identified, holding 25% of the votes. The NBS has a rule according to which profits exceeding 6% of the authorized capital cannot be allocated for the payment of dividends. From year to year, a group of private shareholders has been pushing for the abolition of this rule. Equity returns for private investors have not risen above 1% in recent years. They insist that it be at least 6-7% per annum.

The largest private investor is businessman and economics professor Theo Siegert. Moreover, he is not a citizen of Switzerland, but of Germany. Its share in the share capital at the end of 2016 amounted to 6, 72%. For comparison: such large administrative units of Switzerland as the canton of Bern has 6, 63% of the shares, and the canton of Zurich - 5, 20%.

Of course, only a small fraction of the shares are in free float. On average, from 50 to 100 shares of the NBS are traded on the market every day, that is, no more than 0.1% of all shares. Such a metered outburst of NBS shares to the market insures the central bank from abrupt changes in the capital structure. For many years, the status quo of the shares of the main shareholders in the capital of the central bank has been preserved, changes are measured in tenths of a percent.

In general, there are several more central banks in the world with the status of a joint-stock company, in which some of the shares circulate on the stock market. These are the central banks of Japan, Greece, Belgium, Italy and South Africa. However, some of the shares there do not give voting rights, in other cases the securities have a symbolic yield and therefore are not of interest to investors. In any case, none of the named central banks has such a consolidation of shares in a narrow group of private investors as in the Swiss National Bank.

The NBS is one of those central banks that, during and after the financial crisis, embarked on the path of a sharp increase in their assets. The Swiss central bank has turned on the printing press in order to prevent an excessive appreciation of the Swiss franc exchange rate. And this, according to the authorities, is necessary to support the domestic producer. In addition, the NBS introduced a negative deposit rate (which also distinguishes it from most central banks).

The production of the NBSh printing press is directed to the acquisition of various assets denominated in foreign currency. As a result, the gigantic annual growth of international reserves, which in the assets of the Swiss central bank occupy significantly more than 90% and continue to grow. Even the Central Bank of the Russian Federation, which is rightly criticized for an excessively large share of international reserves in assets, was only 62% in 2017, according to the latest annual report of the Central Bank of Russia. This is how the official international (gold and foreign exchange) reserves of Switzerland looked in certain years (billion dollars, at the end of the year): 2005 - 57, 6; 2010 - 270, 5; 2015 - 678, 9. Now, in terms of official international reserves, Switzerland is in third place in the world (822 billion dollars) after China and Japan. For comparison: data on the reserves of some European countries (billions of dollars, at the end of March 2018): Germany - 204; France - 164; Great Britain - 191.

An even more shocking feature of the Swiss central bank is the special composition of its assets. Throughout the history of central banks, it was believed that they only invested in the most reliable, risk-free assets. If these are loans to banks, then they are secured with reliable security. If these are securities, then only treasury bonds, bills of exchange and notes, moreover, with the maximum rating. The central bank is the lender of last resort, so it must be as reliable and stable as a rock. And so that there is no temptation to chase after profit (where the pursuit of profit, there is risk), the constitutions and laws of many countries indicate that making a profit is not the goal of the central bank. At the same time, the central bank is traditionally perceived as an institution that does not depend on the state budget and feeds itself. With rare exceptions, any central bank until recently ended the next year with a positive financial result, that is, with a profit. This was the case until the last world financial crisis of 2007-2009. In the current decade, the profitability of many financial instruments and assets began to fall to zero and even go into negative territory. The traditional approaches to the formation of assets of central banks in the new conditions began to threaten with the occurrence of losses. The reaction of some central banks was to invest in new financial instruments - more profitable, but also more risky. The Bank of Japan is cited as a prime example of this new policy. He began to form a significant part of his assets by purchasing shares of Japanese companies traded on the country's stock market. Recently, the European Central Bank (ECB) began to purchase corporate bonds.

However, the Swiss central bank went farthest. He, like the Bank of Japan, began to buy shares, but if the Japanese central bank buys shares of Japanese companies, then the Swiss central bank has focused on the acquisition of securities of foreign corporations. At the same time, the NBS selects stocks of companies with high and very high returns and with above-average risks. Financial analysts behind the eyes began to call the National Bank of Switzerland a hedge fund (hedge fund - a private institution operating in the financial market with highly profitable and at the same time high-risk instruments). If in September 2014 in the NBS portfolio the shares of American issuers accounted for $ 26.1 billion, then three years later (in September 2017) this portfolio was already estimated at $ 87.8 billion. ! In total, shares account for about 20% of the international reserves of the Swiss central bank (American securities account for at least half).

The NBS is the owner of large stakes in the following American companies: Apple (almost $ 3 billion at the end of the third quarter of 2017), Alphabet ($ 2.2 billion), Microsoft (over $ 2 billion), Facebook (over $ 1.5 billion). The portfolio also contained large stakes in American companies such as Amazon, Exxon Mobil, Johnson & Johnson, AT&T, General Electric, Pepsico, Coca Cola, Procter & Gamble, Chevron, etc. In some of these American companies, the NBS became a prominent shareholder. sometimes competing with giants such as global investment funds Blackrock and Vanguard.

The example of Apple clearly shows how the NBS is strengthening its position in the equity capital of leading American corporations. In the fourth quarter of 2014, the number of Apple shares in the NBS portfolio was 5.6 million. In the fourth quarter of 2016, their number increased to 15.0 million. According to the results of the second quarter of last year, there were already 19.2 million. At the same time, Apple shares are traded on the Nasdaq Stock Exchange, a favorite platform for hedge funds and other gamblers, where securities of high-tech companies are mainly traded, many of which are bubbles due to artificially high prices for issued securities.

According to the NSB, for the period 2005-2016. (twelve years) the average return on his bond portfolio was 0.7%; portfolio of shares - 2, 8%. At the end of the period, the gap widened: in 2016, bonds provided a yield of 1.5%, and stocks - 9.2%.

In the world of central banks, the Swiss National Bank is a pioneer. From a conservative investor, he turned into a gambler. At the beginning of 2018, the financial results of the NBS for 2017 were announced. The bank said it had a profit of CHF 54bn ($ 55.2bn) and said that CHF 49bn was generated from foreign assets, including shares. Such profits can be the envy of the world's business giants (for example, the American banking giant JP Morgan had a profit of $ 24 billion, while Wells Fargo's - a little more than $ 20 billion).

A number of central banks awaiting losses have said they are carefully studying the NBS experience. Not today or tomorrow, buying shares by central banks may become the norm. True, the desire to follow the path of the Swiss central bank has cooled somewhat after the announcement at the end of April that in the first quarter of 2018 the Swiss National Bank suffered losses of 6.8 billion francs. About half of the losses were attributable to a decline in the market price of the shares. Of course, this is just a market fluctuation, but if the second wave of the global financial crisis begins, a hedge fund called the Swiss National Bank risks bursting like a soap bubble. I wonder what will happen then with Switzerland, which is considered to be the standard of well-being?