It has long been the accepted wisdom that investors who diversify their portfolios across a variety of overseas markets achieve better returns for less risk than by investing only in their home market.

At Moonshot, a penchant for challenging the accepted wisdom is embedded in our culture, so it’s only natural that we should test this diversification argument on behalf of Swiss investors. Switzerland is definitely an exception to the rules in so many regards; perhaps, it also contradicts these assumptions about international portfolio diversification? We have crunched the numbers; let’s look at the results.

For the comparison*, we took the returns of the major Swiss, US, and Chinese indices within the public market, while also including some world-renowned private market benchmarks for a comprehensive analysis. The rationale behind our scrutiny of US and Chinese indices is their widespread appeal to Swiss investors seeking overseas diversification, given their prominence in the global economy.

* The calculations were made using the SIX – Swiss Market Index (SMI) as the Swiss stock market, the SSE Composite Index (000001.SS) as the China stock market, the S&P 500 (GSPC) as the US stock market, the SXI Real Estate® Fnds Broad TR (SWIIT) as the Swiss real estate market, the SSE Real Estate Index (000006) as the China real estate market, the Dow Jones U.S. Real Estate Index (DJUSRE) as the US real estate market, the SBI® AAA-BBB Total Return (SBR14T) as the Swiss bond market, the SSE Corporate Bond Index (000013.SS) as the China bond market, the Bloomberg US Aggregate Bond index as the US bond market, the Cambridge Associates US Private Equity Index for private equity, the Cambridge Associates Real Estate Index for private real estate, and the Cliffwater Direct Lending Index for private debt.

Switzerland, US, and China: Unveiled

As the first stage, we turned to the recent research made by our esteemed partner, Le Bijou, to determine what the most appropriate test model might be for portfolio allocation across different asset classes, public and private, within those three countries.

The study they made convinced us that, in addition to both listed and unlisted bonds and equities, we should include an exposure to real estate. On that basis, we concluded that 40/30/30 – Model D from Le Bijou’s article – is the best in terms of balancing return and risk: 40% in equities and 30% each in bonds and real estate.

This model, however, might not suit everyone; investors who are currently in their 20s (with more time on their side) might be happy to take on more risk by increasing their allocation to private markets for higher returns. Their older counterparts could well be happier with a more conservative approach that excluded those markets. The table below compares both approaches.**

** The methodology behind our calculations focused on establishing, on a quarterly basis, correct parity in the data for all asset classes. This adjustment was needed because the returns data for the private equity, debt, and real estate funds used to represent those assets are drawn from the respective fund managers' various quarterly and annual fund reports.

Technical terminology

Standard deviation measures volatility in terms of the average difference between individual data points and their mean. It’s expressed as the square root of the variance. The degree and frequency with which asset prices move up or down determines their volatility, which is the accepted proxy for investment risk.

The Sharpe ratio, devised by American economist William Sharpe, is a gauge of risk-adjusted returns. The higher the ratio, the higher the return in relation to the risk taken to achieve it. Put more simply, a high ratio signifies a better investment (all other things being equal, of course).

Drawdown is the financial analysis term for a decline in the price or value of an individual asset, index, or portfolio. In our table, the maximum drawdown is the biggest decline recorded for an index in any one of the 40 quarters (10 years) for which the data were taken. The measurement is closely tied to the Sharpe ratio because it shows the greatest level of historical risk, or volatility, experienced by the subject index.

Armed with this understanding, what is the table actually telling us?

1. Return analysis

Whether in terms of cumulative or annualized rates of returns, it’s obvious that the inclusion of private debt, equity, and real estate is transformative. It more than doubles the results.

10-year annualized rate of return for examined portfolios (in %)

What is especially interesting is that the transformation is much more marked for Switzerland than for either China or the US. Indeed, the Swiss return, including private markets, is 4.1x bigger than one limited with indices measuring publicly traded securities only, while for China and the US, the increase totaled 2.55x and 2.22x, respectively.

At the same time, however, the Swiss strategy enhanced with the private market barely separated from the other two, being 12.04% annualized compared with 12.78% and 12.67%, respectively, for China and the US.

2. Risk and maximum drawdown analysis

On the basis that individual investors tend to be more averse to investment losses than their institutional counterparts, even temporary ones, we have taken the maximum drawdown as the point of focus for that aversion.

Maximum drawdowns for quarter returns for examined portfolios (in %)

Here, then, is another transformation as a result of including private markets. And, again, it is Switzerland that has seen the greatest benefit. Taken with the previous chart, it means that investing in the Swiss public market enhanced with the private market opportunities over the past 10 years has produced a return that almost matches those for the US and China, but with a lower maximum loss (or drawdown) of 6.91% against 8.02% and 7.68%, respectively.

Standard deviation, meanwhile, tracks not just the losses that have occurred, but the upside price variations also. As a risk measurement, therefore, it’s more holistic than drawdowns alone. The table shows that, although the inclusion of private markets increases the absolute level of deviation (or risk), it narrows the difference between Switzerland (0.06) and the other two markets to near-insignificance (0.07 for China and 0.06 for the US).

That is a significantly better result than was seen by the comparison across more-or-less similar annualized returns, suggesting our markets deliver world-class portfolio performance for noticeably less risk. Do the Sharpe ratios bear that out?

3. Sharpe ratio analysis

Sharpe ratios for examined portfolios

Not only do the ratios confirm the conclusions drawn from our analysis of the previous two charts, but they enhance and expand the results substantially. Again, the inclusion of private markets transforms the “Swiss advantage”, boosting its Sharpe ratio more than fourfold, from just 0.36 to a compelling 1.49, far ahead of China (0.86) and the US (1.11).

In other words, for every single unit of risk, investment in a combination of Swiss private and public markets has produced a return that’s very nearly one and a half times that degree of risk over the past decade.

An exceptional decade is over – seeking safety in Switzerland

It seems that Switzerland has, indeed, been exceptional in terms of investment performance. The decade we are examining, however, has itself been exceptional. Even before 2012, quantitative easing (QE) had been gathering pace, as central banks tried to avert the recession threatened by the effects of the Global Financial Crisis (2007-08). From about 2012, however, that money-creation program accelerated significantly.

Total assets of major central banks (in USD trillion)
Source: Yardeni Research, Inc.

This deluge of central bank liquidity powered a sustained rush of investors into almost every asset, whether public or private markets for equities, bonds, real estate, or collectibles. As that trend progressed and grew, it trailed a growing sense of unease over the sustainability of such a “bull market of everything.”

That unease became more marked as the 2012-22 decade wore on. The election of Donald Trump as US president in 2016 flagged the rise of populism and the widening polarization of politics in general. The 2020 pandemic added to these disruptions, culminating in the Russian invasion of Ukraine in 2022 which continues to threaten the post-World War II European geopolitical order.

In such times, investors tend to seek safety. The latter half of the decade witnessed a continuing flight into US Treasuries, gold, and other traditional safe havens. For as long as anyone can remember, one of those havens has been Switzerland, because of its political stability, strategic neutrality, and calm social order.

That is why the Swiss franc has, over the past ten years, kept pace with the US dollar, despite the latter’s increasing popularity as an international investment refuge itself. Here’s how the dollar has performed against a basket of other leading currencies.

Development of the MSCI World USD index from 1986 to 2022
Source: Statista

Here is the picture for the Swiss franc, showing that its rate against US currency was almost exactly the same at the end of the decade as at the beginning.

CHF to USD exchange rate

However, if it has taken a decade of unprecedented monetary, economic, and political turmoil to drive Switzerland’s exceptional investment performance, will those numbers not fade when order is restored to the world’s affairs?

A world of worries

The operative word in that question is “when.” On that, the outlook can only be considered uncertain, at best. The war in Ukraine threatens to drag on, while its unsettling effects have been echoed by the resurgence of hostilities in Israel and Gaza. Meanwhile, the Caucasus, long a theater of conflict between Armenians and Azerbaijanis, threatens further disorder, following a military offensive by Azerbaijan against Nagorno-Karabakh in September 2023.

To those geopolitical risks must be added continuing economic uncertainties. In the US, growth remains stubbornly strong, despite the best efforts of the Federal Reserve (with its “higher for longer” interest rates) to engineer a recession that might halt the prevailing rise in prices and wages. That is distinct from the unresolved issue of QE, where no plan for its unwinding has been made public, and the economic and other consequences of any such unwinding remain shrouded in a fog of anxiety anyway.

No wonder, then, that the price of gold has reached a significant juncture. As the chart below shows, the yellow metal has been in a well-defined trading band for well over 3 years, creating a massive area of congestion near the top of the trend. If the price breaks downward from this band, it’s likely to suffer a sharp fall and remain under pressure thereafter.

On the other hand, if it breaks upward, above USD 2’000 per ounce or thereabouts, it looks set for a sustained uptrend. At Moonshot, we dread to think what might be the catalyst for that break, if it happens. Certainly, it won’t be good news.

Gold price as of the end of October 2023 (in USD per oz)

In the midst of all of these unknowns, the urge to keep one’s investments close to home does not seem likely to dissipate in the foreseeable future. That suggests the “Swiss advantage” that has been revealed and proven in this article is likely to persist.

For those of our readers who have been brought up with the conviction that international portfolio diversification is the best and safest approach to investing, we should acknowledge that putting all of one’s eggs in that one basket is not necessarily free of risk.

At the same time, we would argue that Switzerland is not a typical basket. We have enjoyed international neutrality and a conflict-free environment for centuries, have one of the world’s hardest currencies, and are acknowledged everywhere as a model of stability and security.

Investing only in our home market might, occasionally, mean an opportunity cost in terms of missing out on high returns in, for example, emerging markets. Nonetheless, the evidence of the past ten years, combined with the expectation that the currently parlous state of world affairs will not be resolved anytime soon, suggests strongly that, in Switzerland, your regrets will be low but your risk-adjusted returns are likely to be among the very highest.

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