Suva's Approach to Long-Term Investment and Mandates.
Suva's investment strategy is based on the principles of broad diversification and a long investment horizon. This strategy is possible for the reasons described below.
Suva provides mandatory accident insurance as part of the social insurance system in Switzerland to certain specified sectors of the Swiss economy. This partial monopoly ensures a relatively stable number of insured companies and allows Suva to take a long-term investment view.
Ongoing claims and disability pensions are financed through the collection of mandatory insurance premiums. Most of Suva's liabilities are for disability pensions which are long-term in nature. Under these circumstances the risk of forced selling of long-term investments at depressed levels is limited.
Given this ability to have a long investment view, Suva focuses not only on direct financial aspects when investing, but also takes into account environmental, ethical, social and governance principles. The normative basis for these principles is Swiss law, the international conventions signed by Switzerland, including those on the Environment, Human Rights, Labor Rights, Governance and Banned Weapons and the ten Principles of the UN Global Compact, all of which are taken to reflect the interests of the Swiss public.
In selecting external managers, Suva analyses their investment strategy and how they incorporate non-financial aspects into their due diligence processes. As both analyses are uniquely interrelated, a case-by-case evaluation of each manager is carried out.
A long investment horizon supports responsible investing. The preference for long-term investing in the context of selecting external managers is reflected in various aspects of Suva's manager selection process.
A manager's performance is quantitatively screened when Suva searches for new mandates. The filters applied in a quantitative screening are designed with the assumption that potential managers need a long time period to prove their capability to add value. Managers are thus not excluded for following longer-term investment approaches that might lead to significant periods of underperformance.
Suva prefers equity investment managers with longer-term investment strategies. Suva changes managers infrequently, generally in cases of a change in the organization or a deviation from a stated investment strategy.
While short-term investment approaches which are often applied by quantitative managers might not lend themselves to an active engagement on sustainability issues, they can still be an effective part of investment portfolios. Therefore, Suva does not exclude short-term investment approaches when implementing its investment strategy. However, there is a general preference to partner with equity investment managers that apply longer-term investment strategies. These strategies typically exhibit lower trading costs and managers have a strong self-interest to carefully evaluate ESG aspects during their due diligence of companies and in some instances to actively engage with companies. An investment manager that claims to follow a long-term investment strategy, but does not include ESG criteria in its analyses, is not credible in Suva's view. If a strategy is implemented through a managed account, a list of restricted securities is provided to the manager.
Suva proactively expresses its view of the value of ESG integration in the investment process but leaves the choice between active engagement and exclusion to the managers it chooses. Ultimately, it is our belief that only a manager itself can decide on the effectiveness of an ESG approach given its own investment strategy, skillset and the culture in a particular country.
In order to evaluate a manager's true focus on the long-term aspects of investments, Suva uses interviews and examples of company research provided by the manager. Both tend to give good indications of how focused an investment manager truly is on understanding a company's long-term strategic issues and value drivers. Another valuable source when evaluating the credibility of ESG claims is a manager's proxy voting policy.
When it comes to the actual terms of a mandate, Suva aspires to include certain provisions in Investment Management Agreements (IMAs). For example, we negotiate the inclusion of Suva's restricted list to exclude companies from the investment universe. In the negotiation of fees, for performance fee structures Suva tries to incentivize managers with a long-term strategy.
When working with external managers, Suva emphasizes its efforts to invest responsibly during the due diligence and monitoring phases, as the terms of the mandate cannot compensate for a lack of long-term reasoning and commitment by a manager.