Annual report 2024

Concentration risks have also emerged within the American stock market. The share of the Magnificent Seven in the capitalisation of the S&P 500 has risen from 5 percent to well over 30 percent in the past 15 years. Apple alone holds about the same weight in the world market index as all German and Swiss companies combined. Tesla, meanwhile, is valued at 100 times its earnings and is as “valuable” as the car manufacturers BMW, BYD, Ferrari, Mercedes, Porsche, Toyota and VW combined.

In the Swiss Market Index (SMI), the heavyweights Nestlé, Novartis and Roche alone account for nearly half of the market capitalisation of all listed Swiss companies. Accordingly, we welcome the fact that in our internationally diversified portfolios, we practise a tendency towards equal weighting, because especially the food giant Nestlé, which was traded as a “widows and orphans investment” during the Corona crisis, was a major disappointment last year. In the long run, it makes no sense to get blindly caught up in these pro-cyclical developments and bear such concentration risks. We are therefore deeply convinced that replicating stock markets through indexing makes no sense from a risk consideration perspective. In doing so, we consciously accept the possibility of trailing behind some indices, especially in boom years. Despite all the criticism, we do not wish to demonise passive investing. It shares with us the long-term thinking that stocks of good companies are held for eternity.

Even when buying fixed-interest bonds, the passive approach is to be rejected. Notably, those who pursue indexed investing prefer precisely the countries with the highest debt levels. In 1900, the USA had a rather modest weight of 5 percent in the world bond index. Due to rampant American debt practices, this weight increased to well over 40 percent by the end of last year. Absurdly, precisely those debtors with the highest debt levels account for the largest shares in a bond index. Investors who consistently invest passively automatically follow this pro-cyclical shift to the kings of debt – which is crazy. For us, this type of investing is out of the question.

Asset management is not only about returns but also about risk management. Benjamin Graham, author of the legendary 1949 book “The Intelligent Investor” and mentor of Warren Buffett, was never a proponent of passive investing. He ensured that the stocks he held in his portfolio were fairly valued and he always saw himself as an investor, never as a speculator. He advised a sensible, but not excessive, diversification in the portfolio. Benjamin Graham’s wise philosophy has not lost any relevance to this day.

As you know, we primarily manage the equity portion of our portfolios according to sectors and only secondarily by countries. When we look at the revenue mix of the largest Swiss companies we hold in our portfolios, it becomes clear that this approach makes sense. The food giant Nestlé generates just 1.2 percent of its revenue in Switzerland, while around 32 percent comes from the United States and 6 percent from China. The pharmaceutical company Novartis achieves approximately 3 percent of its revenue in Switzerland, 40 percent in the USA, and 7 percent each in China and Germany. For Roche, the share of its revenue in Switzerland is 1.9 percent, while 47 percent is in the USA. Similarly, the Swiss share of revenue generated by the technology company ABB is a modest 1.2 percent, while it is 26 percent in the USA, 14 percent in China, and 6 percent in Germany. The company with the highest share of revenue in Switzerland is the insurance group Zurich with 7.4 percent. Nonetheless, the share of revenue generated in the USA is five times higher at 36 percent.

Anyone who believes that buying a Swiss corporation would conservatively place a lot of Switzerland in their portfolio is mistaken. The headquarters may be in Switzerland – filled with many foreign executives, by the way – but the dependence of these companies on the world market, and especially on the global superpower, the USA, is enormous. Anyone who thinks they can largely escape dependence on global events by solely focusing on Switzerland as an investment destination is making a mistake. Furthermore, there are many companies outside Switzerland that are among the global leaders in their field. Despite our appreciation for Switzerland as an investment destination, we advocate an approach of international sector and stock diversification in dealing with equities. We do consider it important for companies to be headquartered in a democratic country.

As you can see from our accompanying article “How the Wealthiest Invest Their Money”, which was published on 28 August in “Finanz und Wirtschaft”, Swiss and German investors are very fond of real estate ownership. On average, the share of their “concrete gold” is almost ten times their stock holdings. There are certainly good reasons for this, such as the desire to own a home and the fact that real estate is the second most lucrative asset class after stocks. Furthermore, many investors who invest their money for the long term acquire real estate funds with the aim of achieving a solid return with modest risks. However, there are frequently unpleasant surprises.

In mid-August, UBS announced its intention to liquidate the “Credit Suisse Real Estate Fund International”. The price had fallen 50% within three years. This led to panic among investors. The real estate fund simply could not accommodate the withdrawals triggered by a wave of sales, which is why it was closed and will be wound up over the coming years. How was this possible? The fund, set up in 2005, diversifies its international real estate holdings according to the fund prospectus in “quality properties”, especially in commercially used properties and residential buildings in economic centres characterised by creditworthy tenants as well as long-term leases. The selected centres include the cities of Austin, Brisbane, Boston, Frankfurt am Main, London, Toronto, Vancouver, Warsaw, Washington and Wellington. The promise to invest in quality properties and diversify globally gave investors a warm feeling of security. Ultimately, the fund management had to admit that a massive correction of market values had to be made due to a revaluation – a fiasco for the fund unit holders who had actually wanted to make a conservative investment. That this happened in an environment where the sun has been shining for years in many real estate regions around the world is astonishing.

There is also unrest in the German real estate market. Virtually overnight at the end of June last year, the open-ended real estate fund “UniImmo Wohnen ZBI” of Union Investment, a fund subsidiary of the cooperative DZ Bank, was devalued by 17%. Investors were shocked. The reasons cited for the price drop were the interest rate increase, exploding construction costs, and increasing regulatory requirements, which led to a “considerable decline in investor demand” for residential properties. According to “Handelsblatt”, this was the biggest single-day loss that investors in real estate funds had endured since the financial crisis in 2008. The fund, with a volume that peaked at over EUR 5 billion, is one of the largest of its kind. It was launched in 2017. Particularly bitter for investors was the fact that the fund was marketed as a low-risk product. Now investors can hardly get out, as it can be terminated at the earliest 24 months after purchase, and then there is still a 12-month notice period to observe. The above examples of funds vividly demonstrate that the returns on real estate investments are often grossly overestimated and the risks underestimated.

The former head of Raiffeisen Bank, Pierin Vincenz, was also caught up in the risk of his real estate investing. His villa in Morcote (Ticino), which he bought in 2015 for CHF 6.5 million, went up for auction in the spring of 2024. After the property almost found a buyer for CHF 2.55 million, Dölf Früh, a former friend of Vincenz, stepped in. According to press reports, since Früh had granted his friend a property loan of CHF 4.3 million at the beginning of 2019, he made an offer of CHF 4 million and remained without competition. The market value of the Vincenz property is therefore likely to be somewhere between CHF 2.5 and 4 million – in any case well below the original price Vincenz paid in 2015. The lesson from this: the true value of a property only becomes evident during a sale.

From a longer-term perspective, the current gold rush must be sharply relativised. The annual return on gold calculated in Swiss francs from 1974 to 2024 – over a 50-year horizon – was just 3.2 percent. After deducting inflation, which averaged 1.6 percent during this period, investors are left with an annual real return of 1.6 percent.

Compared to gold, stocks performed significantly better over the same period. The annual return on Swiss stocks was 8.0 percent – after deducting inflation, an outstanding real return of 6.4 percent per annum remains. Anyone who understands the mechanism of compound interest knows that such return differences have monumental long-term effects. Anyone who invested CHF 100,000 in Swiss stocks in 1974 now has a fortune of CHF 4.69 million; those who invested the same amount in gold must settle for a fortune of CHF 0.48 million. The final value of stocks is therefore almost 10 times higher than that of gold after 50 years. Additionally, the fluctuation risks, measured by annual volatility, are even higher for gold (17.7 percent) than for stocks (15.1 percent). All that glitters is definitely not gold. As the author outlines in his book “Über die Gier, die Angst und den Herdentrieb der Anleger” (“About Greed, Fear and the Herd Instinct of Investors”), gold is not a core investment of an overall portfolio but can definitely have a supplementary character with a share of, for example, 2 percent.

Since the election of Donald Trump as the 47th President of the United States of America, there has been no stopping the price of Bitcoin – the sound barrier of USD 100,000 was broken at the beginning of December. Let’s not forget that just three years ago, he labelled cryptocurrencies as fraud. After his campaign was significantly funded by crypto enthusiasts, Trump announced his intention to make the USA the “Bitcoin superpower” of the world during his second presidency. Donald Trump’s enthusiasm for Bitcoin & co. has also spilled over to conservative Swiss financial institutions such as PostFinance and the cantonal banks of Lucerne, Zug and Zurich. In Zug, public transport buses bear the state institute’s advertising message in large letters: “Krypto? Aber sicher.” (“Crypto? Certainly.”) As an occasional bus passenger, one rubs one’s eyes in disbelief – especially at the word “certainly”. Can that end well?

What are the reasons why more and more people are investing their money in cryptocurrencies? An illuminating study, “Crypto-assets in Switzerland: Awareness, Relevance and Investment Reasons” by researchers Andreas Dietrich, Reto Rey and Simon Amrein at the Lucerne University of Applied Sciences and Arts (HSLU), was commissioned by the crypto-provider PostFinance last year. 71 percent of respondents buy Bitcoin or other cryptocurrencies out of curiosity, interest or just to try it out; 50 percent believe in their potential for gains, 30 percent see them as a diversification opportunity, 17 percent don’t want to miss out, and 14 percent buy because others have also invested (multiple responses were possible). The above purchase reasons describe typical herd behaviour characteristics. People buy because prices are rising and because others have made money off them. No one buys Bitcoin with the conviction of acquiring a long-term, productively value-enhancing real asset – because it isn’t one. It is merely the hope that a crazier buyer will pay more than you paid – the famous “greater fool” phenomenon.

We do not rule out the possibility that the price of a Bitcoin will soon reach a million dollars. Irrational prices know no rational bounds – there are no valuation benchmarks for Bitcoin, which has no intrinsic value and yields neither interest nor dividends. Equally, the price could be zero in a few years – which is probably where it belongs from a rational perspective. Thorsten Hens, finance professor at the University of Zurich, commented on the Bitcoin euphoria in the “NZZ am Sonntag” on 8 December as follows: “This market reaction is a kind of self-fulfilling prophecy.” Even if half the world will soon be euphoric about this digital dream world, we are not getting involved in this enchanting hocus-pocus.

Private equity is theoretically an interesting asset class as it represents real capital, like stocks. Investing in companies not listed on a public stock exchange promises high returns. In the industry, annual average returns of 15, 20, 25 or even 30 percent are regularly heard of. However, the private equity industry is, to a large extent, purely a marketing event. Instead of clear-cut facts about the true returns and risks of this asset class, success stories are boasted about companies successfully sold or brought to the stock exchange after intensive support by private equity providers. This “storytelling” includes companies like Breitling, Dell, Facebook, Hilton, and VAT. It is reported that the early investors increased their investment tenfold, thirtyfold or even fiftyfold. That might be true, but firstly, those are absolute exceptions – perhaps one in 100 startup or buyout companies achieves such success in the end. A much larger proportion goes bankrupt. Secondly, an average investor will never have the chance to participate early in the most promising gems.

In the opaque segment of private equity, a major bluff by the financial industry is taking place. Ludovic Phalippou, a renowned finance professor at the University of Oxford, has been researching the field of unlisted companies for many years and is considered one of the world’s biggest critics. In his LinkedIn post on 9 March 2024, he writes that the IRR (Internal Rate of Return) declared by the industry “has absolutely nothing to do with real returns and is an absolutely useless piece of information”. In his statement, Phalippou presents an interesting calculation referring to the American industry leader KKR, which has claimed annual returns of over 25 percent for its investors since its inception in 1976: “To see what annual returns of 25.5% over a period of 47 years would mean, take just USD 100 million invested once in 1976 with KKR. This would have become USD 4.2 trillion today, which is no less than Japan’s GDP... Why are the SEC, FCA, and other regulatory authorities sleeping at the wheel?” Phalippou reaches the devastating conclusion that there is bluffing and trickery in dealing with private equity returns and that investors are being deceived. The fact is that investments in publicly listed stocks can achieve better long-term returns with a fraction of the fees and enjoy much greater transparency than private equity investments.

It is repeatedly heard in the industry that investing in alternative investments, particularly in private equity, is rewarded with a so-called illiquidity premium. Dr Roman von Ah is one of the leading experts in the Swiss capital market scene. He has extensive practical and academic experience. In an interview with the pension fund magazine “Schweizer Personalvorsorge”, he speaks plainly. He says that he would never invest in private equity. The propagated illiquidity premium will not actually land with the clients but in the pockets of the product providers. If anything, one should invest in these providers: “The best evidence for this is the private equity firm Partners Group, whose listed stock has been a sensational investment”.

At present, special caution is advised when investing in private equity. According to the rating agency Moody’s, many corporate holdings of private equity giants such as Apollo, Clearlake Capital, Platinum Equity or Ares suffer from excessive debt burdens and are therefore exposed to an increased risk of default. Some private equity firms have grown significantly in recent years and are having great difficulty offloading their investments at advantageous prices. As a result, so-called “continuation deals” are being forged, questionable transactions within a firm’s own group – companies are being sold to each other. Certain market observers therefore fear that an economic downturn or rising interest rates could unleash a storm on the private equity market.

We have serious doubts that even half of Swiss Life’s promised returns can be delivered. However, the famous “bottom line” can only be calculated in half a century – the vehicle has a lifespan of 50 years. 50 years! Who would want to invest their money in a completely illiquid and opaque construct for 50 years? Furthermore, the fund is exposed to a significant currency risk and can take out loans. From experience, we know that the use of leverage, especially with illiquid investments, can be extremely dangerous. In times of crisis – which are almost guaranteed within 50 years – it acts as an accelerant. Moreover, it has been shown in the past that state actors involved in the relevant infrastructure projects often do not adhere to the contracts with private investors or have changed the conditions afterwards. The issuer of “Privado Infrastructure” is undoubtedly a reputable life insurer. Nonetheless, we advise: keep your hands off this and similar products, which primarily enrich the providers, not the investors. Even the openly disclosed annual fee is a horrendous 1.9 percent – and we don’t even want to talk about the hidden fees.

According to Roman von Ah, it is appalling how much in returns is lost with private market investments, namely private equity and infrastructure. Nevertheless, the trend towards these high-margin and opaque products is not only a reality in the context of pension funds. UBS, for instance, recommends a 20 to 40 percent share in private market investments to its clients in their “House View Investor’s Guide” – this boosts the bank’s earnings significantly. Furthermore, the only remaining major Swiss bank also recommends a 7 to 11 percent share in hedge funds. This is the cumulative madness of illiquidity and opacity. This trend is associated with enormous cost implications for pension funds, as a study by Swisscanto, a subsidiary of Zürcher Kantonalbank, reveals with brutal honesty. Within a decade, the average asset management costs of pension funds have increased by over 40 percent. The negative impact on returns is obvious. Legendary investor Warren Buffett consistently avoids all conceivable and inconceivable product innovations that the industry relentlessly hawks to investors each year. We are firmly convinced that his mentor Benjamin Graham would view it the same way.

We would like to emphasise at this point that we have enjoyed a long-standing and very trusting collaboration with the custodian bank UBS. Many respectable, conscientious and qualified employees work at the bank. We are convinced that they do not deserve having their employer constantly pilloried in the media. Nevertheless, the managers of the “best bank in the world” would be well advised to act a little more modestly. Otherwise, they risk, as so often in the past, losing their grounding.

It seems that Axel Lehmann, the last Chairman of the Board of Directors of Credit Suisse, which spectacularly collapsed in March 2023, has definitively lost his grounding. In an article written for the Lausanne-based IMD Business School for Management and Leadership, Lehmann offers tips to other board directors on crisis management. The “four effective ways for a board of directors to manage a crisis” reads like a list of findings from a management textbook, as reported by CH Media in mid-November. However, Lehmann does not reference “his” collapsed Credit Suisse as an instructive example but rather the Uber scandals that engulfed the ride-sharing service in 2017 – an approach that borders on self-irony and denial of the truth. The fourth and final piece of advice in Axel Lehmann’s advisory column is that board directors should lead by example. Lehmann definitely cannot refer to the Credit Suisse example in this regard. For the benefit of students, Lehmann would be well advised to refrain from publishing further instructive management articles – as such articles from the “instructor” could turn into instruction for him.

The University of Oxford is also richly endowed with sponsorship money. In 2019, it became known that the founder and CEO of the world-leading private equity firm Blackstone, Stephan Schwarzman, had donated GBP 150 million to the English elite university. Schwarzman increased this sum by a further GBP 25 million in 2022. It is well known that Ludovic Phalippou, one of the world’s most renowned critics of private equity, has been teaching at the University of Oxford for many years. Will he be able to continue conducting uncompromisingly independent research and publishing in the future? We can only wish it for him and ourselves. However, the headwind that blows directly or indirectly in his face is likely to become substantially stronger with near certainty.

When quality media outlets sell parts of their independent journalistic potential to well-heeled financial institutions, and, furthermore, numerous university chairs are sponsored by banks, one should not be surprised if many investors repeatedly fall for the crude tricks of the finance industry. The pinnacle of irony is finally reached when the state takes this as impetus to create a monstrous regulatory authority to protect investors.

On 9 June 2024, Roger Federer gave a speech to students at Dartmouth College in New Hampshire. The tennis star’s statement that he won almost 80 percent of his 1,526 matches in his career but only 54 percent of his points was intriguing. That is astonishing. Intuitively, one would probably have assumed that he was able to decide at least 70 percent of all points in his favour.

Roger Federer’s statement reveals an analogy to asset management. In investing, too, it is a completely utopian goal to win or beat the market every single year or in 85 percent of years. The champions are those asset managers who, on average, are somewhat better and, above all, more consistent than the competition over the years. On the tennis court, Roger Federer achieved this by often winning the decisive points and avoiding silly mistakes. The latter is crucial in investing to be at the top in terms of performance over the long term.

As you know, we do not make forecasts – at least not for a short horizon of one year. Following the interest rate cuts by the Fed, ECB and SNB last year and because inflation in the major industrial nations is largely under control, moving towards 2 percent or below, there is reason for optimism. In addition, there are good chances for further interest rate cuts in the United States of America, in Europe and in Switzerland. However, at the same time, we caution against complacency. Contrary to popular belief, falling interest rates are not a guarantee of a bullish stock market. There is no consistent interpretation, based on the experience of major crises (Dotcom/9-11, financial, and coronavirus crises), of how rate cuts impact stock markets. Often, their effects are significantly delayed.

When, in the wake of the Dotcom/9-11 crisis, interest rates were repeatedly and significantly cut after the turn of the millennium, stock prices tumbled for a full two years before recovering in spring 2003. Recession fears triggered the drop. A similar pattern emerged during the financial crisis. After the Fed significantly lowered interest rates from autumn 2007 onwards, stock prices plummeted until spring 2009, before the recovery began. There is no reliable correlation, only a weak one, between interest rate changes and stock market performance. What is particularly new compared to the coronavirus period is this: bad news – for example, regarding economic performance or job growth – is genuinely bad news for the stock market again. During the coronavirus period, it was paradoxical: bad news about economic prospects and the threat of a looming recession put the stock markets in a celebratory mood because central bank interest rate cuts were expected as a consequence.

Economically, China, once the showcase nation of emerging markets, is severely strained. At the end of September, the leadership of the Communist Party announced comprehensive stimulus measures for the Middle Kingdom, and the Chinese central bank cut interest rates to support the struggling real estate market. This sparked short-term euphoria on the Chinese stock market, which has been disappointing for years. Nonetheless, we remain sceptical and continue to steer clear of this market. Politically, China is an unpredictable dictatorship. With our multinational companies, which are based in democratic countries, we are sufficiently present in this “emerging” country with all its opportunities and risks.

Rarely before was the performance gap between the American S&P 500 and the European and Swiss indices as wide as in the past year. With all due respect for the economic power of the USA, we do not expect this trend to continue at a similar pace. This is supported in part by the valuation difference: while the average price paid for the S&P 500 is 23 times corporate earnings, the price/earnings ratio for European companies is just 14. European stocks can therefore be classified as relatively cheap, whereas American dividend stocks are now considered rather expensive. What worries us in the global context is exploding sovereign debt, especially American debt. It already amounts to 120 percent of GDP. In 2023, despite a well-oiled economic situation, the US budget deficit was a hefty 6.3 percent. This cannot go well in the long run.

Even if we are not capable of making reliable forecasts, we can certainly promise you that we will not fall prey to fashionable trends and the procyclical behaviour of the product industry in the future either. It is important to resist the ever more adventurous “innovations” and the lucrative temptations of the finance industry. The strategy consulting firm Boston Consulting Group concluded in its study “Global Asset Management 2024: AI and the Next Wave of Transformation” that only 37 percent of newly launched funds are still on the market after 10 years. The majority, 63 percent, are scrapped due to lack of success. In 2010, the percentage of funds that still existed after 10 years was at least 60 percent.

Innovations are reserved for the companies whose stocks are in our clients’ portfolios. Client-oriented asset managers, by contrast, are characterised by stability, discipline and adherence to principles. Crucial for long-term success in investing is the consistent implementation of a low-cost, countercyclical and transparent strategy with high-quality direct investments limited to the most promising asset classes. If one follows these virtues, one can look forward to the investment year 2025 with confidence – whatever may come.

An increasing number of our valued clients are considering contributing part or all of their assets to a charitable foundation during their lifetime or after their death. In recent years, we have been asked by interested parties to explore various options on this subject. We have discarded the idea of establishing an umbrella foundation ourselves, which we could offer as a platform to our clients, because running a charitable foundation requires the technical knowledge of specialists, and the personnel and administrative costs are enormous. This might also have raised critical questions regarding our independence. After evaluating various options, we have concluded that a collaboration with renowned external experts, who have a lot of experience in this area, is the best solution for our clients.

In the past year, we have held constructive discussions with high-ranking representatives of the Swiss foundation sector. Today we are convinced that we can provide interested parties with professional advice and offer solutions that are more cost-effective compared to the offerings of banks. Should you be interested in learning more on this topic, please feel free to contact us at any time.

Finally, we would like to once again point out that, if you have not done it already, you are invited to introduce your children or potential heirs to us or to establish a separate client relationship for them. In the hope that the “worse case scenario” will not occur for as long as possible, it is advisable to plan early and set the course across generations.

For the New Year 2025, we wish you and your loved ones all the best, and above all, good health. We would like to thank you for the trust you have placed in us and look forward to working with you in the future. With kind regards, on behalf of the entire “Hotz Team”. Your

Dr Pirmin Hotz