Mortgage solutions for institutional investors

Pension funds that hand over the processing of their mortgage business to finovo profit from many advantages. finovo is a service provider for the mortgage business and takes over the processing procedures from A to Z for pension funds; from processing to the collection of mortgage interest. In the process, pension funds can define parameters for granting mortgages, so that we can manage the mortgage business in their interests.

What prompted the ALSA pension fund to enter the mortgage asset class and how it and its policyholders are now benefiting from it

In the current market environment, institutional investors such as pension funds, insurance companies and family offices are finding it difficult to generate a good return on their investments at a reasonable risk. This is also the case with the ALSA pension fund, which as a family-owned and extremely high-performing partner provides mandatory and extra-mandatory occupational benefits in accordance with the BVG for around 450 companies. At the end of 2019, it had more than 13,000 insured persons whose retirement provisions are to be invested in a risk-conscious yet profitable manner - a responsible task. In the negative interest rate environment with an investment emergency, new, innovative solutions outside the traditional capital market are in demand.

This category includes, for example, private equity investments and hedge funds, with which significantly higher returns can be achieved in some cases, but which also entail the undesirable side effect of higher risks, strong volatilities and massive exchange rate risks. The mortgage asset class is different: it represents a well-diversified, low-risk and low-cost investment alternative with solid returns in the investment spectrum.

Mortgages as a real alternative for securing pensions

Compared to first-class bonds such as government bonds, mortgages as an asset class can generate a higher return and at the same time the risk can be better calculated. Mortgages are a very low-risk asset class secured by real estate liens, which is also explicitly provided for by law for pension funds. In addition, thanks to the accounting at nominal value, the investor benefits from a stable investment without fluctuations in value even in a changing interest rate environment, which in turn makes pension funds such as ALSA more attractive to policyholders.

It is striking that many pension funds still invest considerable amounts in government bonds, even though these investments have been generating practically minimal or even negative returns for years. Not so the ALSA pension fund: With the asset class mortgages, it relies on a sustainable gross return of almost one percent annually. What's more, mortgages on Swiss homes are the only asset class with a risk profile comparable to first-class bonds. And all this without any exchange rate risks or price fluctuations.

Asset allocation within fixed-income investments (in CHF billion)
Case study graphic with pie chart
Bonds CHFConvertible bondsForeign currency bondsMortgages and loans
Source: Complementa Risk Check-Up 2019, total balance sheet of 437 pension funds as of 31.12.2018.
Solid return regardless of interest rate environment

Contrary to what is often said, the sustainable profitability of mortgages as an asset class can also be demonstrated in periods of high interest rates. A long-term historical comparison between mortgage interest rates and Swiss government bonds shows that even in the high-interest phase of the 1990s, mortgages

generated an additional return of a good one percent. It is not true that the yield advantages disappear when interest rates rise, so the outperformance is not a phenomenon of the current low interest rate environment.

Historical interest rates mortgages vs. government bonds
Case study graphic
Confederation 7 yearsMortgage 7 years (Published interest rates for new transactions according to SNB)*
Source: snb.ch, last observation of the year in each case
The SNB has only been documenting the interest rates of individual terms since 2007. Mortgage rates from 1991 to 2006 are therefore a volume-weighted average of all terms.
Very low risk and easily compatible with regulations

Furthermore, Swiss home mortgages are virtually risk-free and thus also comparable in terms of risk to a Swiss government bond. Historically, default risks have amounted to one to three basis points. By comparison, the lowest probability of default (AAA) for bond issuers in Standard & Poor's rating model is ten basis points for a four-year term and 50 basis points for an eight-year term.

The low risk also ensures compatibility with investment regulations. Under the existing BVG regulations (BVV2), pension funds may invest up to 50 percent of their capital in mortgages. As a partial replacement of the Swiss bond asset class (share currently around 20 percent), this maximum share is therefore not limiting.

The mortgage asset class increases diversification at comparatively low cost

By investing in Swiss home mortgages, the investment portfolio can be further diversified. The administrative costs are low compared to other asset classes.

Entering the mortgage asset class helps us to achieve sustainable returns for our policyholders. As a high-quality partner, MoneyPark can score with professionalism and efficiency in both the distribution and processing of mortgages.
Ziltener Harry
Harry Ziltener
Managing Director ALSA

It is possible to build up a mortgage portfolio within one year

Historically, institutional investors have lacked not only the sales power but also the credit and settlement know-how to enter the mortgage asset class market - and this is also the case for ALSA pension fund. The question then arises as to whether to enter the mortgage asset class or expand it with its own sales and processing, or whether to buy in these services. ALSA decided to enter the mortgage asset class with a partner who would take over all operational processes of distribution and settlement. Risk control was also an important factor.

Comparison investment opportunities in mortgages
First class bonds
10 years (AAA/AA)
Mortgage bonds
10 years
Indirect investments
10 years (AST)
Direct investments
10 years
Case study graphic
Net yield (as of 09/2020)
CostsAll data indicative and without guarantee
The figure refers to the average costs of the most important investment foundations and includes the TER as well as the issue and redemption premiums.
Switzerland-wide distribution allows swift volume build-up

In most cases, the in-house distribution of mortgages goes hand in hand with the development of expertise. With low volumes, it can thus be difficult to achieve reasonable efficiency. ALSA therefore decided to rely on MoneyPark's B2B offering, through which more than CHF 3 billion in mortgage volumes are concluded annually. The market-tested concept with personal and holistic advice at over 20 locations throughout Switzerland meets ALSA's high quality standards. In addition, market-oriented pricing with individually definable criteria helps with the targeted and efficient portfolio construction.

Efficient processing is key to low administrative costs

The same applies to a greater extent to the auditing, processing and management of mortgage business. Mortgages can only be managed efficiently with specialized software. This requires a high degree of customizability, which allows the financing parameters of the investor, such as volume, regions, debtors or property type, to be implemented in a time- and cost-enefficient manner. In the case of the ALSA pension fund, the requirements were both geografical diversification and the desire for short maturities. The credit decision and document generation are also system-supported and thus fully digitized - right through to "direct closing". Collateral, payment processing, inventory management, interest collection, settlements, etc. are handled by MoneyPark. MoneyPark's proprietary developed software also allows to take over and expand an existing mortgage portfolio. In doing so, any existing regulations can be taken over and mapped at the end customer interface with 150+ scoring criteria.

Maintain an overview at all times thanks to detailed reporting

Regular automated reporting shows the investor the structuring of his portfolio. The geografical distribution as well as the customer segments, the product type, the maturity and thus the maturity structure are clearly displayed.

Onboarding made easy

Thanks to its expertise in working with over 150 mortgage partners and reference customers from the pension fund sector, MoneyPark can build on extensive onboarding experience. The ALSA pension fund was able to benefit significantly from this and built up a mortgage portfolio of over CHF 200 million within a year.

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