Why Switzerland?

Marwan Naja, AS Investment Management January, 2010

I. Executive Summary Swiss Equities Have Outperformed: Here is a fact you probably did not know: The Swiss equity market has arguably been the best performing developed world market over the past 20, 10, 5 and 2 years. The SPI Index, which incorporates over 200 Swiss stocks, is the best performing index in Swiss Franc (“CHF”), US Dollars (“USD”), Euro (“EUR”) and British Pounds (“GBP”) over the past 20 years1,10 years, 5 years, and 2 years when compared to similar broad-based total return indices in the United States (S&P 500 Total Return), the United Kingdom (FTSE 350 Total Return), Germany (CDAX), France (SBF 120 Total Return) and Japan (TOPIX Total Return)2.

For most of these periods the magnitude of the outperformance is significant. Furthermore, the Swiss market has exhibited attractive risk characteristics including lower volatility than comparable markets.

Figure 1: SPI 20 Year Performance (red) Compared to Major Developed Indices in CHF3

1 The 20 year comparable excludes the EUR which has not existed for that duration and the French SBF 120 TR which was established in 1990 and has underperformed the SPI over the 19 year period. 2 The Swiss market is the best performer in our local currency comparison (stripping out the foreign exchange effects) over 20 years and marginally trails the FTSE 350 for the 10 year, 5 year and 2 year comparisons. 3 Source of all graphs is Bloomberg unless otherwise indicated. Why Switzerland? AS Investment Management

Contents

I. Executive Summary ...... 1 Swiss Equities Have Outperformed ...... 1 Swiss Franc Attractive ...... 3 Swiss Environment & Stability ...... 4 II. Swiss Equities ...... 6 Key Comparison Assumptions ...... 6 Currency ...... 6 Normalization ...... 6 The Indices ...... 6 Volatility ...... 16 Size, Liquidity & Valuation ...... 17 Diversification...... 18 Conclusion ...... 18 III. Swiss Currency ...... 20 Historical Strengthening ...... 20 Fundamental Equilibrium Exchange Rate (FEER) ...... 20 Real Effective Exchange Rate (REER) ...... 21 Purchasing Power Parity (PPP) ...... 22 The Euro ...... 23 IV. Swiss Environment & Stability ...... 24  Reserves ...... 24

 Public Debt ...... 24

 Budget ...... 24  Tax Environment ...... 24

 Unemployment ...... 25

 Access to inexpensive capital ...... 25  Flexible and highly efficient labor market ...... 26 IV. Conclusion ...... 27 Contact ...... 28

www.as-im.com Page 2 Why Switzerland? AS Investment Management

Over the past two decades most Swiss investors eagerly looked outside their country to diversify away from local equities while the Swiss market continued to be one of the most resilient markets in the world. In fact, for most Swiss investors staying local would have likely generated very good results, lower volatility, less lockups and less side-pockets.

Figure 2: Volatility since 2000 for Select Indices (SPI – Red, SMI – Black)

Swiss Franc Attractive: One cannot consider Swiss equities without having a perspective on the underlying currency. The Swiss Franc has also been a solid long term performer. The purpose of the CHF currency analysis in this paper does not support any short or medium term trading conclusions. Rather it indicates that there is fundamental long term support for this currency. At a time when the US and Europe are facing dramatic budget deficits, monetary easing, regulatory ambiguity and fiscal stress, the Swiss Franc may not be a bad place to be.

Figure 3: USD-CHF Exchange Rate since 1971 with Moving Averages (5, 10, 20 years)

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Switzerland has a significant and consistent structural current account surplus. For 2009, the current account surplus is expected to represent roughly 6% of GDP according to the IMF which also forecasts that this level will gradually climb back up to 10% by 2014. Both the IMF and the Petersen Institute models have accurately predicted the gradual appreciation in the CHF over the past decades. There is nothing to indicate that this structural CA surplus is under threat.

Looking at other models like the Real Effective Exchange Rate (REER) and Purchasing Power Parity (PPP) models, the CHF often appears to be overvalued. However, these models have been erroneously expecting a devaluation of the Swiss Franc for decades. The CHF has indeed been strengthening.

Swiss Environment & Stability: Swiss companies compete internationally, but operate out of a stable and business-friendly environment. Investors considering investing in the Swiss equity markets also need to satisfy themselves that this environment is stable and sustainable. Here are some key indicators to illustrate this stability:

 Unemployment is currently at 4.1%4, higher, as a result of the current economic crisis, than the ten year average of 3.0%5, but well below levels in Europe and the US.  Switzerland has a manageable public debt level. With a GDP of approximate CHF 542 billion6 in 2008, Switzerland has approximately CHF 225 billion7 gross public debt (about 41%).  The Swiss National Bank boasts approximately USD 86 billion in foreign reserves and approximately USD 33 billion in gold reserves8.  There has been a government budget surplus for almost a decade. Including the cantons, the level was at CHF 5.6 billion9, or about 1% of GDP in 2008.  Inflation has consistently been low at an average of 1% over the past decade.  On major socio-economic factors such as education, investment in R&D, crime rates and literacy, among others, Switzerland constantly ranks very highly in the developed world.  Switzerland has witnessed a long period of political stability. The last armed conflict was in 1847, when a one month civil war between Catholics and Protestants resulted in approximately 100 casualties.  Flexible and highly efficient labor market with one of the world’s lowest industrial action (strike) rates10.

4 http://www.seco.admin.ch/themen/00385/00387/index.html?lang=fr 5 Bloomberg 6 http://www.bfs.admin.ch/bfs/portal/fr/index/themen/04/02/01/key/bip_gemaess_produktionsansatz.html 7 http://www.bfs.admin.ch/bfs/portal/fr/index/themen/18/03/blank/key/schulden.html 8 https://www.imf.org/external/np/sta/ir/che/eng/curche.htm 9 http://www.bfs.admin.ch/bfs/portal/fr/index/themen/18/01/key/02.html www.as-im.com Page 4 Why Switzerland? AS Investment Management

 Reasonable tax regime for corporations and individuals. Switzerland has one of the lowest corporate tax burdens in the OECD11.  Access to inexpensive capital. For example, rates on 1 month deposits have been under 3% for over 15 years.

10 http://www.nationmaster.com/graph/lab_str-labor-strikes 11 Paying Taxes 2010 – The Global Picture, International Finance Corporation, Price Waterhouse Coopers. http://www.pwc.com/gx/en/paying-taxes/download-order.jhtml www.as-im.com Page 5 Why Switzerland? AS Investment Management

II. Swiss Equities

The Swiss equity markets (the SPI and the SMI Indices) have performed extremely well relative to other markets. The objective in this section is to validate this claim and elaborate on other factors that address the size, volatility, diversification and depth of the Swiss market.

Key Comparison Assumptions: In the world of equity indices there are many differences that must be consistent for meaningful comparison. Briefly, we have selected broad-based, total return indices (dividends reinvested) generally containing 200 – 500 of the top listed equities in each market.

Currency: With regards to currency, the analysis looked at comparisons in local currency as well as four major currencies (CHF, USD, EUR and GBP). While the Swiss market is one of the leading performers in local currency comparisons across time periods12, the impact of the currency is part of what investors actually experience. Hedging the currency component of equity allocation can be very expensive and impractical. When comparisons are expressed in a certain currency, they become more tangible: if one invests 100 Swiss Franc (or EUR, USD or GBP) in the SPI (or S&P, FTSE, etc.) what would it be worth today in that reference currency.

Normalization: We have normalized all the indices to a value of 100 at the beginning of each comparison period.

The Indices: The following are brief descriptions and Bloomberg ticker symbols of the indices used for comparison.

 SPI: The Swiss Performance Index is a total rate of return index of 200+ stocks issued by Swiss companies whose shares are traded on the Electronic Bourse System.  SMIC: The SMIC represents the total return (dividends reinvested) of the SMI. The Swiss Market Index is a capitalization-weighted index of the 20 largest and most liquid stocks of the SPI universe.  SPXT: SPXT represents the total return (dividends reinvested) of the S&P 500.  FTPTT350: The FTPTT350 represents the total return of the FTSE 350.  CDAX: The CDAX Performance Index is a total return index, which represents the German equity market in its entirety, i.e. all companies listed on the Frankfurt Stock Exchange.  TPXDDVD: The TPXDDVD represents the total return of the TOPIX Index. The TOPIX, Tokyo Stock Price Index, is a capitalization weighted index of all companies listed on the First Section of the Tokyo Stock Exchange.

12 The Swiss market is the best performer in our local currency comparison (stripping out the foreign exchange effects) over 20 years and marginally trails the FTSE 350 for the 10 year, 5 year and 2 year comparisons. www.as-im.com Page 6 Why Switzerland? AS Investment Management

 SBF120NT: The SBF120NT represents the total return of theSBF-120 Index, which is a capitalization-weighted index of the 120 most highly capitalized and most liquid French stocks traded on the Paris Bourse.  NDUEAWXZ: The NDUEAWXZ Index is the MSCI World Daily Total Return Net Ex Switzerland expressed in USD:  NDDUEXSZ: The NDDUEXSZ is the MSCI Daily Total Return Net Europe Ex Switzerland expressed in USD.  NDUEEGF: The NDUEEGF Index is the MSCI Daily Total Return Net Emerging Markets Index expressed in USD.  MVUDNC: The MVUDNC Index is the MSCI Daily Total Return Net Nordic Index expressed in USD:

The following graphs represent a subset of our analysis. The full database of analysis is available to our clients and can be obtained by contacting us through our website (www.as-im.com). Here is a summary of the following graphs13:

 Figure 4: 20 years, CHF, developed market  Figure 5: 10 years, CHF, developed markets  Figure 6: 10 years, USD, developed markets  Figure 7: 10 years, EUR, developed markets  Figure 8: 10 years, GBP, developed markets  Figure 9: 5 years, CHF, developed markets  Figure 10: 2 years, CHF, developed markets  Figure 11: 10 years, CHF, including emerging markets  Figure 12: 10 years, 260 trading day annualized volatility

13 All graphs through December 3, 2009. Source: Bloomberg. www.as-im.com Page 7 Why Switzerland? AS Investment Management

Figure 4 Comparison Period: 20 year. We have arbitrarily chosen 20 years as the outer limit of what one might call the modern era. Going backwards beyond 20 years may place us outside the relevant and expected financial, geo-political, socio-political, regulatory and economic framework limiting the use of the comparison. Indices: SPI (Switzerland - red), SPXT (US - green), FTPTT350 (UK - orange), CDAX (France - blue), TPXDDVD (Japan – Grey). Our 20 year comparison did not include the other indices outlined previously as their data does not extend back to that date. Currency: CHF. While the graph below illustrates the SPI’s outperformance in CHF, the Index also outperforms in USD and GBP…and yes even local currency. The EUR did not exist 20 years ago.

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Figure 5 Comparison Period: 10 year. Indices: SPI (Switzerland - red), SMIC (Switzerland - black), SPXT (US - green), FTPTT350 (UK - orange), CDAX (Germany - blue), SBF120NT (France - purple), TPXDDVD (Japan - dark orange), MVUDNC (Nordic - dark blue). Currency: CHF.

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Figure 6 Comparison Period: 10 year. Indices: SPI (Switzerland - red), SPXT (US - green), FTPTT350 (UK - orange), CDAX (Germany - blue), SBF120NT (France - purple), SMIC (Switzerland - black), TPXDDVD (Japan - dark orange), MVUDNC (Nordic - dark blue). Currency: USD.

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Figure 7 Comparison Period: 10 year. Indices: SPI (Switzerland - red), SPXT (US - green), FTPTT350 (UK - orange), CDAX (Germany - blue), SBF120NT (France - purple), SMIC (Switzerland - black), TPXDDVD (Japan - dark orange), MVUDNC (Nordic - dark blue). Currency: EUR.

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Figure 8 Comparison Period: 10 year. Indices: SPI (Switzerland - red), SPXT (US - green), FTPTT350 (UK - orange), CDAX (Germany - blue), SBF120NT (France - purple), SMIC (Switzerland - black), TPXDDVD (Japan - dark orange), MVUDNC (Nordic - dark blue). Currency: GBP

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Figure 9 Comparison Period: 5 year. Indices: SPI (Switzerland - red), SPXT (US - green), FTPTT350 (UK - orange), CDAX (Germany - blue), SBF120NT (France - purple), SMIC (Switzerland - black), TPXDDVD (Japan - dark orange), MVUDNC (Nordic - dark blue). Currency: CHF. The CDAX tied with the SPI over the past five years. However, the SPI and SMI outperformed in EUR, USD and GBP.

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Figure 10 Comparison Period: 2 year. Indices: SPI (Switzerland - red), SPXT (US - green), FTPTT350 (UK - orange), CDAX (Germany - blue), SBF120NT (France - purple), SMIC (Switzerland - black), TPXDDVD (Japan - dark orange), MVUDNC (Nordic - dark blue). Currency: CHF. While the graph below illustrates the SPI’s and SMI’s outperformance in CHF, the SPI and SMIC also outperform in EUR, USD and GBP.

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Figure 11 Comparison Period: 10 year. Indices: SPI (Switzerland - red), SPXT (US - green), NDDUEXSZ (MSCI Europe Ex Switzerland - orange), NDUEEGF (MSCI Emerging Markets - blue), SMIC (Switzerland - black). Currency: CHF. While the Swiss market has clearly outperformed in the developed world, the emerging markets have had a decade of strong (and volatile) performance.

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Figure 12 Volatility: The volatility of the Swiss market has generally been lower than other markets (and significantly lower than emerging markets). For example, since this last financial crisis, the volatility of Swiss stocks has been at least a third lower than the S&P 500. Indices: SPI (Switzerland - red), SPXT (US - green), NDDUEXSZ (MSCI Europe Ex Switzerland - orange), NDUEEGF (MSCI Emerging Markets - blue), SMIC (Switzerland - black). Measurement: Volatility for past 260 trading day (1 year) annualized since 2000.

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Size, Liquidity & Valuation: The Swiss market is roughly a USD/CHF 1 trillion dollar market. In terms of size, it is larger than a number of European indices and smaller than the UK and certainly the US. Volume is not heavy in the medium and smaller stocks. Furthermore, the SMI, which contains the 20 largest and most liquid stocks in the SPI universe, account for about 85% of the market capitalization of the Swiss equity market. This may represent a risk for investors in this market and underlines, from admittedly our self-serving perspective, the need for specialist Swiss-focused asset manager.

Figure 13: Volume of Traded Shares and Market Capitalization of Select Markets

Market Volume (100 day average) Current Market Cap Currency SWISS MARKET INDEX 62,126,960 816,247,437,500 CHF SPI SWISS PERFORMANCE IX 73,980,600 1,020,180,187,500 CHF AEX-Index 108,525,600 330,173,375,000 EUR OMX STOCKHOLM 30 INDEX 125,632,300 3,343,243,500,000 SEK BRAZIL BOVESPA STOCK IDX 167,954,600 1,459,539,750,000 BRL SBF 250 INDEX 200,826,200 1,251,534,750,000 EUR IBEX 35 INDEX 281,099,800 514,693,593,750 EUR NASDAQ COMPOSITE INDEX 643,075,000 3,608,595,750,000 USD FTSE Italia All-Share 917,602,000 440,237,062,500 EUR S&P 1500 Composite Index 1,285,357,000 11,409,790,000,000 USD FTSE ALL-SHARE INDEX 1,589,609,000 1,595,684,625,000 GBP HANG SENG INDEX 1,803,880,000 10,792,780,000,000 HKD TOPIX INDEX (TOKYO) 2,016,282,000 297,978,900,000,000 JPY Source: Bloomberg - 11/12/2009. Expressend in currency of respective index.

Figure 14: Valuation of Swiss equities has generally been in line with developed market levels at times trending higher to reflect the high quality of companies.

Market P/E - Estimate SWISS MARKET INDEX 15.79 SPI SWISS PERFORMANCE IX 16.37 AEX-Index 16.22 OMX STOCKHOLM 30 INDEX 17.63 BRAZIL BOVESPA STOCK IDX 17.11 SBF 250 INDEX 16.13 IBEX 35 INDEX 12.02 NASDAQ COMPOSITE INDEX 25.62 FTSE Italia All-Share 15.35 S&P 500 INDEX 17.57 FTSE ALL-SHARE INDEX 14.62 HANG SENG INDEX 17.18 TOPIX INDEX (TOKYO) 36.78 Source: Bloomberg - 11/12/2009. Based on Bloomberg consensus estimate for next four quarters.

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Diversification: The Swiss market provides for a good level of diversification across sectors as well as exposure to growth in the international markets with a bias to defensive sectors. Many of these companies have leading positions in their respective sectors.

Figure 15: ICB Sector Weights for Select Indices

SBF 250 CDAX UKX SPX SPI Oil & Gas 12.28% 0.77% 20.42% 11.31% 0.17% Basic Materials 6.17% 18.85% 12.53% 2.91% 4.25% Industrials 14.75% 16.43% 4.13% 11.47% 12.64% Consumer Goods 12.61% 13.96% 12.46% 10.94% 24.65% Health Care 8.51% 3.69% 8.94% 12.55% 32.31% Consumer Services 10.72% 2.95% 8.55% 11.49% 0.69% Telecommunications 3.93% 5.04% 6.80% 3.10% 0.99% Utilities 7.29% 13.61% 3.65% 3.91% 0.22% Financials 20.97% 18.27% 21.85% 14.54% 23.30% Technology 2.78% 6.42% 0.65% 17.78% 0.77%

Swiss companies operate globally and have benefitted significantly from growth in the emerging markets and elsewhere in the world. For Swiss investors, this has arguably been a safer conduit to international and emerging markets exposure and diversification, with limited currency risk, than some of the strategies proposed by local advisors.

Figure 16: Revenue Breakdown by Geography for Select SMI Companies

Revenues Europe Americas Asia Other ABB LTD-REG 34,912 15,815 6,428 8,967 3,702 ACTELION LTD-REG 1,474 678 615 180 ADECCO SA-REG 19,965 11,714 2,697 5,554 HOLCIM LTD-REG 25,157 9,788 8,620 5,413 1,336 LONZA GROUP -REG 2,937 1,418 1,092 427 NESTLE SA-REG 109,908 28,153 33,134 17,130 31,491 NOVARTIS AG-REG 41,459 18,034 16,286 7,139 ROCHE HLDG-GENUS 45,617 18,755 20,179 6,310 373 SGS SA-REG 4,818 2,643 1,026 1,149 SWATCH GROUP-BR 5,677 2,692 545 2,321 119 SYNGENTA AG-REG 11,624 4,290 5,878 1,456 SYNTHES INC 3,193 825 2,059 309 Percentage of Revenues 37% 32% 14% 16%

Conclusion: The Swiss equity markets have been one of the best performing developed markets over the past 20, 10, 5 and 2 years with lower volatility than other equity markets - an impressive record. This market contains many high-quality names, provides ample sector diversification and geographic diversification as many Swiss companies compete globally. The Swiss market is not a very deep market, particularly outside the SMI.

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Many factors have contributed to the out-performance of the Swiss market including, a strong and stable currency and a stable business-friendly environment. We will discuss these elements next.

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III. Swiss Currency

An investor in the Swiss equity markets or one considering investing in this market must have a view on the Swiss Franc. The hedging of long term equity assets is expensive, impractical and arguably undesirable. The aim of this section is to investigate if there is structural support for the currency or if it is under threat of long term devaluation, which may detract from equity performance. The aim is not to identify short or medium term currency trading opportunities.

Historical Strengthening: Over the past 40 years, the CHF has strengthened versus world currencies and especially the USD.

Figure 17: USD-CHF Exchange Rate since 1971 with Moving Averages (5, 10, 20 years)

We will look at three approaches for evaluating the relative strength or weakness of the CHF and argue that the models driven by a country’s structural current account surplus or deficit has been the best at predicting the movement of the CHF. This model bodes for continued long term support for the Swiss Franc.

Fundamental Equilibrium Exchange Rate (FEER): If we apply either the IMF CGER (Consultative Group on Exchange Rate Issues) Macroeconomic Balance Model or the Petersen Institute Fundamental Equilibrium Exchange Rate (FEER) Model to the Swiss Franc, both models indicate an undervaluation of the CHF. Many economists believe that the current account approach to measuring a currencies’ strength as superior to PPP and REER. This structural current account surplus has resulted in a gradual and significant appreciation in the Swiss Franc over the past forty years.

Simply described, the model is applied in the following fashion:

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 Measure the current account (CA) balance as a percentage of GDP for the currency in question. Switzerland has consistently shown a CA surplus.  Estimate a target CA/GDP%.  Derive the level of change in CA/GDP% from current levels to target levels needed to reach equilibrium.  Apply adjustment factors to the change based on the elasticity of imports and exports to movements in foreign exchange rates.

Figure 20: Switzerland IMF Estimates Current Account as a Percentage of GDP

This seemingly complicated approach is simply saying that a country with a high CA surplus (deficit) would expect to witness an appreciation (depreciation) in its currency as it moves to an equilibrium target CA/GDP%. The Peterson Institute for International Economics14 applies this mode on major world currencies and estimates that the CHF is undervalued compared to the USD by 29% (as of March 2009) with a target rate of CHF 1.00 = USD 0.90 (currently USD 1.01 – November 31, 2009).

Real Effective Exchange Rate (REER): The Real Effective Exchange Rate, or REER, methodology for evaluating the strengths or weakness of a currency looks at the current exchange rate of a currency versus a basket of other currencies (weighted based on the level of bilateral trade) and compares that rate to a long term average - the 10 year moving average. The idea is that, short and medium term, the currency would tend to revert to the 10 year moving average. Based on the REER methodology, the Swiss Franc is slightly overvalued and is currently at 4% (BIS calculation) – 8% (JP Morgan calculation) above its 10 year moving average. However, as can be visually seen from Figure 18, REER has been

14 2009 Estimates of Fundamental Equilibrium Exchange Rates, William R. Cline & John, Williamson, Peterson Institute for International Economics, Policy Brief Number PB09-10, June 2009. www.as-im.com Page 21 Why Switzerland? AS Investment Management erroneously predicting a CHF devaluation most of the time for the past four decades – as it continued to strengthen.

Figure 18: JPMorgan Real Narrow Effective Exchange Rate for CHF 1971-2009 with Moving Averages (5, 10, 20 years)

Purchasing Power Parity (PPP): The PPP concept is easily captured by the Economist’s Big Mac Index. Simply put, if the price of a Big Mac (a standardized product that is comparable across regions) in Switzerland is higher than in the US, then that implies that the Swiss Franc is overvalued compared to the USD: The application of this concept can be further refined and made more accurate and complicated.

Figure 19: PPP Implied USD-CHF Exchange Rate (IMF - Blue, Bloomberg - Green) versus Actual USD-CHF Exchange Rate (red) from 1980-2009

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PPP analysis shows that the CHF is significantly overvalued in a range of 25% to 65% versus the USD. More sophisticated PPP derivative models such as the Goldman Sachs GSDEER Currency Model currently show the Swiss Franc as being 18% overvalued compared o the USD: For all of us living in Switzerland, the PPP conclusions feel correct. Life seems expensive here compared to many places abroad. However, similar to the situation with the REER model, a key point to observe (and illustrated in Figure 19) is that CHF has appreciated in contradiction to PPP expectation.

The Euro: The Swiss National Bank’s declared objective has been to maintain an inflation level of under 2%. In the past decade, inflation has hovered at around 1%. However, the SNB has also aimed at a stable EUR – CHF exchange rate as the Eurozone is Switzerland’s largest trading partner and a meaningful percentage of the Swiss work force lives in Germany and France along the Swiss border. This goal is clearly observable as the EUR-CHF exchange rate has fluctuated between 1.5 and 1.6 for most of the decade existence of the Euro.

Figure 21: EUR – CHF Exchange Rate since 2000

As we will see in the next section, there is pressure on the Swiss Franc to appreciate against the Euro. Euro investors considering the Swiss market may consider this factor as support for an unhedged Swiss investment.

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IV. Swiss Environment & Stability

Investors in Swiss equities also need to look at structural, political, and macroeconomic factors in Switzerland that may indicate whether the environment that has contributed to the positive performance of Swiss equities and the strength of the Swiss Franc are sustainable. The following is a non-exhaustive list:

 Reserves: The SNB boasts approximately USD 86 billion in foreign reserves and approximately USD 33 billion in gold reserves15. These have grown dramatically during the crisis reflecting the structural current account surplus and the perception of Switzerland and the Swiss Franc as a safe haven.

Figure 22: IMF Switzerland Total Reserves (minus Gold) in USD since 1960

 Public Debt: With a GDP of approximate CHF 542 billion16 in 2008, Switzerland has approximately CHF 225 billion17 gross public debt (about 41%), well below American and European comparables.  Budget: There has been a government budget surplus for almost a decade. Including the cantons, the level was at CHF 5.6 billion18, or about 1% of GDP in 2008 (some observers expect a temporary dip in 2009 as a result of the financial crisis).  Tax Environment: Switzerland boasts a business-friendly tax environment ranking higher than most of its trading partners in terms of total taxation levels and complexity of compliance.

15 https://www.imf.org/external/np/sta/ir/che/eng/curche.htm 16 http://www.bfs.admin.ch/bfs/portal/fr/index/themen/04/02/01/key/bip_gemaess_produktionsansatz.html 17 http://www.bfs.admin.ch/bfs/portal/fr/index/themen/18/03/blank/key/schulden.html 18 http://www.bfs.admin.ch/bfs/portal/fr/index/themen/18/01/key/02.html www.as-im.com Page 24 Why Switzerland? AS Investment Management

Figure 23: Comparative Corporate Taxation Metrics Select Countries 200919

Ranking (out of 183) Ranking (out of 183) Hours/Yr. Ease of Paying Taxes Total Tax Rate Time to Comply Tax Rate Switzerland 21 37 63 29.7% United Kingdom 16 67 110 35.9% Germany 71 112 198 44.9% United States 61 118 187 46.3% Russia 103 129 320 48.3% Japan 123 147 355 55.7% China 125 160 504 63.8% India 169 162 271 64.7% France 59 165 132 65.8% Italy 136 166 334 68.4% Brazil 150 167 2600 69.2%

 Unemployment: Due to the current economic crisis, the current unemployment rate in Switzerland is at 4.1%20, higher than the ten year average of 3.0%21, but well below Europe and the US. No structural long term unemployment expenditures are expected to exert pressure on the budget situation.  Access to inexpensive capital: Swiss companies have had access to stable an inexpensive capital. For example, as a proxy, one month deposit rates in Switzerland have been under 3% for the past 15 years.

Figure 24: CHF 1 Month Deposit Rates (annualized)

19 Paying Taxes 2010 – The Global Picture, International Finance Corporation, Price Waterhouse Coopers. http://www.pwc.com/gx/en/paying-taxes/download-order.jhtml 20 http://www.seco.admin.ch/themen/00385/00387/index.html?lang=fr 21 Bloomberg www.as-im.com Page 25 Why Switzerland? AS Investment Management

 Flexible and highly efficient labor market: The IFC’s Doing Business Report ranks Switzerland 5th among OECD countries in terms of ease of employing workers22 (hiring / firing). Furthermore, after Japan, Switzerland had the lowest incident of industrial action (strikes) at 2 days lost per year per 1,000 employees (US, by contrast, is 60 and Spain is 189)23.  On major socio-economic factors such as education, investment in R&D, crime rates and literacy, among others, Switzerland constantly ranks very highly in the developed world. For example, Switzerland ranks 6th in the world in terms of R&D expenditure as a % of GDP at 2.6%24.  Switzerland has witnessed a long period of political stability. The last armed conflict was in 1847, when a one month civil war between Catholics and Protestants resulted in approximately 100 casualties.

Of course, Switzerland has its fair share of problems. For example:

 The bedrock of the Swiss international political profile has been neutrality. This has been a posture that has always been difficult to maintain.  Today, the country is surrounded by a European Union that is increasingly assertive in its demands for substantive integration of Switzerland in to Europe.  Its cities have a chronic housing shortage.  Over 20% of the residents of Switzerland are non-citizens.  Swiss banking secrecy is under incessant attack and will likely not survive in its current form.

Over the past centuries, the Swiss have dealt with significant challenges including a country with German, French and Italian heritage that stood in solidarity over centuries of warring Europe. There is no sense that the current issues facing Swiss society fundamentally threaten Swiss stability.

22 http://www.doingbusiness.org/economyrankings/?direction=Asc&sort=4®ionid=5 23 http://www.nationmaster.com/graph/lab_str-labor-strikes 24 http://www.nationmaster.com/graph/eco_res_and_dev_spe-economy-research-and-development- spending www.as-im.com Page 26 Why Switzerland? AS Investment Management

IV. Conclusion

Swiss investors should concentrate their equity exposure in the Swiss market. The argument for global diversification has delivered very little over the past twenty years. There is an argument for some allocation to the emerging markets as they have delivered on the high risk (volatility) / high return metric. However, there is limited historical argument for some of the other adventurism that has occurred in the past.

International investors should consider an allocation to the Swiss equity markets. The combination of historical outperformance, a significant pool of high quality companies, a strong and resilient base currency and an excellent environment for corporations to operate bodes well for continued strong performance.

Why Write this Paper?: We are proud of the track record we have achieved for our clients through our funds and managed accounts in terms of investment performance and volatility. We have achieved this performance by focusing exclusively on the Swiss market. We believe that this laser-focus allows us to gain a competitive investing edge. While this paper hopefully demonstrates the deep insight we have for our market, it is primarily designed to collect and synthesize, for ourselves and our clients, some of the key facts and observations upon which we have built our investing strategy.

All feedback is welcome. Please email to [email protected].

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Contact

AS Investment Management 23 quai des Bergues 1201 Geneva Switzerland

Tel: +41 22 716 5200 Fax: +41 22 716 5201 Email: [email protected] Web: www.as-im.com

The information mentioned herein is not intended to be construed as a solicitation or an offer to buy or sell any sec urities or related financial instruments. Past performance is not a reliable indicator of future results. This information pays no regard to the specific or future investment objectives, financial or tax situation or particular needs of any specific recipient. The details and opinions contained in this document are provided by AS Investment Management without any guarantee or warranty and are for the recipient's personal use and information purposes only. www.as -im.com Page 28