What long-term Swiss Franc investors should bear in mind

A 6.56-foot-long table in an American family is no longer than a two-metre table in a Swiss household. A fair comparison must use the same units of measurement. This also applies to the comparison of returns in different currencies. If you take the returns in local currency, it’s like the two tables: measured in feet and metres, they appear to be different in length.

A look into the past illustrates the differences. The average deviation between local returns for various stock exchanges based on monthly data from 1970 to 2024 is 1.9%. In comparison to Swiss equities at 7.7%, it is US equities at 10.7% that exhibit the largest difference (3% – top line in the table).

Because the Swiss franc is more stable (it is the currency with the lowest long-term inflation), returns are lower when measured in Swiss francs than in local currency. It can be said that savers abroad can look forward to an apparently greater increase in assets, while Swiss investors are also getting richer, just less obviously. If one correctly compares Swiss franc returns from a Swiss perspective, the differences even out. The mean deviation halves to 1% and the difference in returns between Swiss and US equities disappears.

Calculated in Swiss francs, long-term returns in the range of 6 to 8% therefore seem realistic; Japan is an exception, with its excess at the end of the 1980s and subsequent ultra-long bear market. However, it should be noted that small differences in returns over the years have a massive impact on assets. If a Swiss investor had invested CHF 100,000 in Switzerland over this 55-year period, she would have assets of CHF 5.8 million at the end of 2024, but “only” CHF 2.5 million with German equities – that is, less than half!

On the one hand, the capitalisation weighting leads to a certain degree of procyclicality: after the excessive rise in the 1980s, the Japanese stock market accounted for almost half of the global index; investors bore the full brunt of the subsequent collapse with the capitalisation-weighted world index. Following the rise of the US market in recent years, it dominates the MSCI World with a weighting of over two thirds – with an uncertain outcome.

On the other hand, the Swiss domestic market has a certain advantage because the foreign currency risks are lower: they are only borne indirectly through the amount of foreign sales by Swiss companies, but not directly through the trading currency of the equity. In the table above, this is reflected in the lower volatility of the Swiss market.

These two findings are used to analyse how a portfolio consisting of these six countries – Germany, France, Japan, Switzerland, the UK and the USA – performs in comparison to the MSCI World Index if all countries are initially weighted equally and then the Swiss share is gradually increased. However, this should not be more than half, as this would otherwise run counter to the primacy of diversification.

This optimises the two aspects of procyclicality and foreign currency risks in comparison to the capitalisation-weighted MSCI World. The number of negative months decreases over the observation period: while the MSCI World recorded 266 out of a total of 660 months with a price decline (40.3%), the diversified portfolio, in which Swiss equities were given four times the weighting, showed 257 months (38.9%).

The conclusion is that differences in returns between markets tend to even out over the long term, which makes currency hedging unnecessary for long-term investors. For Swiss investors, there is also a plausible reason for a “home bias,” i.e., an overweighting of the Swiss equity market, from a risk/return perspective.