Beyond concentration risk

Swiss equities are often seen as a safe haven, but they come with their own challenges. One-third of the Swiss Performance Index (SPI)’s market capitalization is concentrated in just three stocks – Nestlé, Novartis, and Roche – and the market overall is heavily weighted toward defensive sectors, such as consumer staples and healthcare. While this defensive tilt offers stability in challenging times, it can become a disadvantage in long-term rising markets. The key for investors is to retain exposure to Swiss quality while reducing concentration risk and improving diversification. But how?

Factor investing

One option lies in multi-factor investing. Instead of weighting companies simply by size, factor strategies allocate according to characteristics such as momentum, quality, value, or low volatility. For example, in a momentum portfolio, companies with stronger recent performance carry greater weight, while in a minimum volatility portfolio, the focus is on those with more stable share price behavior. Unlike static benchmarks, a dynamic multi-factor approach can adapt to changing market conditions. Hence, it can be more effective over the long run, with three main drivers of returns: broader diversification by reducing the dominance of mega-caps, additional performance potential through factor premiums, and the flexibility of dynamic allocation.

Income investing

A different, but complementary, approach is taken by the Swiss Sustainable Equity Income Plus (SSEIP) strategy. This portfolio combines active stock selection with a covered call overlay to aim for an above-average, and in part tax-efficient, distribution yield of around 7%. The idea is straightforward: hold a 100% Swiss equity portfolio while selling call options on selected holdings to create a steady stream of additional income. By giving up some upside potential, investors receive regular cash flows and a partial buffer in weaker markets. The SSEIP team manages option positions actively, adjusting strike prices and maturities depending on market conditions.

This dynamic management is key, as purely passive covered call strategies often lag in performance over an economic cycle. Since its inception, the strategy has shown that during market corrections, it can outperform its benchmark, the SPI, as the option premium income cushions losses, while in sideways or moderately rising markets, it can generate superior risk-adjusted returns. In sharp rallies, however, it tends to lag, since part of the upside is exchanged for income. Still, SSEIP represents a compelling alternative for investors who prioritize regular distributions and tax-efficient income over full participation in every equity rally.

Home market: leverage strengths and avoid weaknesses

Both the multi-factor and income approaches show how Swiss equities can be managed more smartly and dynamically. Factor investing broadens diversification and taps into long-term risk premiums, while SSEIP provides income stability and risk management through options. Together, they offer ways to move beyond the traditional concentration of the Swiss equity market, giving investors the chance to benefit from its strengths while mitigating its weaknesses.