* Swiss central bank's equity holdings worth 127 bln francs
* Equity holdings rise 41 percent in a year
* Diversification drive aims to spread risks
* GRAPHIC - SNB investments tmsnrt.rs/2bQHE10
By John Revill
ZURICH, Aug 30 Switzerland's central bank now
owns more publicly-traded shares in Facebook than Mark
Zuckerberg, part of a mushrooming stock portfolio that is likely
to grow yet further.
The tech giant's founder and CEO has other ways to control
his company: Zuckerberg holds most of his stake in a different
class of stock. Nevertheless this example illustrates how the
Swiss National Bank has become a multi-billion-dollar equity
investor due to its campaign to hold down the Swiss franc.
It is now the world's eighth-biggest public investor, data
from the Official Monetary and Financial Institutions Forum
show. While most analysts think the strategy is sound, this does
expose the SNB to stock market risks that the likes of the
European Central Bank and U.S. Federal Reserve avoid.
"The SNB is in a bit of a corner, they have acquired a lot
of foreign currency as part of their efforts to weaken the franc
and they have to invest it somewhere," said Alessandro Bee, an
economist at UBS. "The bond market is drying up and so they are
going increasingly for equities."
Switzerland's reputation as a safe haven has long caused
problems for the SNB. Investors pile into the franc in times of
uncertainty, causing a rise in the currency which hurts Swiss
exporters and increases the risk of imported deflation.
While the SNB gave up capping the currency's value 18 months
ago, it still intervenes on the foreign exchange market from
time to time by buying euros with francs it prints, including
after Britain voted to leave the European Union in June.
Chairman Thomas Jordan has made clear the SNB will stick to
its course, which also includes negative interest rates.
"We're convinced that given the difficult situation with an
overvalued Swiss franc, a negative output gap, and negative
inflation, the current approach is the right one - expansion in
monetary policy with negative rates and willingness to
intervene," he said earlier this month.
The result is that its pile of foreign currency reserves -
which rose to the equivalent of 635.3 billion francs ($650
billion) at the end of June from 529.5 billion francs a year
earlier and 226.7 billion francs in 2010 - is likely to keep
The SNB's balance sheet is now proportionately the biggest
of any leading central bank. On top of that, its
stock portfolio has risen at roughly twice the rate of the
overall balance sheet as it diversifies its holdings.
In the last 12 months the SNB's equity holdings have surged
41 percent to around 127 billion francs, according to Reuters
calculations. Part of this is due to stocks increasing in value
despite losses in recent months, as well as new purchases.
The SNB has also diversified across stock markets. The
United States is its favoured location, with its holdings on
Wall Street jumping to nearly $62 billion at the end of June
from $38.6 billion a year earlier, according to a Securities and
Exchange Commission filing.
This includes $741 million in Facebook shares, giving the
SNB a 0.28 percent stake, according to Thomson Reuters data. The
figure is larger than the 0.17 percent of the firm's
publicly-traded stock held by Zuckerberg.
The SNB has increased its stakes in all of its top 10 U.S.
holdings this year, while many big institutional investors have
been reducing much of theirs. For example the SNB's stake in
Apple increased by 1.07 million shares in the second
quarter, while Invesco sold 9.53 million shares and Fidelity
sold 9.23 million in the iPhone maker, according to SEC filings.
FRANCS FROM THIN AIR
The SNB does not comment on the details of its strategy, but
says it does not pick stocks, investing instead in companies
according to their weight in various indices.
Governing board member Andrea Maechler also said this week
that it does not invest in medium-sized and large banks to avoid
possible conflicts of interest. It also shuns other stocks for
ethical reasons, she told Sonntagsblick newspaper
An in-house team manages the investments with help from some
outside bankers it does not identify. The SNB is mostly a
passive investor, starting only last year to vote by proxy on
issues such as executive pay and management structure.
While the upward pressure on the franc is unlikely to ease
much, this is not the only reason why the stock holdings are
likely to continue rising.
Alternative markets such as bonds - the traditional
favourite investment for central banks - are becoming more
risky. This is especially the case in the euro zone where the
ECB is buying up debt to stimulate the region's economy, helping
to push up prices and turning yields negative on many bonds.
The risk for the SNB is that bond prices fall back sharply,
should the ECB change its policy.
"It's a diversification strategy for them and it is harder
to find investment opportunities," said Alexander Koch, head of
macroeconomics at Bank Raiffeisen in Zurich. "With the ultra-low
interest rates environment currently there is a very high risk
that the prices of bonds can fluctuate more than equities."
The bank started its share buying spree in 2005 after a
change to Switzerland's banking laws allowed it to buy assets
other than short-dated bonds.
Around 20 percent of the SNB's foreign currency reserves are
now in equities, up from 17 percent last year and 10 percent in
"It makes sense for the SNB to do this, and I could imagine
them to increase the amount of shares they hold in the future
even further," said Koch. "They could even go up to 50 percent
of their holdings."
The bank's stock portfolio lost 200 million francs in value
in the first half of 2016, although it collected 1.7 billion
francs in dividends.
Nannette Hechler-Fayd'herbe, head of investment strategy at
Credit Suisse, said that the risks attached to the SNB's
investment portfolio were "absolutely manageable". Diversifying
its holdings was more important than any temporary setbacks in
global equities, she added.
The SNB is not obliged to make a profit under its mandate to
ensure price stability and support Swiss economic development.
However, it did report a net profit of 21.3 billion francs in
the first half of 2016 and its shareholders, including
Switzerland's cantons, have grown used to a hefty annual
Still, not everyone is happy about the bank's strategy of
money printing and buying up stocks including constituents of
the U.S. S&P 500 index.
"The SNB creates Swiss francs out of thin Alpine air," said
James Grant, publisher of Grant's Interest Rate Observer, a U.S.
financial markets journal.
"Then they go and call their broker and go on a tour of the
U.S. stock exchange," he told Finanz und Wirtschaft newspaper.
"They get involved in important companies from the S&P which
create real profits, and they do that with money which has been
created out of nothing."
($1 = 0.9793 Swiss francs)
(Additional reporting by Timothy McLaughlin; editing by David