SWITZERLAND - Credit Suisse has conducted a study on the efficiency of Swiss Pensionskassen’s asset allocation, which indicates the strategies applied by schemes are “relatively efficient” but have room for improvement in terms of diversification.
While Swiss pension funds have been applying Markowitz’s modern portfolio theories to asset allocation over the last decade, the study entitled Investment behaviour of Swiss Pensionskassen - Facts and Figures found the efficiency level achievable under current regulatory restrictions has not been reached.
For example, the equity quota of Pensionskassen which has sat at just over 25% historically has never reached the legally allowed 50%-mark as set out in Swiss regulatory rules, said Credit Suisse.
“The higher the funding level, the higher the equity quota and the investment risk taken,” noted the investment house in its study.
The researchers said this also meant equities are sold in falling markets once a crash has already lowered the funding level, deteriorating the fund’s performance even further.
“The increasing, rather short-sighted focus on the funding level and the ‘magic’ 100%-mark leads many Pensionskassen to sell and buy equities procyclically; combined with the herd mentality this causes the funding level to mirror strong market movements,” said the report.
Credit Suisse concluded that security has a greater influence among Swiss Pensionskassen on equity levels and other investment decisions than over returns, liquidity or diversification.
“With regards to a further optimising of the asset allocation, there is no need for the loosening of legal restrictions or indeed for getting rid of them altogether. Instead, Pensionskassen have to individually assess targets like return, diversification and liquidity for their own situation.”
It was also found that Swiss Pensionskassen have not made full use of diversification effects because of a home bias.
However, Credit Suisse noted that the legal ban on short-selling for Pensionskassen does reduce portfolio efficiency considerably.
Elsewhere, official statistics compiled by the government revealed the average funding level for Pensionskassen was 89.3% at the end of 2008 while the average equity quota fell to 20.9%.
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