NETHERLANDS - The organisational structure of pension funds and banks can have a negative influence on investment returns, according to Ralph Koijen, who today will defend this thesis at the University of Tilburg.

Koijen, currently a visiting assistant professor of finance at the Stern School of Business in New York, argues fund managers need to take each others' investment choices into account, while also considering the risks and the liabilities of the pension fund.

"The mechanism that I propose is the so-called benchmark," Koijen told IPE, adding current benchmarks are often standard indices such as AEX or S&P500.

He proposes a strategy, whereby the chief investment officer (CIO) chooses optimal benchmarks which implicitly force the fund managers to heed each other's choices, causing an increased concurrence between the risk in the assets and the risk in the liabilities.

"A pension fund with only equity and a fixed desk has a different benchmark than a pension fund that also has an alternative investment desk," explained Koijen.

He added: "For pension funds you could also think of a benchmark which reflects the inflation risk in the liabilities - in this way, fund managers are encouraged to look within their asset class for assets that can cover the risk in the liabilities."

The new strategy would also cause a better accord among the various assets classes a pension fund holds, which implies better diversification and hence lower risk for identical returns.

Koijen argues the investment horizon of a CIO often differs from that of fund managers, who operate more in the short-term. "In my thesis, I also show how the benchmarks can be constructed to stimulate managers to consider the longer term."

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