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IPE special report May 2018

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Pension funds in search of yield at risk of 'herding', Swiss experts warn

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The search for yield is driving institutional investors into illiquid assets, but the market may already be overcrowded, delegates at the Swiss Pensions Conference were warned.

Guido Bolliger, co-head of quantitative investment solutions at SYZ Asset Management, said liquidity risk was “on the rise” as investors ramped up exposure to less liquid instruments.

But he added: “Long-term thinking is a competitive advantage for Pensionskassen in today’s markets, and they can act anti-cyclically”.

Nannette Hechler-Fayd’herbe, head of investment strategy at Credit Suisse, said she was concerned about a “herd mentality” among institutional investors triggered by their search for yield.

The illiquidity problem is made worse, she argued, by the “convergence” in the returns of various asset classes, particularly equities and alternative assets.

Vera Kupper-Staub, vice-president at the Swiss regulator (OAK), said she was concerned about “herding” arising from too many Pensionskassen using the same investment consultant.

“This reduces the diversification needed to reduce the risk in portfolios,” she said. 

Meanwhile, Bolliger argued that, before the financial crisis, there had been a kind of “natural hedge” in balanced portfolios that “no longer exists”.

He said pension funds, when shifting investments, should not only consider risk but also “avoid pro-cyclicality”.

“It’s not too late to make changes to portfolios,” he said. “The question is whether the changes will happen fast enough.”

Speaking with IPE after the conference, Lukas Riesen, a partner at PPCmetrics, said he was concerned Pensionskassen might be “lured” into taking on too much illiquidity, particularly with respect to products that were “made to look liquid”.

“What happens,” he asked, “when there is another downturn and everyone wants out at the same time?”

However, Christoph Ryter, president at Swiss pension fund association ASIP, said he was convinced Pensionskassen had grown more aware of illiquidity risks in the wake of the crisis.

“They have learned from the crisis and know about illiquidity risks and are including them in their long-term investment strategy,” explains Ryter.

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