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Swiss economist warns pension funds of overdiversification

The trend to diversify as much as possible into alternative investments is based on a “misunderstanding”, according to a Swiss economist.

Peter Meier, economist and former professor at the ZHAW Zurich University of Applied Sciences, voiced concerns over the trend towards alternatives to delegates at the Institutional Retirement and Investor Summit organised by Barbara Bertolini in Vienna this week.

“Swiss Pensionskassen are often invested in too many different strategies and are paying too much money for them,” he said.

He urged medium-sized and smaller pension funds to instead specialise and get familiar with one or two strategies.

“Pensionskassen should build know-how or start by paying specialists in one segment to better be able to judge asset managers,” he said.

It was easier for large players to get better fee structures because of economies of scale, Meier added.

He said he was particularly worried about the trend for Swiss Pensionskassen to invest in assets such as insurance-linked securities or private debt solely for return reasons.

“Many pension funds do not fully understand the risks and in Switzerland we lack historic experience with the investments,” he explained.

High exposure to corporate bonds was a “possible ticking time bomb”, Meier warned, as the “additional credit risk is often underestimated”.

Meier has been researching alternative investments for many years, and up until the summer he taught this subject at the ZHAW.

The debate on costs in Swiss pension portfolios has been fuelled by the low interest rate environment as well as the obligation for Pensionskassen to fully disclose total expense ratios.

In some cases cautious strategies have led to Swiss pension funds cutting out alternative investments entirely.

However, recent research by consultancy Siglo showed competition and demand had already brought down fees in some alternative segments such as senior secured loans. 

Additionally, the most recent risk study by consultancy Complementa revealed higher cost strategies outperformed last year.

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