Swiss Pensionskassen are missing out on higher returns resulting from increasing allocations to alternative asset classes, especially in private markets, foreign investments, reducing “home bias” and diversifing their portfolios towards emerging markets and small caps, according to the Investment-delegation study conducted by Mercer in partnership with the University of Zurich.

The investment strategy of the “average” Swiss Pensionskasse pursues bonds, real estate and equity allocations with a “significant share” of investments in Switzerland (home bias), the study said.

On average, Swiss pension funds invest more than 30% of their portfolios in bonds denominated in Swiss francs and 13% in Swiss equities.

The home bias, combined with other factors, create obstacles to diversify portfolios to achieve higher returns and ultimately offer pension funds’ members attractive conditions on the capital saved.

The study pointed to an optimised asset allocation with more risk/return built on 20% investments in alternatives including private markets, 20% real estate, 27% foreign equities, 8% Swiss equities, 19% foreign bonds, 5% Swiss bonds and 1% liquidity, to generate 3.5% returns.

Now Swiss pension funds with assets up to CHF1bn (€962m) invest 5% of their portfolios in alternative asset classes, 21% in real estate, 23% in foreign equities, 13% in Swiss equities, 2% in foreign bonds, 31% in Swiss bonds and 4% liquidity to generate 2.2% returns.

An additional return of only 1% per year, on average, would compensate for the cuts in pension benefits that members are facing because pension funds are lowering conversion rates used to calculate pension pay-outs, according to the study.

A further obstacle in the effort to hone asset allocation is the insufficient expertise, especially in small and middle-sized pension funds, which often leads to a “restricted view of the investment universe” combined with limited access to investment opportunities, particularly with regard to private markets, the study added.

The investment processes of pension funds – small, mid or large – should not take long, two months the study said, to grasp opportunities in the market.

A dynamic asset allocation (DAA) gives Pensionskassen the opportunity to benefit from market moves leading to inefficient market valuations offering not only returns but also reducing risks.

The study mentioned as an example the increase in spreads on high-yield bonds during the COVID-19 crash in early 2020, when investors opportunistically bought high-yield bonds to boost returns, having a significantly lower downside risk compared with equities.

Moreover, 44% of Pensionskassen have not drafted plans for rebalancing their portfolios and profit from market moves; 40% rebalance their portfolios opportunistically, 22% on a monthly basis, 27% on a quarterly basis and 7% every year.

The study was based on a survey of 46 Swiss pension funds with total assets of CHF154bn.

To read the digital edition of IPE’s latest magazine click here.