In the past, investment funds were the preserve of the small investor.

Now institutional investors are increasingly turning to them as an alternative to direct investment. The disadvantages of higher costs are seen to be outweighed by the savings in personnel resources, as well as the diversification of risk that funds bring.

Since the 1995 investment law there has been a real boom in Switzerland, with the number of Swiss equity-investing funds doubling in the past three years. The new competition is mainly from foreign investment fund companies and has resulted in a considerable improvement in performance in the past two years. But performance can still vary widely. The SPI equity index in-creased 17.78% in 1996, but the worst of the 75 funds monitored grew by only 5%, while the best was up 31.6%.

In today’s fairly high valued Swiss equity market, small and mid-cap funds could have upside potential compared with blue-chip companies. Two funds which outperfomed the small cap index last year (up 6.23%) are SBC Small & Mid-Cap Switzerland (11.5%) and Vontobel Swiss Small Cies (10.5%).

Foreign investors considering Swiss-domiciled funds must look at the fiscal aspect. The Swiss withholding tax deduction of 35% on fund dividend payments can only be reclaimed by investors in countries with double tax agreements.

Daniel Hafele is president of Fondvest in Zurich, Switzerland