Low risk appetite despite high risk capacity
Does the higher than expected risk capacity of the small pension funds go hand in hand with a higher expected risk of the investment strategy? Our analysis shows that the average investment strategy of the small funds has a more defensive risk/return profile compared to all other funds.
More defensive investment strategies
The fact that small funds accept a lower risk is demonstrated by the investment strategies, which are largely responsible for the fluctuations in returns in the pension fund portfolios. The investment strategies of the larger funds are more globally diversified. The smaller the fund:
- the higher the average percentage share in domestic investments such as bonds in CHF and domestic equities;
- the smaller the share of strategic foreign currency exposure;
- the higher the strategic share of comparatively defensive domestic equities compared to international equities.
Large funds appear more agile
Over the period under review, large funds have adapted more closely to changes in the markets. For instance, small funds reduced the share of bonds in CHF by 27 percent, but the largest funds did so by 44 percent, i.e. significantly more strongly. Small funds increased the proportion of domestic real estate most frequently during this period. Therefore, they re-allocated between defensive asset classes. Large funds (> CHF 1 billion AuM), on the other hand, increasingly invested in alternative investments, an asset class with higher potential for returns.
Large funds use the justification of expansion more frequently
The OPO 2 (BVV 2) guidelines specify ranges for pension funds regarding the shares of asset classes. In order to deviate from the limits, the funds invoke the justification of expansion pursuant to Art. 50 (4) OPO 2. A comparison shows that a majority of the small funds (< CHF 500 million in assets) operate within the limits, while the majority of larger funds with over CHF 500 million in assets operate outside the limits, at 60 percent. Small funds use the justification of expansion in 70 percent of cases for the defensive real estate asset class. In the case of large funds, the majority use the justification of expansion for real estate, but also for the more volatile asset class of alternative investments.
Asset management costs
Higher asset management costs could be a reason for the lower returns of small pension funds. However, a comparison of the average capital-weighted asset management costs over the period 2013 to 2020 (Figure 3) shows that the differences of a few basis points are too small to explain the lower returns of small funds.
Figure 3: Asset management costs (capital-weighted)