Swiss ECOFIN co-founder's views on passive investment 'naïve'
SWITZERLAND – Herbert Brändli, head of the €2.2bn Swiss pension fund Profond, has slammed a recent article written by industry expert Martin Janssen and rejected the notion that active investment in particular lends itself to criminal activity in pension funds.
Janssen – co-founder of ECOFIN and a professor of finance and economics for more than 35 years – recently reignited the active-versus-passive debate after suggesting in the Zurich daily Tages-Anzeiger that passive investment could minimise corruption in pension funds, referring specifically to the ongoing scandal involving the Canton of Zürich civil servants fund (BVK).
In his interview with Tages-Anzeiger, Janssen suggested four improvements to the Swiss pension system: “First you need good organisation. Second, mandates should only be awarded on competitive terms. Third, good inter-personal skills.
"Fourth, a head of investments should invest passively to the greatest possible extent – that means not in individual stocks, but in entire indices, such as the SMI [Swiss Markets Index].
"The job of an investment head would become deadly boring, although that would be a good thing."
Janssen also suggested a split in personnel between principal, agent and controller, and said pension fund trustees should be better remunerated, although pension fund investment staff should be paid less than investment professionals in the asset management or banking industries.
He also warned against consultants who market actively managed products, but receive a hidden fee.
"Unfortunately, this still happens, even at large funds," he said.
But Brändli questioned Janssen's logic.
He said: "It is naïve to think the problem at the BVK – where a weak personality and criminal energy led to members' funds being siphoned off – could have been solved by going into indirect or passive investments instead of direct ones.
"Passive investments deprive investors of control over their allocations – what Swiss pension funds really need is a professionalisation on the management level."
Brändli pointed out that investing passively would have made it impossible for his fund to disinvest from UBS in 2008 and thus avoid subsequent major losses.
He added that "liquidation waves" from fixed-income indices of bonds issued by the PIIGS-states were yet another problem association with passive investing.
Similarly, Swiss asset manager Swisscanto pointed out that index investments often carry extensive concentration risk, which had to be taken into account.
Gerard Fischer, chief executive, said: "Credit Suisse and UBS made up 21% of the Swiss Blue-Chip-Index SMI until mid-2007 – after the financial crisis, their share had dropped to 11% at the beginning of March 2009."
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