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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | Motivations for asset delegation: Evidence from the Swiss pension fund industry |
| Organization Unit | |
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| Language |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 74 |
| Date | 2021 |
| Zusammenfassung | The increasing complexity of investment management in a challenging market environment has led to great interest in investment delegation solutions for pension funds (Aon (2018)). Global assets invested in delegated solutions have increased by more than 50 per cent over the last five years and amount to almost USD 2 trillion as of June 2020 (Williamson (2020)). This trend is also present in Switzerland as Swiss pension funds are increasingly interested in outsourcing investment processes and investment decisions (Mercer (2020) and Swisscanto Vorsorge AG (2020)). Given the domestic importance of Swiss pension funds, the obligation of Swiss pension funds to manage their assets to comply with the law and to be able to grant adequate pensions at the time of retirement in the context of the mentioned challenges and developments, interest in more research as to why pension funds in Switzerland do or do not delegate their assets is raised. Existing research on the delegation behavior of pension funds is almost exclusively focused on the delegation to asset managers. However, assets can not only be delegated to an asset manager but parts or the whole pension fund portfolio management can be delegated to a fiduciary manager. Although the classical asset management industry is considerably bigger with USD 110 trillion (PwC (2017)) compared to the mentioned USD 2 trillion for fiduciary management, more research shall be made to assess this new fast-growing market. Moreover, the existing literature only investigates investment delegation as a whole but does not dissect the investment process into its components to analyze the delegation of different delegable elements across the investment process. In this thesis, we analyze the motivations for asset delegation in the Swiss pension fund industry across the whole investment process. As investment delegation confronts a pension fund with governance challenges (Stracca (2006)), we especially analyze the relation-ship between good governance and investment delegation. To assess the current status of investment delegation and pension fund governance in Switzerland and gather data on possible reasons why pension funds do or do not delegate assets, we conducted an online survey in the Swiss pension fund industry. Besides searching for drivers of investment delegation by regression analysis, we investigate the relevance of the following three con-jectures. Firstly, classical asset management business models may be seen critically because the asset managers invest heavily in the firms’ own products. Secondly, a strong desire to maintain internal control may prevent investment delegation. Thirdly, as fiduciary management is a relatively new concept compared to classical asset management, knowledge and word of mouth of the service may be limited, which may hinder investment delegation. We are able to present numerous interesting findings. We find that investment delegation levels in Switzerland are similar to the global situation, which is that measured by assets under management, classical asset management is superior to the newer phenomenon of fiduciary management. Though, as lacking knowledge of the newer offer is only rarely a reason not to delegate, we conclude that fiduciary management has made a beachhead in the Swiss pension fund industry. We find that the desire to maintain internal control is considerable, which has significant negative implications on the desire to delegate for almost every step along the investment process. Furthermore, we find that the likelihood for investment delegation may be higher (lower) when the financial situation of the pension fund is worse (better). From a governance standpoint, we find that the awareness for conflicts of interests in the financial services industry is high, which decreases the likelihood of investment delegation. We are able to make important findings for specific components of pension fund governance. Investment delegation may enhance the governance and is able to benefit from that as Swiss pension funds with defined criteria to evaluate potential asset man-agers are more likely to delegate manager selection and vice versa. Moreover, the com-position of the board of trustees as well as information flow to the trustees and the frequency of board meetings may have a significant effect on the probability of delegating assets. Pension funds that have more information available on short-term investment matters are less likely to delegate, but pension funds that have a better overview of their structural risk and opportunities are more likely to delegate. The clarity of some results has important implications for Swiss pension funds on the one hand and Swiss-based fiduciary and asset managers on the other hand. As perceived conflicts of interest in the financial services industry may hinder investment delegation from happening, asset and fiduciary managers would be well advised to preferably reduce conflicts of interest or reduce the perception of them within their potential client base. Also, as the delegation of manager selection is more likely when the financial situation of the pension fund is tense, pension funds shall consider delegating the manager selection earlier because avoiding value-destroying funds can increase investment performance by up to 2% per year (Dyakov and Verbeek (2019)). |
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