Dynamic investment strategies [CH]

The recently published study Dynamic Investment Strategies for Swiss Pension Funds by the Swiss Institute of Banking and Finance at my alma mater has caused a bit of a stir in the Swiss media. But naturally, the stir does not come from the study's main tenets - it's far too technical for that - but rather from some marginal comments which hit an environment rife with discontent about pension funds' investment behaviour.

Materially, the study assesses alternatives to the current common practice of buy and hold strategies. There is quite enough material for disagreement not to have to take recourse to marginal political squabbles. My main points of critique are the following:

The expected annual growth rate of the funding ratio is the key variable studied. The model pension fund's liabilities are a key component of this ratio. Yet, the model never revalues the liabilities during the whole simulation period of ten years, despite of changes in the discount rate. Starting from an initial value, the fund's liabilities are simply bearing the technical interest rate. This is not just a model simplification, it is a critical omission. If the model were corrected for that factor, the shapes of the central charts probably have to be modified, which might easily change the conclusions of the study.

Leveraged Constant Proportion Portfolio Insurance (CPPI) is one of the strategies recommended. This strategy implies that the fund uses leverage, probably in the form of a loan. Strategic borrowing is not permissible for pension funds, though.

Another strategy uses long straddles without mentioning that there cannot be net leverage without recourse to art. 59 BVV 2.

P.S. The authors comment offline that they assumed a constant technical interest rate and a closed fund. Unfortunately the assumption about the technical rate was tacit.