The causal link between good governance and investment performance has been an elusive domain for financial services academics. Now, in Switzerland, some progress.
A study of 139 Swiss occupational pension plans shows, empirically, governance is positively related to excess returns, benchmark outperformance and Sharpe ratios.
The paper, Is Governance Related to Investment Performance and Asset Allocation? Empirical evidence from Swiss pension funds, investigates the relationship between governance, investment performance and asset allocation at pension funds in Switzerland.
Study authors Manuel Ammann and Christian Ehmann, from the University of St. Gallen, find that fund governance is positively related to investment performance, but only marginally related to funds’ asset choices.
The paper doesn’t give any indication of the direction of causality, but it does show that good governance pertaining to target-setting, defining investment strategy, and risk-management design is positively related to both excess and risk-adjusted net returns.
The academics developed a metric comprising six different governance areas: attributes of organisational design, management incentives, target-setting and investment strategy, investment processes, risk management, and managerial transparency.
The study finds that pension funds in the top governance quartile outperform those in the bottom quartile by about 1 per cent, related to average excess returns and benchmark deviation. It also shows that a clear, written statement specifying organisational goals and strategic targets is positively related to passive benchmark outperformance.
Asset allocation decisions are not related to governance, the study finds, but rather to institutional factors such as size, legal form and the ratio of active managers to pensioners.
The full report can be accessed here: