Former UBS chief economist Klaus Wellershoff is among the best-known scolds when it comes to the shortcomings of Swiss banking. Now he's criticizing the investment strategies of professional investors.
The performance of the strategy funds of major banks is rather embarrassing, writes Klaus Wellershoff in a study from his eponymous consulting firm. Compared with a «naive» investment pattern, such strategies haven't made any progress in the past five years in terms of return or risk, in his estimation.
«The performance of the asset management of large Swiss banks hasn't improved in the past five years,» according to a Wellershoff & Partners publication Monday, which posited a completely ignorant investor could achieve better results with simple means than UBS.
Assets Evenly Distributed
Wellershoff compares the performance of a «Naive Asset Allocation» (NAA) with a «Strategic Asset Allocation» (SAA) used by banks, insurance companies, and large private investors. In NAA, assets are allocated in equal proportions to all selected asset classes.
According to the firm's calculations, NAA would have significantly outperformed most strategy funds after costs. Over the period from 1990 to this summer, the annual average return of an NAA would have been 4.17 percent, while strategy funds would have delivered only 3.08 percent.
Less Risky
What's particularly embarrassing for the financial industry «is that NAAs not only have higher returns, but they also have lower risk.» The volatility used as a measure of risk when viewed over 30 years was 6.92 percent for the NAA, compared to 7.71 percent for the strategy funds. NAA showed an edge in both returns and volatility when looking at one, three, five, and 10-year horizons.
What's more, in recent years the performance gap has grown larger, not smaller. Wellershoff writes that in the financial markets, such patterns usually disappear after their discovery. The appearance of the arbitrage anomaly should lead to the disappearance of the phenomenon, as experts learn from mistakes and eliminate them.
Poor Marks for the Experts
Empirical results show «the asset management of many Swiss banks doesn't even meet the simplest efficiency requirements,» he concludes. It's an indictment not only of the experts involved but also of the boards of directors of the institutions they represent, «which aren't fulfilling their supervisory duties in asset management.»
Wellershoff left UBS in 2009 as chief economist to set up his own consulting company. He's co-founder with former UBS manager Patrick Mueller of Zwei Wealth, an online comparison service for independent asset managers and banks.
