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Giving fiduciary managers freedom over tactical asset allocation could detract from performance, a new survey has found, which also says that complex sub-strategies did little to add to returns last year. However, half of fiduciary managers still performed better overall than most diversified growth strategies.
A new comparison of 18 growth portfolios across 14 fiduciary managers, representing more than 90% of the assets managed by the UK fiduciary market, shows that tactical asset allocation contributed almost nothing to returns over 2021 and for one manager significantly detracted from them.
The study by consultancy XPS Pensions Group also found that complex sub-strategies did little to enhance returns, which were mainly driven by equities.
Timing markets can be costly
The consulting firm said trustees should evaluate how much latitude to give their fiduciary manager over tactical asset allocation, “given that such decisions are very difficult to get right consistently”, with analysis suggesting “that this element may actually detract from some fiduciary managers’ performance”.
The study argues that strategic asset allocation is the main driver of returns, while “added value from tactical asset allocation is difficult to achieve over the longer term”.
Co-head of fiduciary management oversight at XPS, Andre Kerr, said: “Some fiduciary managers are not always adding significant value in their portfolios through dynamism or complexity. Instead, portfolios are often heavily reliant on market returns. It is important that trustees are in a position to challenge their fiduciary managers on what is driving performance and why.”
FMs tend to outperform DGFs
However, the study also found that over half of fiduciary managers outperformed the upper quartile of diversified growth fund returns over 2021. It noted that while most fiduciaries had a “fairly typical” risk/return link, some managed to perform very well while being exposed to less risk.
Overall, equities were driving performance over the year, while more complex sub-strategies like hedge funds “often did little to add to returns”, the report states. Most fiduciary managers that use hedge fund or absolute return strategies have not seen a contribution from this during 2021, though the strategy might have reduced portfolio volatility, it found, a trend XPS says holds true over longer time periods as well.
“As these are some of the complex and most costly parts of a portfolio, it is important that trustees are able to challenge their FM on the roles played by different components of the portfolio and how they are adding value,” it notes.
Fiduciary managers generally performed well during 2021, however, others stress. The quarterly analysis of Global Investment Performance Standards for fiduciary managers by evaluator IC Select shows that nearly all fiduciary managers have achieved their client’s investment objectives over the past five years. IC Select director Donny Hay said this was largely because of strong equity market performance, as well as the strategic decision to hedge a high portion of the pension scheme’s liability risks.
"At the same time, the past is the past, and it’s the future which matters now. Given investment market complexity is currently very high, we find it staggering that so few DB schemes receive independent oversight of their fiduciary managers," said Hay. A recent IC Select survey found that just 31% of schemes do so, which Hay described as a significant governance gap.
"Checking the ongoing ‘suitability’ of your investment adviser and raising the level of challenge from DB trustees has never been more important so the gains of yesterday don’t become the losses of tomorrow," he said.