Risk-averse DC members shy away from DGFs

Communicating the pros and cons of multi-asset strategies to scheme members within DC is one of the key issues trustees need to tackle, the panellists found.

Remember that managers’ performance is cyclical, so don’t chase performance alone

Giles Payne, HR Trustees

John Nestor, associate at City Noble, said many schemes tend to choose overly diversified multi-asset strategies, which become difficult to monitor and govern.

He said it is important that any multi-asset strategy is chosen because it fits in with a scheme’s broader investment plan, rather than for its own sake.

For the same reason, he said, “don’t look for fund managers that follow a particular fashion”. Long-term thinking, rather than fads, should drive strategic choice.

Nestor also emphasised the importance of trustees educating themselves and members about multi-asset strategies, as often they fail to realise that they are paying as much as three times the market rate for a strategy by not reviewing their investments frequently enough.

He said members in particular tend towards risk aversion, and shy away from concepts they do not fully understand, such as diversified growth funds. “Make the choices very simple for the DC market”, Nestor advised.

When asked whether illiquid assets are a safer way of finding returns than multi-asset strategies at the moment, he said they can be, but it is important to be as sure as possible that an illiquid asset has low “political risk”, citing the example of the Norwegian government nationalising a gas pipeline. 

Consider illiquid assets instead

William Dinning, head of investment strategy at Coal Pension Trustees Services, said that the first thing schemes should ask themselves when considering which multi-asset strategy to implement, if any, is what will help grow the scheme’s assets. “Multi-asset strategies have a role in damping down volatility,” he said.

However, he said that for the foreseeable future, “publicly traded markets will remain low-return, even if you pick the right things”. He said it is better to chase returns through illiquid assets, and if DGFs can help with this they are worth trying.

Dinning pointed out that visibility can be an issue with multi-asset products. “DGFs won’t show you what risks you are running, which is a governance drawback,” he said, adding that schemes are focusing too much on their alpha at the expense of their beta.

Overall, Dinning said, when opting for a multi-asset strategy it is important to consider a scheme’s size, as DGFs are often too time consuming in terms of governance and can prove unwieldy.  

Don’t chase performance alone

Giles Payne, director at professional trustee company HR Trustees, said understanding of DGFs among trustees is much higher now than in the past. Even so, trustees tend to lose sight of the sheer variety of DGFs, he said.

While some are more market-driven, others are more "esoteric” and are not one-size-fits-all, said Payne.

He added that most DC scheme members are excessively risk averse, and often fail to realise that too many low-risk investments can lower long-term returns. He advised trustees to educate members more about complex concepts such as multi-asset strategies to mitigate this tendency.

Discussing the merits of fiduciary management and multi-asset funds, he remarked that fiduciary managers have to demonstrate that they can outperform “a DGF with passive LDI on the side” to justify their fees.

Payne emphasised the importance of understanding the risks involved, deciding if they are worth it, and ensuring that a scheme is not paying for “closet trackers” – supposedly active managers who end up merely tracking benchmarks for a higher fee.  

For schemes that do opt for active management, he said, it pays to pick markets where an active manager might have some advantages. However, he added: “Remember that managers’ performance is… cyclical, so don’t chase performance alone.”