On the go: Some fiduciary managers have altered investment guidelines for all of their clients in light of October’s market turmoil, which saw schemes scramble for liquidity in response to collateral calls from liability-driven investment managers.
The doomed "mini" Budget, which pledged extensive unfunded tax cuts, precipitated a deterioration in markets. Gilt yields spiked and collateral calls poured in for schemes.
The performance of some fiduciary managers during the crisis has been called into question. Some were slow to communicate that hedges had been lost, Law Debenture director Natalie Winterfrost told a recent meeting of trustees and advisers.
“There have been fiduciary managers that I don’t think have managed to get through this crisis particularly well,” she said.
Research from XPS Pensions Group revealed that some fiduciary managers are changing investment guidelines for all of their clients.
XPS is typically witnessing 20 per cent to 30 per cent of its clients having their hedges reduced.
“Your portfolio will never look quite the same as it did before,” the consultancy said.
“This is primarily driven by the greater capital requirement of all LDI portfolios, meaning there is less capital to be held in non-LDI assets,” it continued.
“In the short-to-medium term you may also be holding more illiquid assets than is optimal, as your liquid assets have recently been depleted (both at fund and/or underlying fund levels).”
XPS added that reviews of investment strategies and journey plans are also on fiduciary managers’ agendas.
It warned that restoring the liquidity of portfolios could take several months, adding that “any tactical view on the level of liability hedging is now likely to be a significantly larger risk”.
“We consider interest rate and inflation to be unrewarded risks — in that we do not expect them to be a source of expected return over the long term,” XPS said.
“Where possible we believe that schemes should aim to maintain their hedging in portfolios, exploring all options.
“Where levels of liability hedging have been reduced it is important to understand why and the implications.”
André Kerr, XPS Pensions Group head of fiduciary management oversight, said: "Our report has found that fiduciary managers have had to make changes to their clients’ investment portfolios and risk profile in response to recent market volatility, and in some cases significant changes.
"In that context, it’s crucial that trustees understand what action their FM has taken and to ensure that the approach that managers are taking aligns fully with the scheme’s goals and risk tolerances.”
