While no one has emerged from the coronavirus crisis unscathed, a number of fiduciary managers have been given cause to brag, as figures show they have outperformed the wider market.
Trustee boards that appointed fiduciary managers generally saw less damage to their funding levels than was experienced by the broader DB universe, according to performance data gathered by Pensions Expert. The funding level recorded by the Pension Protection Fund’s 7800 Index, which measures the cost to the lifeboat of buying out PPF-level benefits, has slipped from full funding to 90.9 per cent coverage in the year to May.
Willis Towers Watson was the first to publicly release its annual figures on Tuesday, stating that “for the 12-month period to March 2020, the average funding level was flat at minus 0.1 per cent, versus a decline of 5.4 per cent for the wider UK industry”.
The report also claimed a decade-long trend of outperforming the broader sector, as clients saw their funding levels “improve by 24 per cent over 11 years to March 31 2020, compared with 4.8 per cent for the UK DB industry over the same period”.
Pensions Expert approached a number of companies offering fiduciary management services for comparable figures. Tim Giles, senior investment partner and managing director of investment at Aon, said the company had managed to avoid the sharp fall in asset values experienced by much of the market by a process of “sophisticated diversificationand active asset allocation”.
“In year to March 31 2020, our unconstrained portfolio grew by 12 per cent, a couple of per cent behind the remarkable growth in liabilities (of 14 per cent),” he said.
“While we always like to be ahead of liabilities – over the 12-month period that included the fastest bear market ever for equities – we avoided sharp falls in funding positions.”
The market downturn was the first big challenge for the majority of fiduciary managers
André Kerr, XPS Pensions Group
Managing equity exposure was key to mitigating the damage done by the crisis and potentially to reaping gains once the market recovers, he explained.
He added that Aon had “reduced exposure to equities in the last quarter of 2019 as we became increasingly concerned that equity markets had become overstretched. At the low point in markets in March, we added the equity exposure back into portfolios, and clients have continued to benefit from this since the end of March.”
Adding back risk and equity exposure in March appeared to be a common theme, with Joost van Leenders, senior investment strategist at Kempen Capital Management, and Sion Cole, managing director at BlackRock, confirming that a similar strategy had been followed. However, neither company disclosed the impact of their performance on client funding levels.
Mr Cole said: “The Q1 sell-off presented an opportunity for us to position client portfolios to take advantage of what we thought would be a strong rebound. At the time, we felt that the unprecedented levels of fiscal and monetary support provided a foundation for risk assets to recover.”
However, Mr van Leenders cautioned that, while “the low seems to be behind us for many of the negative factors”, investors pinning their hopes on a V-shaped recovery were being "excessively positive”.
No alarms and no surprises
Roger Brown, founder and director of IC Select, which assists clients in selection and oversight of investment managers, said that the results came as no surprise.
“At IC Select we carry out detailed oversight of pension schemes with an advisory approach to their governance,” he said.
“Of those we have analysed over the past year, only two have outperformed the median fiduciary manager, with more than 40 per cent performing worse than the worst-performing fiduciary manager.”
Mr Brown explained that schemes that have adopted fiduciary management tend to have higher levels of liability hedging than those operating an advisory approach.
“In aggregate, this will have considerably enhanced their funding position relative to those using an advisory approach, as interest rates have continued their downwards trend over the past decade, with a sharp decline at the start of 2020,” he said.
He added that fiduciary management clients tended to have significantly better diversification in their growth assets: “This will have provided them with better protection than funds on an advisory approach basis, throughout recent market turbulence.”
Covid-19 reshuffles the deck
The market crisis brought about by coronavirus has seen some fiduciary managers undergo a reversal of fortunes, according to a report by XPS Pensions Group, with the best-performing managers in 2019 suffering the worst losses in 2020, and the worst-performing managers faring best this year.
The report, which presents the results of a survey of fiduciary managers with responsibility for assets of more than £190bn, attributes this disparity to fiduciary managers’ different levels of equity exposure, with the result being a 10 per cent differential between the best and worst performers.
Third of fiduciary managers disappoint in 2019
New research has revealed the stark differences between best-in-class and stragglers in the fiduciary management market.
Commenting on the report, André Kerr, head of fiduciary oversight at XPS Pensions Group, said: “The market downturn was the first big challenge for the majority of [fiduciary managers].
“The industry was only in its infancy during the 2008 financial crisis, and since then managers have enjoyed one of the strongest bull markets in history.
“While all managers suffered losses last quarter, these were most severe for bulls in the bull market,” Mr Kerr continued.
“As the initial shock of Covid-19’s arrival begins to subside, trustees at pension funds with an outsourced [fiduciary manager] must understand what is driving strategic decisions and whether they align with their investment beliefs.”
