Default CD vendor funds make ‘scorching’ weather 2020 – Investment
In a year defined by the market shock resulting from the Covid-19 pandemic, the Punter Southall report showed how different designs of default funds coped with market turmoil, revealing that default funds at CDs have generally rebounded “relatively quickly”.
Equity-focused funds were the hardest hit but then benefited the most from the rebound, especially those with the lowest exposure to UK assets.
Default funds with greater diversification and lower risk levels, on the other hand, performed ‘medium performance’, protecting members better from the recession, but then not making the most of the recovery. foreign equity markets.
Going forward, providers will need to continue working on strategies to reduce risk and ensure they can be agile enough to make the right decisions at the right time to protect those approaching retirement age. selected.
Christos Bakas, Associate Director of Investments at Punter Southall Aspire, said: “The most common phrases we’ve heard in the investment markets in 2020 include words like ‘steamy’, ‘unprecedented’ and ‘shocking’ .
“After nearly 12 years of positive stock returns, declines of more than 20% in March 2020 came as a shock to many, especially to those approaching retirement age. Suddenly, savers were nervously checking their retirement values and seeing negative numbers they hadn’t seen since 2008. ”
In the report, he wrote that the diverse nature of DC default funds meant that it was “not surprising that these strategies outperform the global stock market in times of declining equities and underperform in times of rising markets. fellows “.
Fees vary from plan to plan and are crucial in the end result of each DC default “because they have a measurable and significant effect on the value of members’ funds and subsequently on disposable income in retirement. The report says.
“The more diverse and sophisticated the default option, the higher the total cost. Therefore, providers need to ensure consistent performance and effective protection against market volatility to create value for members and justify higher fees.
Bakas added: “In the future, providers will need to continue to work on strategies to reduce risk and ensure that they can be agile enough to make the right decisions at the right time to protect those approaching the crisis. retirement age they have chosen.
“They will have to decide whether meeting the flexible needs of retirement freedoms is worth the additional risk members are exposed to. Providers and employers will also need to ensure that members are much better informed about the need for continued exposure to stocks once they start receiving benefits, if they wish to use the income levy. “
Punter Southall’s report noted that there is no “single, specific, and consistently applied metric to assess the performance of default options in the CD market,” with vendors using a variety of different comparators, including peer group sectors, composite benchmarks, cash or inflation indexes.
However, he found that vendors were generating returns of between 4.5-10.3% per year on a three-year annualized basis.
Aviva My Future Growth received the highest score, with Fidelity Growth Portfolio second at 9.5%, while Royal London Governed Portfolio IV and Standard Life Active Plus III scored 5.9% and 4.5 respectively. %.
On a five-year annualized basis, the Fidelity Growth portfolio, Aviva My Future Growth and B&CE The People’s Pension (up to 85 percent equity) achieved the best scores, with 10.9 percent, 10.3 percent, respectively. percent and 10.1 percent.
Royal London Governed Portfolio IV and Standard Life Active Plus III finished at the back of the pack, with 7.3 percent and 5.3 percent respectively.
“There is a lot of variation between vendor default strategies, especially in terms of the level of risk they build into the growth phase of their strategy, which affects long-term total performance as risky strategies higher tend to generate higher returns. The report read.
“However, over short periods like the bearish market environment of March 2020, the more risk-conservative strategies had a less negative impact on their returns.”
Regarding asset allocation, the report notes that “providers that have their own branch of asset management have developed more diverse and sophisticated default offerings, which also take a more aggressive approach to allocation. asset allocation (tactical asset allocation) to seek to take more advantage of market inefficiencies ”.
During the consolidation phase, providers generated returns between 3.7% and 7.4% per annum on a three-year annualized basis, with the Nest 2026 Retirement Fund having the highest score and L&G Multi Asset Coming in second with 7.1%, while the Royal London balanced lifestyle strategy reached 3.7% and Fidelity Futurewise at 3.5%, according to the report.
Over a five-year period, these figures were 8.7% and 8.4% respectively for Nest and L&G Multi Asset, and 4.5% each for Royal London Balanced Lifestyle and Fidelity Futurewise.
The report says this indicates “the importance of asset allocation in maximizing the value of members’ funds.”
“There is a lot of variation between vendor funds, especially in terms of the level of risk they incorporate into the consolidation phase of their strategy which affects overall performance,” he continued.
“It is important that DC’s defaults ensure effective risk management, as the consolidation phase is a relatively short period. Therefore, any negative market event may not allow the value of members’ funds to fully recover. “
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During the retirement phase, claimants generated returns of between 2.7% and 7.1% per year on the same three-year annualized basis.
L&G Multi Asset had the highest score, with People’s Pension in second at 5.4%, while Fidelity Futurewise and Standard Life Universal Strategic Lifestyle Profile were the two lowest, at 2.8% and 2.7 respectively. %.
Risk management is important here because “the retirement phase heralds the start of the withdrawal phase of membership benefits, with asset allocations designed to broadly match the benefits to be taken. Again, in the event of a severe market downturn, the value of members’ funds may not fully recover, ”the report said.