However, combined performance of schemes will also be dependent on how well the liability hedge level was maintained during the gilts crisis
Approaches with more illiquid and complex assets could have experienced greater liquidity challenges, compromising the ability to maintain liability hedging levels
Funds from fiduciary managers (FMs) that were most exposed to equity and fixed income were amongst those with the lowest returns across 2022, research from XPS Pensions Group has found.
A survey that gathered data on the performance of 18 growth portfolios managed by 15 FMs over 2022 found that, while all fiduciary managers bar one posted negative returns, the asset allocation within their funds led to a wide range in performance across the year. The unusual pattern of simultaneous losses in both equities and fixed income seen throughout 2022 reversed the recent trend of FMs’ portfolios rising on the back of strong equity performance.
By contrast, FMs with portfolios that featured more illiquid assets fared better throughout the year, with higher net returns and lower volatility. But pension schemes who use these managers were more exposed during the LDI crisis of October 2022, when managers would have struggled to meet collateral calls, potentially reducing the level of hedging and exposing pension schemes to unhedged losses and haircuts on sold assets.
Fiduciary managers still largely outperformed the median returns of Diversified Growth Funds over the year, with only 5 funds of 18 underperforming this benchmark. Over 50% of the funds examined outperformed the upper quartile of all Diversified Growth Fund returns.
Andre Kerr, Partner at XPS Pensions Group, said: “The performance of fiduciary managers over 2022 shows that there is no ’silver bullet’ to guarantee investment performance. Whilst complexity and illiquidity can be a good diversifier of returns and reduce volatility, it can also create other risks, such as during the LDI liquidity when some fiduciary managers had insufficient liquidity to meet the LDI collateral calls.
“Trustees should monitor their investment arrangements closely and feel empowered to challenge their fiduciary managers if they feel the arrangements do not align with their scheme’s goals.”
XPS Fiduciary Manager Report 2023
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