Standard Life’s default fund returned less than half than that of the top performing provider, Zurich, over the last three years, despite having active management elements in the fund, it has been revealed.
Punter Southall Aspire’s (PS Aspire) DC default survey 2018 revealed that the provider returned just 3.54 per cent over the three years to 31 March 2018, compared to 7.29 per cent returned by Zurich’s DC default fund.
Analysing nine of the leading DC providers, PS Aspire found a dramatic variation in the allocation to equities, bonds and other asset classes across the providers. The report noted that Standard Life, along with Royal London, Fidelity, Aviva and L&G, have asset management arms within their groups, which means more internal resources are available including ranks of economists, strategists, portfolio managers and specialised analysts. As a result, PS Aspire said the funds have developed more diversified and sophisticated default offerings.
Standard Life’s default fund has one of the lowest exposures to equities at around 44 per cent, whereas Zurich’s fund has a 77 per cent allocation. However, Standard Life has one of the highest allocations to alternative investments, with around 22 per cent. These include investments such as commodities, property and absolute return strategies. Standard Life's default fund has a 28 per cent allocation to bonds and around 6 per cent in other asset classes. The split between UK and non-UK assets is 32 to 68 per cent.
Looking back over a one year period Standard Life has performed better with a return of 1.26 per cent, compared to Zurich’s default fund, which has seen returns of just 0.32 per cent. However, speaking to Pensions Age, Punter Southall Aspire DC investment consultant Christos Bakas explained that a bad year of performance in the growth phase can be recovered. He believes that picking a strategy that is able to achieve enough growth over a long-term is more important than checking short-term growth.
Bakas also highlighted the need to take account of costs: “We also need to incorporate in our rationale, the cost of the strategy, and how bad the outcome can be if you have a consistently low-performance strategy that is quite expensive. For example, Standard Life has performed so bad over the last few years, and because they have active funds it’s an expensive strategy. If we incorporate the bad performance and the cost, in the end, the projected fund value is going to be much lower than a fund that’s had a better performance and is cheaper,” he explained.
In response, Standard Life said its approach is to build a default fund with customers in mind, which balances their need for returns in the long term, their capacity to take risk and their attitude towards risk.
“Active Plus III aims to maximise the long-term returns at a level of risk —based on research — that we believe the majority of customers are willing to take. It seeks to do this by adopting a much more diversified approach to asset allocation than many alternatives and, as a result, over the shorter time periods, it is much less likely to experience either extreme highs (when markets race ahead) or extreme lows (when markets fall) but in the longer term will generate enough return to meet investment objectives.
“So in a period when equity markets perform very strongly (2016 and 2017), we would expect more concentrated strategies with relatively high levels of equity exposure to have done better. However, in other environments when equities do less well (such as the one year period shown in Punter Southall Aspire’s report), Active Plus III is likely to do better in relative terms.
“Our focus is on the long-term and ensuring that Active Plus III is likely to deliver the returns members need, at a level of risk that members are willing and able to take, as consistently as possible. We believe that the fund has done this in the longer term and, through ongoing monitoring and review, we will seek to ensure that it continues to do so in an ever-changing environment. Standard Life also offers a range of other risk managed funds with a higher risk profile and greater exposure to equities should people prefer them.”