Diversified investments delivering ‘questionable value’ for master trusts

Master trust funds with more diversified investment approaches throughout their growth phase have delivered “questionable value” for members, a new report has found.

Hymans Robertson’s Master trust default fund performance review for September, reported that diversified approaches have lagged over the last eight years, meaning there is now “significant pressure” on the funds to deliver downside protection in a falling market.

The best performing master trust in the growth phase was Mercer, who returned 8.1 per cent over three years, compared to Now Pensions 2.06 per cent return, the worst performing fund of the 16, as at 31 March 2018.

“There is a large difference between the best and worst performer over 3 years of over 6 per cent per annum. This leads to a difference of over 18 per cent compounded over that time,” the report states.

According to Hymans Robertson, this can result in a difference of 10 per cent in the value of a member’s defined contribution pot in just 3 years for somebody on a salary of £24,000 a year, with an 8 per cent contribution.

“In this growth phase, where members are a long way from retirement, short term risk mitigation through diversification of asset class or active asset allocation is of questionable value. Regular contributions by the member provide their own diversification benefit as a result of pound cost averaging.”

Now Pensions did slightly better over the past year with a return of 3.9 per cent, while Aegon was the best performing master trust with returns of 5.19 per cent. The Aviva Master Trust, formerly Friends Life, The Aon Master Trust and National Pension Trust all performed badly with returns of 0.7 per cent, 0.75 per cent and 0.93 per cent, respectively.

Despite this, Hymans Robertson noted that low Q1 2018 returns resulted in the median performer delivering just 1.5 per cent over the past year.

Commenting on the findings, Now Pension director of investment and product development, Rob Booth, said: “The market dynamics over that three year period are characterised by a strong equity bull run coupled with a depreciation in the value of sterling. As Hymans rightly say in the report “Recent history has been kind to risky asset classes”.

“As a result, the relative three year performance figures for the Diversified Growth Fund which targets long term, sustainable growth come as no surprise. Although Now Pensions will always focus on medium to long term performance, it is good to see the strong one year performance of our diversified growth fund coming through.”

Aviva too questioned the short-term time period of the investment performance and also the specific period from which the results were analysed.

An Aviva Spokesperson said: "Had a different 12-month period been chosen – for instance, the 12-months until April, May, June, July or August 2018 – the Aviva Master Trust would have shown positive returns.

“We are confident that the default fund used for the Aviva Master Trust is delivering good returns for our members while minimising volatility. Performance of the My Future Growth Fund, the growth phase of the solution, and where most assets are invested, has been strong since launch in March 2013, delivering an annualised return of 9.1 per cent with the level of risk taken 7.7 per cent. We believe it represents an attractive risk/return profile.”

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