Fiduciary managers’ (FM) returns in 2021 were driven by strong performance in equity markets over the year, despite “a majority” pursuing multi-asset strategies, according to XPS Pensions Group.

The firm’s Fiduciary Manager Review 2022 found that while equities made up less than 50 per cent of portfolios for most FMs, the asset class was the largest contributor to managers’ returns in 2021.

It noted that the more complex allocations, such as hedge fund strategies, that were incorporated into FM’s portfolios did “very little” to drive returns in most cases.

However, XPS stated that these strategies can have other benefits, such as risk reduction, so may prove more effective when equities do not perform so well.

Despite this, it warned that they can be one of the most expensive strategy components FMs can pursue.

The review found that 70 per cent of FMs outperformed the returns of the median Diversified Growth Fund, while 30 per cent underperformed.

XPS noted that the dispersion of returns between FMs remained “significant”, with an 8 per cent gap between the highest- and lowest-returning growth portfolios.

However, the volatility of FM returns was lower in 2021 than in previous years, which XPS said was largely due to equity markers exhibiting relatively lower levels of volatility.

The firm urged trustees that had not reviewed their arrangement in the last year or two to do so and consider how each part of the portfolio is contributing to returns, whether risk levels and downside protection are as expected, and whether all parts of the strategy are delivering value as expected.

“Markets can change quickly,” commented XPS Investment head of fiduciary management oversight, Andre Kerr.

“So far this year, the war in Ukraine, in particular, has brought about significant volatility and a fall in equity valuations.

“Given asset allocations seen coming into 2022, therefore, portfolios may already have performed very differently over the last 4 months than in 2021, depending on the fiduciary manager in question.

“We’d encourage trustees not to be complacent and to challenge their managers to ensure that significant value is expected to be delivered by all parts of their portfolios.”

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