Fiduciary managers show ‘colossal’ spread in allocations

Fiduciary managers are increasingly allocating assets away from equities and into bonds and alternatives, with a “colossal” spread in allocations, data from IC Select has revealed.

The data, which used the results from 12 fiduciary managers with a combined £83.3bn assets under management, found that on average, firms put 24 per cent into equities, a drop from the 34 per cent average shown in the Purple Book, as of 31 March 2017, while bonds were allocated 51 per cent compared to 41 per cent in the Purple Book.

The survey asked major fiduciary managers including Aon Hewitt, Willis Towers Watson, Mercer, BlackRock and Cardano, to model an investment portfolio with the objective of achieving liabilities plus 2.5 per cent net of all costs, with a liability duration of 20 years and an initial funding level of 80 per cent.

Furthermore, the research showed that fiduciary managers were allocating 22 per cent into alternatives, up on the 17 per cent Purple Book average.

IC Select director, Roger Brown, said: “On average the fiduciary managers are reducing their weight from equities and increasing their weight to alternatives. A lot of it was originally hedge funds but now it's illiquids such as private equity and private debt.”

“The difference in equity investment is colossal.”

The amount fiduciary managers are allocating into equity, ranges from 9 per cent to 34 per cent, while illiquid allocations range from 9 per cent to 32 per cent.

“Basically, what it says is that there are huge differences between fiduciary managers, they are making huge bets and they will either win or lose in the next ten years,” Brown said.

However, Redington head of DB pensions, Dan Mikulskis, believes that there are always going to be differences between firm’s asset allocation, depending on their investment beliefs and research techniques.

Fiduciary managers are currently under pressure to be seen to be not hedging too much risk at the expense of returns.

Mikulskis added that despite the need for schemes to both manage risk and encourage growth, there is a point where schemes must start holding on to growth assets.

"Over the past 10 to 20 years the pension scheme trend has been to leave equities and go for bonds due to the changing landscape of DB schemes. The right question to ask is, are you sure you haven’t gone too far? There is a point where it needs to stop and schemes need to hold on to grow assets,” he said.

“Managing risk for DB pension schemes involves managing interest rate risks which means using bonds. On the return generating side, there are a lot of strategies and equities is a key one.

“In these areas managers are taking enough risk to get the returns they need. That’s the challenge, you are always doing both.”

According to Brown, the results show that fiduciary managers will have less risk than the average pension scheme as a result of greater diversification.

He added: “Our view is that fiduciary managers are achieving better risk solutions for their clients than is the case for many pension funds that are under an advisory arrangement for clients with similar return objectives. 

"The comparison with Purple Book data would seem to support this. As long as fiduciary managers can deliver the required returns then the lower risk they can do this with the better.”

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