The inclusion of private market assets in off-the-shelf default strategies is gaining momentum following the Mansion House Accord, Isio has found, although challenges around implementation and transparency remain, requiring "robust governance".

Isio's latest update found that major providers are working towards allocating up to 10 per cent of default funds to private markets by 2030, offering the potential for significant benefits.

In particular, Isio argued that, by replacing a portion of equity exposure with private market investments, such as infrastructure, private equity, or real estate, providers can mitigate concentration risk while accessing a broader opportunity set.

It also argued that private markets can offer potential for higher risk-adjusted returns and enable deeper environmental, social, and governance (ESG) integration through direct
stewardship.

However, Isio noted that challenges around implementation and transparency remain, necessitating robust governance.

Equities remain a key driver for results; however, as Isio's report revealed, with double-digit growth phase yearly performance across the provider universe as equities continue to rally.

Indeed, global equity markets rallied in Q3, fuelled by optimism around AI-driven growth, resilient corporate earnings, and reduced trade tensions between the US and China.

The US Federal Reserve’s 0.25 per cent rate cut in August further bolstered investor confidence, resulting in the S&P 500 hitting record highs, while the FTSE 100 delivered its strongest quarterly gain since late 2022 but lagged global peers due to its limited exposure to high-growth technology stocks.

In contrast, emerging markets outperformed developed markets, supported by a depreciating US dollar and robust performance from tech-centric regional indices in Taiwan and South Korea.

This is beginning to impact equity portfolios, as Isio noted that whilst DC providers have been focused on increasing their equity allocation in recent times, many are now shifting focus onto how their equity portfolio is invested.

Whilst market capitalisation remains the preferred approach, Isio found that, as US markets continue to outperform, its increasing share of global markets raises challenges.

Additionally, most providers allocate to emerging markets, but few still allocate to smaller companies.

With significant variation in the approaches to currency hedging across providers, Isio raised concerns that those that have stayed unhedged may now be considering whether the US dollar will still provide a safe haven in times of turmoil.

Greater focus on the index being used for passively managed equities is also emerging, covering both the extent of any ESG tilting but also whether a multi-factor approach should be followed.

Equity allocations were not the only key driver for results, however, as Isio found that how a provider allocates to fixed income has been another big driver, particularly for the at-retirement phase.

In particular, Isio found that exposure to longer duration has been detrimental, as yields have climbed upwards, and anything spread-based has done well.

According to Isio, however, providers are increasingly looking at how to diversify in the retirement phase, and while illiquid allocations are still relatively rare, they are beginning to build.

Furthermore, asset classes that have been more common in defined benefit (DB) schemes, such as asset-backed securities, multi-asset credit, and protected equity, are starting to be debated for inclusion in DC retirement portfolios.

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