Investment - Articles - Choice of fiduciary manager has significant impact

In this first of its kind review of fiduciary manager investment performance for UK pension funds, we assess how managers have performed across mandates with comparable risk-return objectives up to 31 December 2020.

 For the first time ever, we can build a reliable picture of how fiduciary managers have impacted pension funding positions thanks to newly-launched requirements and standardised methodology for fiduciary managers, the Global Investment Performance Standards (GIPS) for Fiduciary Management Providers to UK Pension Schemes.

 Barnett Waddingham has evaluated the performance of fiduciary managers in 2020 and outlined the key trends.
 1. A continued trend of pension fund de-risking, with increasing proportions of FM mandates having lower investment return objectives and higher liability hedging requirements;
 2. A weaker relationship between risk and return over the 12 months. In other words, in contrast to recent years, it is less clear that fiduciary managers were rewarded for taking risk in 2020.
 3. Over 2020, investment performance has been mixed and somewhat dependent on the level of return being targeted. For low and medium return targeting mandates, most fiduciary managers achieved their investment return objectives; for high return targets, fewer managers were successful.
 4. Wide variation in investment returns and ability to protect against short-term market falls. This applies mainly to medium and high return targeting mandates and can be explained by a wide variation in investment approaches and liability hedging strategies, even among pension funds with seemingly high levels of hedging.
 5. Clear evidence of fiduciary managers adding value for pension funds targeting a moderate level of returns over the long term. For mandates targeting higher returns, success continues to be mixed; for mandates targeting lower returns, closer consideration of value for money is needed.
 6. Differences in returns within fiduciary managers’ own portfolios indicates differing levels of customisation in portfolios to reflect specific pension fund needs.

 Peter Daniels, head of FM Evaluation at Barnett Waddingham, said: “The variation in performance highlights the importance of pension funds understanding what is driving their investment returns and the impact of their managers’ decisions.

 “The range of investment returns and risk protection over 2020 demonstrates the financial significance of selecting the right fiduciary manager to fit with your pension fund’s objectives.

 “We have said for a long time that although the decision to adopt a FM approach should be governance-led, the decision about which fiduciary manager to use should undoubtedly be investment-focussed.

 “It also emphasises the importance of being able to understand what is driving a pension fund’s investment performance and whether the decisions taken by the fiduciary manager are adding value. Delegating responsibility over all of the assets places greater emphasis on a trustee board’s ability to hold their manager to account.

 “We do however absolutely share the views of others in the industry that past investment performance should be one of a number of factors you should consider when appointing a fiduciary manager. Understanding performance data and making sure you are comparing apples with apples is vitally important.”

 Establishing a standardised methodology for measuring FM performance was one of the many positive outcomes of the CMA Review. It allows pension funds to compare and contrast performance which is more relevant to its own circumstances. The data is useful to make high-level performance observations and supplemented by a more detailed assessment of how returns have been generated.

 It is important GIPS® for FMPs data is used alongside expertise in interpreting the results and awareness of its limitations. It should be no substitute for more detailed, scheme specific performance analysis.

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