Fiduciary managers' returns dominated by equity returns despite expensive multi-asset strategies

  • The majority of fiduciary managers’ returns over 2021 were driven by strong performance in equity markets over the year
  • Incorporating expensive hedge fund strategies often delivered minimal returns
  • Timing switches between aggressive and defensive asset allocations appears to be difficult; most managers were either able to capture significant market upside or protect on the downside, but not both.

Fiduciary managers (FMs) relied on a strong performance by equity markets to drive returns over 2021 despite a majority of managers pursuing more complex multi-asset strategies, research by XPS Pensions Group has found.

XPS Pension Group’s Fiduciary Manager Review 2022 examined real-world performance data from 18 growth portfolios across 14 fiduciary managers to assess where they added value to client portfolios across 2021. The research found that while equities made up less than 50% of portfolios for most fiduciary managers*, the asset class was by far the biggest contributor to managers’ returns across the year.**

By comparison, where fiduciary managers incorporated more complex allocations, such as hedge fund strategies, into their portfolios these did very little to drive returns in most cases. These strategies can have other portfolio benefits, such as risk reduction, and so may prove more effective when equities do not perform as strongly. But they often represent one of the most expensive strategy components that managers can pursue.

70 per cent of FMs outperformed the returns of the median average Diversified Growth Fund, whereas 30 per cent underperformed. Fiduciary managers would be expected to outperform a typical Diversified Growth Fund, given the broader investment opportunities generally available to FMs. There was a large gulf between the best- and worst-performing fiduciary managers, with an eight per cent gap between the highest- and lowest-returning growth portfolios.

Andre Kerr, Head of Fiduciary Management Oversight, XPS Investment, said: Markets can change quickly. 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.”