Dean Wetton Advisory has unveiled research analysing the value added by master trust investment strategies, exclusively to PP. Kim Kaveh looks at the findings.
A member's investing time horizon is an important factor to consider when comparing funds, Dean Wetton Advisory's (DWA's) Master Trust Universe report reveals.
The research looked at seven master trusts - BlueSky; Corporate Pensions Trust (CPT); The Legal and General Master Trust (LGMT); NEST; The People's Pension; Smart Pension, and Standard Life - and analysed the investment performance of their default funds for a 40, 50 and 60-year-old member over the five years between October 2013 and September 2018.
DWA's analysis used a metric of value added by each fund, to see how much better off a saver would be for using these funds by taking their pot total at the end of the period and subtracting how much they had paid in. Essentially, the metric shows how much more money was in each pot after fees than the member put in themselves.
For each calculation, DWA used the assumption that each saver had a salary of £25,000 and was contributing 8% of their salary in monthly instalments - a contribution that would amount to a total of £10,000 over five years. The average cost of being in the scheme for five years was applied on a pro-rata basis over that period and the actual historic returns were used over the last 5 years.
The analysis showed that for a 40-year-old member, a CPT member would have £2,707 more than they contributed, a Smart Pension member could expect £2,700, and The People's Pension would have £2,643 more. It is important to note that CPT has now been absorbed by Smart Pension, transferring £12m of assets and over six and a half thousand members to the master trust.
DWA found that a 40-year-old BlueSky member would have £2,602 more than they contributed, while a NEST member would have £2,537. An LGMT member would have £2,092 more, while a Standard Life member would have £1,497.
For a 50-year-old member, the analysis showed that a Smart Pension member would have £2,700 more than they contributed, while a member at The People's Pension would have £2,643 more and NEST, £2,489.
Here, a CPT member could expect £2,264 more than they contributed; BlueSky, £2,251 more, and LGMT £2,092. Standard Life members would have £1,497 more than they contributed.
For a 60-year-old member, an LGMT member would have £2,092 more than they contributed. A Smart Pension member would have £1,969 more; a member of The People's Pension would have £1,784 more and a NEST member £724 more. In this scenario, BlueSky members would be £1,143 better off. CPT members would have seen a gain of £1,138, and Standard Life members a rise of £1,167.
In a separate model, the consultancy also analysed the risk adjusted return for the seven master trusts.
To get a sense of absolute performance, DWA used a simple metric of return divided by risk using ‘maximum drawdown'. This was used to focus on only downside risk to create a ratio of how much return was achieved for each unit of risk. For comparison, DWA used a reference benchmark made up of 70% global equity, 30% cash far from retirement and transitioning to 30% global equity, 70% cash closer to retirement to see whether each strategy was more risk efficient than a simple investable benchmark.
It calculated the return/risk ratio for historic three-year returns split by a period to expected retirement (20 years, 10 years, and one year to retirement). The higher the ratio, the more effective the investment was, based on DWA's calculations. In this instance, DWA's DC reference benchmark was 4.26 for 20 years to retirement, 4.29 for 10, and 4.40 for one year to retirement.
The historic three-year return/risk ratio (20 years to retirement) for LGMT was 3.61 and CPT's was 3.62. BlueSky's return/risk ratio was 3.33; Smart Pension, 3.29 and The People's Pension's was 3.15. Standard Life's Return/Risk ratio was 2.79, and NEST's was 2.80.
For 10 years to retirement, BlueSky's return/risk ratio was 3.88, and CPT's, 3.80. LGMT's was 3.61, and The People's Pension and Smart Pension's was 3.54 and 3.29 respectively. NEST's return/risk ratio was 2.89 and Standard Life's was 2.79.
In the one year to retirement phase, LGMT's return/risk ratio was 3.61, and Smart Pension's was 3.31. Standard Life's return/risk ratio was 2.87, and NEST, 2.78. CPT's return/risk ratio was 2.62. The People's Pensions' return/risk ratio was 2.43, and BlueSky, 2.64.
According to DWA, a higher Return/Risk at retirement could either be "a sign of a reduction in risk, or a fund choosing to maintain higher levels of return for members at retirement".
DWA said the information for this report was sourced directly from fund managers and financial data providers.
All the data provided by Smart Pension was based on its underlying funds, not figures supplied, but the master trust confirmed they were broadly in line with what they would expect.
DWA said it did not have access to Standard Life's direct monthly returns - and used the master trust's quarterly returns and then simulated monthly volatility by using other multi-asset funds as a proxy.
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