Fiduciary managers 'significantly underperformed' targets in 2018, finds XPS

Kim Kaveh
Fiduciary managers significantly underperformed in 2018, finds XPS

Fiduciary managers significantly underperformed in 2018, finds XPS

Key points

At a glance

  • XPS found a wide range of performance outcomes for schemes in 2018
  • Fiduciaries underperformed targets last year, but five-year returns were stronger
  • Trustees should select a manager whose views align with their own beliefs and aims

XPS Investment has unveiled a report looking at fiduciary manager performance over the last year and the longer term. Kim Kaveh looks at its findings.

Last year was a "significant test" for fiduciary managers with financial markets having their worst year since the financial crisis in 2008 and the stock market crash in 2011, according to a recent XPS Investment report.

As part of its analysis, XPS Investment compared the growth portfolio performance of over 90% of the fiduciary management market, based on data received from 10 fiduciary managers, three of whom provided two entries. The growth portfolio performance data was from the main pooled funds they offered to their clients.

It found that there was a wider range of performance outcomes for schemes over 2018 with managers "significantly underperforming targets", but five-year returns were stronger.

The report comes as the Competition and Markets Authority's investment consultants market investigation's final report in December last year revealed there are around 1,000 schemes using some form of fiduciary management representing assets of over £160bn. XPS Investment highlighted that for this reason, "performance of fiduciary managers is important".

It looked at managers' performance alongside XPS' recommended diversified growth funds (DGFs) to see how well they did, noting they are "trying to do a similar job [by] both aiming for a target of around cash plus 4% per annum (net of fees) by investing in diversified assets and strategies".

According to the report, underperformance ranged from 6% to over 11% for 2018. In monetary terms the performance ranged from a loss of between £4m and £8m for a £100m scheme with a 70% exposure to growth assets and 30% in matching assets with a 100% liability hedge as a proportion of assets.

The average performance of the fiduciaries' growth portfolios was very similar to the universe of DGFs - in both cases -4.5%. In 2018 a scheme would have achieved similar overall results with a manager or a DGF combined with a 100% liability-driven investment hedge, the report stated.

Long-term performance

While longer-term performance of fiduciaries was much stronger, they still delivered a wide range of outcomes, with the difference between the best and worst performances equating to 28% over a five-year period.

It found that all but two of the managers achieved their targets and outperformed the comparative DGFs by 1% per annum on average, equating to £3.5m for XPS's example scheme.

XPS said it would expect that fiduciaries would outperform the DGFs as they "typically have a bigger investment opportunity set and more ability to take on illiquidity within their portfolios".

The consultancy also looked at the volatility of returns that the fiduciaries' growth portfolios delivered over the longer term. Its report noted that that the managers were typically trying to deliver returns from their growth portfolios with lower volatility than equities.

It noted the five-year average returns from their growth portfolios had lower volatility than equities, at 5.5% compared to 11.5%, but found returns of 5.3% compared to 8.4% (see chart).

It also showed the point representing the fiduciary managers' target return (cash plus 4% per annum) with half equity risk was a reasonable proxy for measuring the volatility target of 5.75%.

On average the managers had delivered much lower volatility than equities with most also achieving or exceeding their performance target of 4.5%. The fiduciaries had also, on average, delivered stronger performance than the DGFs, at 4.4%, with similar levels of volatility, recorded 5%.

Fiduciary managers have been "successful over the longer term in absolute sense and relative to DGFs", the report said.  


XPS investment concluded that it would be "easy to suggest that schemes should avoid the worst performers", but "unfortunately life isn't that simple".

It added: "It's impossible to predict in advance which fiduciary managers will deliver the strongest performance. However, there are some common themes across the stronger performing fiduciary managers that can be identified: higher exposure to contractual cashflow assets; higher exposure to illiquid assets; and higher exposure to the US dollar."

The report noted XPS's support for using contractual cashflow and illiquid assets within portfolio construction.

"In our view, looking for a fiduciary manager that incorporates these themes into portfolio construction is likely to lead to better outcomes in testing growth markets.

"Higher exposure to overseas currencies as an intentional driver of returns is not something we support strategically as it has a binary outcome.

"We believe schemes should not rely heavily on past performance when appointing a fiduciary manager as it is a poor indicator of future performance. The themes driving portfolio construction should be a key factor, however.

"They should be understood alongside the views held by the fiduciary manager for the future and how those views drive portfolio construction."

It also said that trustees can then select the fiduciary manager whose views and approach they understand and feel most aligns to their own beliefs and aims. An independent oversight provider can really help with this."

Head of fiduciary oversight André Kerr said the performance of fiduciary managers' growth portfolios had been disappointing in 2018.

"This is what we'd expect if market exposures rather than manager skill were driving returns, which is something we prefer to see. However, their performance over the longer-term has been good, with most achieving their targets and outperforming diversified growth funds.

"It's difficult to draw conclusions from just one year's performance, especially when we've experienced such testing markets. It's only through continued tracking that we will determine whether 2018 was a blip or something more worrying.

"The range of outcomes in performance shows that not all fiduciary managers are the same. This is why it's really important that schemes considering fiduciary management appoint the right provider for their needs."

Key points

At a glance

  • XPS found a wide range of performance outcomes for schemes in 2018
  • Fiduciaries underperformed targets last year, but five-year returns were stronger
  • Trustees should select a manager whose views align with their own beliefs and aims

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