The fiduciary managers that made the strongest gains through high equity allocations in 2019 also sustained the biggest losses during the first quarter of 2020, research by XPS Pensions reveals.
The consultant's latest FM Watch - which analyses the growth portfolio performance of fiduciary managers with responsibility for pension fund assets of over £190bn - conversely found that those managers that made lower returns in 2019 tended to be better prepared for the market falls.
It said the outbreak of Covid-19 had been a "major test" for fiduciaries, noting there had been a ten percentage point difference between the best and worst performers in the first quarter of this year.
Fiduciary manager growth portfolio performance - Quarter 1 2020
Notes: This data illustrates the reported performance of 16 fiduciary managers' ‘best-ideas' growth portfolios, net of fees, over Q1 2020. This captures 99% of UK fiduciary clients. It should be noted that most fiduciary management portfolios will have some investment in illiquid or esoteric asset classes, many of which are difficult to price, particularly in the current market environment, such as property funds. Therefore the ultimately confirmed performance numbers over Q1 may differ slightly from those in this chart, which is based on currently available information. The numbers assigned to individual FMs are randomly assigned and not comparable with those used in previous XPS FM Watch Survey reports.
Sources: XPS Investment, Refinitiv and individual fiduciary managers
XPS also found that 75% of fiduciary managers made changes to their portfolio in early 2020, both to take advantage of emerging opportunities and to defend against losses. It said that towards the end of March and early April, there was a divergence of views on economic outlook, with some managers looking to increase exposure to equities, while others acted more defensively and increased allocations to government bonds or cash.
Head of fiduciary oversight André Kerr said: ‘The market downturn was the first big challenge for the majority of fiduciary managers. The industry was only in its infancy during the 2008 financial crisis and since then managers have enjoyed one of the strongest bull markets in history. While all managers suffered losses last quarter, these were most severe for bulls in the bull market.
"As the initial shock of Covid-19's arrival begins to subside, trustees at pension funds with an outsourced fiduciary manager must understand what is driving strategic decisions and whether they align with their investment beliefs."
This analysis comes just weeks after XPS unveiled its second annual FM Watch survey, which assessed fiduciary manager performance in 2019.
It found there was a 12 percentage point difference in the growth portfolio performance of the best and worst performing fiduciary managers in 2019 and over a third underperformed the average diversified growth fund.
The consultant also revealed markedly different asset allocation strategies across the fiduciary management market, with the strongest performers typically favouring higher equity allocations in 2019.