On the go: Most fiduciary managers had positive returns in 2020 without needing to change their investment strategies in light of the Covid-19 pandemic, analysis from XPS has shown.
The first quarter of 2020 saw some “hair-raising” losses, XPS said. Managers with more risk embedded in their portfolio had losses of up to minus 14.5 per cent when the pandemic and the government’s lockdown strategy first struck.
UK equities stood at minus 25.1 per cent at the end of the first quarter, while all-world equities were at minus 15.9 per cent, and emerging market equities at minus 19 per cent.
However, these figures rebounded by the end of 2020. UK equities finished the year at minus 9.8 per cent, while all-world equities were up by 13 per cent and emerging market equities rose by 11.9 per cent.
XPS’s annual ‘FM watch’ report found that no fiduciary manager made “significant or fundamental” changes to their investment strategies, and maintaining high exposure to risk assets “paid off”, with those managers suffering the largest losses making strong recoveries as the market returned to its record highs.
By the end of 2020, all of the 22 fiduciary managers covered by the report had posted positive results. Growth portfolio returns ranged from 2 per cent to 16.8 per cent, although their strong performance in equities “masked variations in performance at different points of the year, especially during the large market bounce back seen in Q2”, the report noted.
But XPS added that while all managers provided some protection against the fall in equities, some “only marginally added value” compared with a “simple, low-cost equity tracker”, while only around half of managers outperformed the median diversified growth fund.
“With the benefit of hindsight, there were significant opportunities to rerisk in the wake of Q1’s market crash,” the report stated.
“A number of [fiduciary managers] employed their tactical asset-allocation skills to benefit from increased equity and credit allocations, with those implementing most quickly reaping the greatest benefits.
“However, generally [fiduciary managers] did not make fundamental changes to their portfolios and the expected levels of return and risk. While trustees might expect [fiduciary managers] to be dynamic at times of market stress and opportunity, the level of dynamism used by [fiduciary managers] is often constrained by the investment guidelines set by trustees,” it continued.
André Kerr, head of fiduciary management oversight at XPS Pensions Group, said that sticking “to their guns may have worked for fiduciary managers this time, but may not have fared so well if the downturn had been drawn out”.
“Fiduciary managers have weathered the storm of Covid-19, albeit with large variations in fortunes,” he said.
Kerr noted, however, that “a more prolonged downturn could have painted a different picture, and some would have faced deep losses by sticking to their original strategy”.
“Trustees should ensure they have selected a manager that shares their outlook on the market and approach to investment in moments of severe financial stress,” he added.
