UK fiduciary managers with more than average equity exposure or risk performed the best over calendar 2020, but with greater volatility, according to research from XPS Pensions Group.

Furthermore, those managers who enjoyed the strongest performance in 2019 – when the best performer returned 20% – were often the hardest hit in Q1 2020, the study found.

The Fiduciary Manager Review 2021 – the consultancy’s third such review – covered 22 “best ideas” growth portfolios from 18 fiduciary managers, capturing 99% of UK fiduciary clients.

It found that while portfolios had suffered from huge market falls in the first quarter of the year, the subsequent rapid recovery and positive returns for the rest of 2020 resulted in returns ranging from 2% to 16.8%, net of fees.

The “significant” dispersion of returns reflected their different investment approaches generally, and in some cases, their attempts at responding to the crisis as it unfolded, said the survey.

However, just over half of fiduciary managers performed above the median return for diversified growth funds (DGFs).

André Kerr, co-head of fiduciary management oversight at XPS Pensions Group, said: “Fiduciary managers’ returns were largely driven by equities over 2020, benefiting significantly from the speed in which equity markets bounded back.”

He said 2020 was the first opportunity for trustees to observe the difference a fiduciary management approach can make during a major crisis.

Kerr told IPE: “In the run-up to the big sell-off at end-Q1, most managers still had quite a lot of risk on the table. Some then put protective measures in place, but most stuck to their guns, keeping a reasonable exposure to all markets. That paid off, because the rebound was faster than expected.”

He said that volatility-adjusted performance figures split the fiduciary managers into three groups, those with:

  • volatility under 12% and returns above 5% (providing a good balance between risk and return);
  • volatility between 12% and 18% and returns over 8% (more return but at a slight cost as more risk required to achieve it); and
  • lower returns and high levels of volatility (with managers in this group failing to protect on the downside and to capture the market rebound).

Kerr told IPE: “Some clients would say that success meant getting controlled drawdowns in Q1 with the ability to capture the upside. Others want the biggest return year-on-year, ignoring the risk. The ideal is probably to get from A to B with the least amount of volatility.”

And he warned pension fund trustees: “When they appoint fiduciary managers, they need to understand whether the managers will invest consistently with the scheme’s needs, and if there is sufficient protection in a downturn. If we had seen a protracted bear market in 2020, those losses would not have been reversed.”

He added: “Trustees should hold fiduciary managers to account. It is easy to assume the managers will run the journey plan, but the trustees are still responsible.”

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