The majority of fiduciary managers in the UK have produced an average return within or above their composite return targets in 2024.
According to a report from Barnett Waddingham, during a year when equity markets performed strongly, passive equity should have benefited portfolios.
It stated that those who had equity protection strategies in place, as well as those with highly active strategies (including ESG-focused strategies), typically detracted from performance.
It added that the liabilities +2.5% to 3.5% composite outperformed to the greatest extent, which it said is not “surprising given the market environment”.
Barnett Waddingham highlighted the divergence in liabilities of +0.5% to 1.5% as “interesting”. It explained that there are different objectives within this composite, such as buyout versus run on, and pointed out the increase in different portfolios with varying use of credit, equity and liquid assets.
However, the consultancy said that while the median returns over the five years to the end of 2024 were within range at the lower end, the performance was “not outstanding”, especially considering the market environment.
Fiduciary managers struggled to meet their performance target for the liabilities +2.5% to 3.5% composite on average, according to Barnett Eaddingham. In addition, portfolios within this composite differ in make-up, with some managers having significant equity exposure, while others rely on more diversified strategies or significant private markets exposure.
Barnett Waddingham added that the difference in hedging levels and approaches to reviewing hedging will have had a significant impact on performance.
Earlier this year, a report from XPS Group highlighted that fiduciary managers’ growth portfolio returns ranged from 5.2% to 12.5%.
Analysing 17 model portfolios from 14 fiduciary managers, XPS said that 15 out of 17 models beat the average performance from diversified growth funds over the year of 6.6%. None of the fiduciary managers, however, was able to provide returns higher than a 60/40 portfolio.
It added that despite the strong performance of equity markets, low allocations to equities combined with relatively more exposure to return-seeking and investment-grade credit meant they struggled to keep pace with the high level of returns.
Managers downgrade equity expectations
However, with trade disruptions and geopolitical risks in mind, following the introduction of tariffs by US president Donald Trump earlier this year, fiduciary managers are now adjusting tactical equity allocations, with one-third (33%) of managers downgrading their overall equity outlook.
A survey conducted by Isio highlighted that fiduciary managers’ sentiment on global equities has deteriorated since Liberation Day, with two-thirds (66%) saying the tariffs have had a negative impact on return opportunities.
This has paved the way for renewed interest in investment-grade credit. Isio found that one-third (33%) of fiduciary managers believe the asset class is now more attractive for short-term returns, noting that widening credit spreads after a prolonged period of tightening presents an attractive opportunity for some fiduciary managers.
Despite the turmoil caused by tariffs, most fiduciary managers are sticking to their guns. Three-quarters (75%) maintained their long-term strategic asset allocation, largely avoiding reactive decision making in response to short-term market volatility and believing in their ability to navigate periods of economic stress.
Outside of equity markets, Isio found that most fiduciary managers advocated for rebalancing activity only, allowing portfolios to drift with market movements and “ride out choppy markets”.
But according to Isio’s research, fiduciary managers were generally well-prepared for this market volatility. Almost all (91%) fiduciary managers reported being underweight in the ‘magnificent seven’ US tech stocks, mitigating exposure to the most volatile market moves and limited downside for schemes otherwise heavily invested in growth assets.
Isio also found that liability hedging targets remain broadly unchained, given fiduciary managers typically hedge close to 100% of assets where affordable. However, fiduciary managers are currently holding higher levels of cash as collateral to support liability hedging arrangements, in order to respond to any attractive market dislocations.
Paula Champion, partner and head of fiduciary management oversight at Isio, said that managers have responded “well” to a shifting investment landscape, where global uncertainty and evolving market dynamics are prompting a more defensive stance.
She said: “The reduction in equity exposure and growing interest in credit demonstrates a pragmatic response to near-term risks and opportunities.”
Champion particularly highlighted a “clear distinction” between short-term tactical moves and long-term strategic discipline.
“While there may be opportunities to utilise market dislocation, lower equity pricing and widening credit spreads, investor confidence has been damaged, and we can expect volatility to continue. Fiduciary managers have proven they are adept at responding to volatility without losing sight of the long-term plan but, against the current backdrop, schemes will be seeking confidence that the plan is still the right one to meet their objectives,” she concluded.
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Pamela is IPE's UK correspondent.
Before joining IPE in May 2023, she spent five years writing about the insurance industry.
During her career so far she won awards for Most Promising Newcomer in 2020 and Best Investigative Article in 2022 from the British Insurance Brokers Association, and was also highly commended at the WTW Media Awards for Insurance Features Journalist of The Year.View full Profile
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