UK master trusts with a high foreign equity allocation achieved a significantly better performance compared with those investing in domestic equity, and in bonds and alternatives, according to LCP’s recently released third annual master trust report.
LCP’s report highlights the disparity between overseas equity returns at 22.6% over the year compared with the UK equity returns at 7.9%, showing that master trusts with high investments in overseas equity had the best chance for a strong annual performance.
However, overseas equity investments do not align with the UK’s chancellor of the exchequer’s plan to help grow the nation’s economy via investments by defined contribution (DC) pension schemes, including master trusts, in UK-based companies.
Master trust investments
Overseas equity markets led all major asset classes by a significant margin in 2023. Hence, many leading master trusts including Aon, Fidelity, LifeSight, and others, have allocated nearly 100% of their growth phase to global equities.
Master trusts with a more diversified portfolio, especially those with a high allocation to government bonds, saw their annual performance fall short. The best performing master trust recorded returns of 17.3% while the worst performer saw returns of 7.9%, amounting to a difference of over 9% over the year, according to LCP’s research.
Mansion House reforms
Jeremy Hunt, chancellor of the exchequer, has called for pension funds – master trust and (DC) schemes included – to invest in the UK market, more specifically through a diverse investment portfolio of bonds, equities and unlisted assets.
It remains to be seen how master trusts will respond to the chancellor’s statement, but Nigel Dunn, author of the LCP report, predicts that “as master trusts begin to add allocations to illiquid assets such as infrastructure, we are likely to see that these investments have a bias towards the UK on the basis that in some cases, it will be more cost-efficient to invest in UK assets”.
On the eve of a growing national debt, the UK needs to find financial support, and pension scheme investments from master trusts remain an appealing option for the government.
In early March, the government announced the introduction of a £5,000 Individual Savings Account (ISA) allowance in addition to the existing allowance to support investments in UK companies. According to Dunn, there could possibly be a similar taxation reform for master trusts.
“Master trusts already enjoy a favourable tax environment for investing on a global basis, so this could be an area that the government looks to address to favour investing in UK companies in the future,” he added.
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