Private markets will be an important part of future growth stage asset allocations for DC schemes, helping maximise returns for investors.
This was one of the main discussion points in a panel event at Corporate Adviser’s Master Trust & GPP conference, looking at asset allocation strategies in the DC sector.
Those on the panel remained confident that greater allocations to private markets would boost returns. Isio senior investment consultant Jacob Bowman pointed out such allocation had been delivering for DB schemes for a number of years, through multiple vintages.
“There is a long track record in the DB space and overseas. LTAFs (Long Term Asset Funds) may be a new vehicle, but the underlying assets are not.”
Barnett Waddingham head of DC investment Sonia Kataora said this shift to diversify into private markets, would see more partnerships between providers and asset managers, particularly those with experience and expertise in this area. “They will be looking to work with managers who have built deep networks in this sector, enabling them to access relevant investment opportunities,” she said.
While she said these assets have the potential to deliver returns for members she said the challenge will be investing on scale.
However Standard Life head of investment proposition development Callum Steward said that company was already able to make direct investments into private markets. He added that the company was also able to utilise the partnership between its parent Phoenix and Schroders on this issue.
He said: “It is not scale that is the challenge, but is ensuring you have the right pipeline of opportunity. There will be a range of returns expected with private equity markets. We want to be in the upper band of those returns to deliver for members so it is finding the right investment opportunities.”
Bowman said that one often overlooked aspect of this, is that DB schemes have considerable holdings in private markets, and some will be looking to exit these investment early, particularly if they are targeting buy-out.
“No-one seems to be talking about this and where there is a solution that will see DB schemes could sell on a secondary market to DC schemes.” He said this had the potential to “super-charge” private market investments into DC.
This raises the question of the valuations of these assets, with DB schemes potentially looking to exit early without “taking a hair-cut” but DC schemes wanting to ensure they are not overpaying for these assets.
Diversification options
Private markets will enable DC schemes to diversify more effectively. The panel also discussed whether this might be extended to other asset classes, in particularly gold. Kataora said there was a potential role for schemes to use gold in tactical allocations. “It can be a tactical plan, and can perhaps make portfolios more resilient particularly in ore extreme market conditions.” She added she did not see as much as a role for it in growth phase investment strategies but would be more useful when looking to de-risk.
However Jeremy De Pessemier, global asset allocation strategist with the World Gold Council pointed out that it also had a role to play in strategic asset allocations within the growth phase, saying its potential value was often overlooked. He pointed out that over the past 20 years gold had delivered annualised returns of 10 per cent. He added that it can also offer attractive ESG characteristics.
Benchmark options
The panel also discussed the incoming Value for Money framework and the potential impact on allocations. One issue under debate was the potential use of benchmarks. Should schemes be allowed able to pick their own benchmarks when it comes to investment performance, something that to a degree is contained with the VFM framework, or should there be an industry standard?
Bowman said there was a danger that an industry standard would produce “herding” as has been seen to a certain extend in the Australian market, with the danger that some providers will simply aim to meet a set target, and not necessarily maximise returns over and above this.
However he says that simply picking a benchmark to make the scheme look good “isn’t particularly good option either”.
Kataora said: “What is important is the scheme known what it wants to provide for members and there is a clear articulation of that so employers can see what they are getting.”
Stewart said that there is often an over-complication when it comes to these benchmarks, with issues like risk-adjusted returns, volatility or the Sharpe ratio taking unnecessary prominence. “I think we have to think about what the long-term saver would expect to see. They would want to see their pension provider maximise their money for retirement. So the benchmark is long-term net returns. I don’t think people retiring are going to be too impressed if their provider subsequently says well 20 years ago your pot was less volatile. This isn’t meaningful to most savers.”
