After a volatile start to the year, all major DC default strategies have delivered positive returns for members in the second quarter of this year, according to Isio research.
The pension consultancy’s latest analysis of 14 DC master trusts, show both growth-stage and at-retirement default strategies delivered positive returns over the last three months.
However, Isio says there remains a significant dispersion in returns. Over this three month period, returns on growth stage defaults ranged from 11.9 per cent to 19.8 per cent. This compares to a range of +0.9 per cent to -4.5 per cent in Q1.
Isio says longer-term outcomes remained significantly stronger, although there is again a significant different in returns between different providers. On growth stage strategies one-year returns ranged from 21.1 per cent to 34.3 per cent, with three-year annualised returns ranging from 14.3 per cent per annum to 22.7 per cent p.a.
For at-retirement strategies returns range from from 4.6 per cent to 7.9 per cent over Q2, with one-year returns ranging from 8.9 per cent to 16.4 per cent. Three-year annualised returns ranged from 7.6 per cent p.a. to 12.3 per cent p.a.
The consultancy firm says this variation in outcomes continues to highlight the importance of strategic design decisions within default strategies. While equity allocations remain a key driver of returns, particularly at the growth stage, regional and sector positioning can also produce meaningful differences between providers.
Isio adds that providers are also gradually introducing private market exposures and broadening diversification. As allocations to private equity, real assets and private credit become more established, they have the potential to introduce additional sources of return and lead to greater differentiation between strategies over time.
Isio points out that the positive returns over the last quarter follows the strong rebound in global equities over this period, as geopolitical tensions eased and oil prices fell, improving investor sentiment.
It adds that over this period emerging market equities outperformed developed counterparts, led by the technology-heavy markets of South Korea and Taiwan. Meanwhile UK equities underperformed the US and Europe, while credit markets delivered positive returns despite continued uncertainty around interest rates.
However it adds that for at-retirement strategies performance was not determined solely by the level of equity exposure. Providers with lower equity allocations were still able to deliver competitive outcomes, reflecting differences in regional positioning, fixed income and alternative asset exposures, and overall portfolio construction.
Isio head of DC master trust research Mark Powley says: “Q2 was a reminder of how quickly market conditions can change. Following a volatile start to the year, markets rebounded strongly and all of the growth-phase strategies in our analysis delivered positive quarterly returns.
“What’s notable is that providers have generally maintained a disciplined, long-term approach rather than reacting to short-term market movements. Members who remain invested are better positioned to participate when markets recover, while attempting to time those turning points remains extremely difficult.
“We also continue to see the importance of diversification at retirement. Equity exposure remains an important driver of returns, but it does not explain the full range of outcomes. Regional positioning, fixed income, alternatives and implementation decisions all matter as providers balance capital preservation with the need for continued growth.”