The result of this year’s Corporate Adviser Ultimate Default Fund competition shows that low charges and exposure to equities are both of great importance to advisers when selecting a default fund for a workforce. The winning fund, the BGI Global Equity (50:50) Index fund, from Barclays Global Investors, is our readers favourite default fund, garnering almost twice as many votes as its nearest rival.
With more than 3m UK workers saving for their pensions in default funds in schemes where they bear the full risk and have no trustees acting on their behalf, the responsibilities of advisers and providers in making sure their money is in the right place has never been greater. And with moves afoot at a regulatory level to demand improved performance from defined contribution holdings, together with the Personal Accounts Delivery Authority’s task of creating its own ultimate default fund, focus on these often ignored funds can only grow. Quality default funds can go a long way to reducing consumer detriment.
There is no single default fund that is suitable for every business in the land so to set the competition on a level playing field we asked eight intermediaries to nominate a fund that best matches the needs of a company with 1,000 employees with an average spread of ages and skill sets. The challenge was to find a fund that would serve well for the growth stage of their pension saving – acknowledging the fact that many funds would be expected to be used in conjunction with some form of process to manage risk in the years before retirement.
We asked advisers to select a default fund for an employer where at least 80 per cent of scheme members are not expected to be getting individual face-to-face advice and are likely to end up in the default option. The default is to be offered through a contract-based scheme and its objective is to achieve maximum returns for members without taking risks that employers are likely to find unacceptable.
Martin West, director at Gissings is the adviser who championed the fund that you, the readers, elected as this year’s winner. “Equities will generally maximise expected returns over the long term, and a 100 per cent investment in equities is generally best practice for members more than five years from retirement,” says West. “An equal split between UK and overseas equities is appropriate to achieve sufficient diversification benefit and to take account of the concentration of large stocks in the UK stockmarket. The equity funds should be passively managed. This removes the need to constantly monitor and review managers and select a new manager if the existing one underperforms. In this way manager risk and administrative complexity can be avoided by using passive managers from the outset.”
Supporters of passive management would say this result marks a clear victory for passive as the solution to long-term fund management over active? West says the 25 per cent vote for the BGI fund is a clear indication of intermediaries’ support both for funds operating at a cheap annual management charge, and also those that give a 100 per cent exposure to equities.
“When it comes to getting returns, it is 80 per cent down to asset allocation and 20 per cent down to choice of fund manager, so the 100 per cent equity allocation is clearly important to advisers,” says West.
He disputes the argument that 75 per cent of votes went to funds that weren’t trackers – but does accept that if, say Legal & General’s global tracker had been on the voting list then the passive vote could have been split. But it would have to have been split pretty much down the middle to be beaten by the second placed fund, Schroder’s Managed Balanced fund, which got 15 per cent of the poll, or Aegon Scottish Equitable’s Universal Lifestyle Collection and Standard Life’s Pension Managed One fund, which came in equal third with 13 per cent of votes.
What the vote does amount to though is an endorsement of trackers, which can be seen as a snub to active fund managers. The active versus passive debate will doubtless carry on for years to come, but Ben Yearsley, investment manager at Hargreaves Lansdown, is not surprisingly for a fund distribution company, a fan of active management. “It is in my view right to say that active management is better than low-cost passive management because the returns you are likely to get will outweigh the savings you might make by having an annual management charge of 0.3 or 0.4 per cent.”
Yearsley makes the point that there are actively managed possibilities out there with relatively low annual management charges. “The Hargreaves Lansdown in-house group Sipp for employees is the Schroder Managed Balanced fund, which gives up to 80 per cent equities through an unfettered fund of fund structure for 0.8 per cent,” says Yearsley.
He believes that many corporate advisers’ attachment to passive management is in part a remnant of the stakeholder charge cap. “When stakeholder came in we had a situation where advisers had to get fund management, advice and pensions administration all within 1 per cent,” says Yearsley. “That has pushed many people towards trackers as of necessity.”
That is a view shared by Adam Potter of Aegon Scottish Equitable. “Because of the price cap environment, you end up with a sentiment that says ‘I can’t put anything else on this product,” says Potter. “Arguably the best product to have been in over the last 10 years is something like Fidelity South East Asia, because pound cost averaging means you will have been buying shares at different prices, so the volatility wouldn’t matter, yet returns have been great. But the problem advisers face is they find it hard to offer funds that cost more because they do not want to be criticised for not advising within a price cap. Regulation has pushed advisers down this route.”
Cost is one issue that advisers have to contend with when putting in place workplace schemes for staff with no individual advice, but equity exposure and risk profile are also clearly significant. Interestingly this year’s shortlist is noticeably higher on equity content than last, when Investec’s Cautious Managed fund came out on top.
That fund currently has a 55 per cent equity exposure, compared to the 100 per cent equity content of this year’s winner. It would seem that if the trend in the intermediary community is towards more equity exposure than less, then volatility is a subject that advisers will have to do more to educate employers and employees to take in their stride.
Volatility is of course one thing that employers, who have to manage staff reaction to falls in stock values, can do without, but given that employers also want their employees to have enough money to be able to afford to retire when they are in their 60s, it is something that everybody has to live with to one extent or another. All of the funds in our competition have different risk profiles, and have performed differently both through the rising market of the last four years and more specifically in the rollercoaster of the last 12 months.
Past performance is of course notoriously subjective, depending on what timescale you choose, as the graphs on the opposite page demonstrate. For example, the Ruffer Total Return fund, which came bottom in our poll, perhaps not surprisingly given the big names the fund manager was up against, has performed far better than all of the rest of the competition through the recent market volatility, actually defying the chaos in the markets caused by the fallout from the US sub-prime sector and the SocGen rogue trader debacle to post a positive return of over 3 per cent since last November. Friends Prov’s Stewardship fund fell 12.8 per cent over the period. For employers concerned about what market volatility does to employees’ engagement in their pensions, the Ruffer fund clearly has its positive points.
Over three years, however, our winner, the BGI global tracker comes out on top, while over five years Friends comes out ahead of the field, with a 106 per cent return, 26 per cent up on the bottom placed Ruffer fund. Yet interestingly, running the figures over six years the Ruffer fund comes out on top, all of which shows the near-impossible task advisers have in choosing a fund that is going to beat competitors for all members over several decades.
The parameters for the Ultimate Default Fund voting process were designed to take the risk issues of getting funds out of a scheme in the years before retirement out of the equation. Lifestyling or other risk reduction strategies are often laid on top of existing funds and West says his ideal default arrangement for pension schemes is the BGI Global Equity (50:50) Index fund housed within a Friends Provident pension structure so employees can be moved towards the FP Annuity Protector fund within five years of retirement.
Friends alone has £600m invested in the BGI Global Equity (50:50) Index through its group pensions, so add to that all the other life offices in the entire market and it is clear that this year’s winner is already popular with the advisory community generally.
“The fund is managed by BGI who are experts in passive management, having created the world’s first index fund back in 1971,” says Marc Haynes, manager of fund strategy and selection at Friends Provident. “This fund was launched in 2003, and covers the FTSE All Share in the UK, which makes up 50 per cent of its holdings, and similar indices in the US, Europe, Japan and the Pacific rim.”
Congratulations to BGI for constructing our winning fund, and thanks to all our fund champions for creating such a lively debate.
Expert view – Martin F West’s lifestyle choices
“When it comes to getting returns, it is 80 per cent down to asset allocation and 20 per cent down to choice of fund manager, so the 100 per cent equity allocation is clearly important to advisers”
Martin F West, dirextor Gissings
The lifestyle option with Friends Provident is available at 3, 5 or 10 years before Selected Retirement Age. The accumulated fund and ongoing contributions are gradually switched on a monthly basis into the annuity protector and cash funds until at retirement the total fund is allocated 75 per cent annuity protector and 25 per cent cash.
Gissings normally recommends the 5 year lifestyle option, as this gives the right balance between equity exposure, security and reduced volatility as retirement approaches. Under this option, 3 years before retirement the fund is allocated 60 per cent accumulation fund, 40 per cent annuity protector. At retirement the total fund is allocated 75 per cent annuity protector and 25 per cent cash.
The annuity protector fund invests in government gilts and is designed to protect the investor from changes in annuity rates (the rate for converting fund into pension at retirement).
The cash fund invests in short term deposits and typically achieves a return close to the Bank base rate. This part of the fund is designed for the investor to take tax free cash from.
The BGI fund is available through Friends Provident at no additional charge, since it is a passively managed fund. Other actively managed external fund Links are available but normally subject to an additional charge.
AEGON Scottish Equitable Universal Lifestyle Collection
Nominated by Douglas Chrystie, director, Chancery Group
Schroder Diversified Growth fund
Nominated by Chris McWilliam, senior consultant, Aon Consulting
BGI Global Equity (50:50) Index fund
Nominated by Martin F West, director, Gissings
Ruffer Total Return fund
Nominated by Andrew Coveney, investment director, Barnett Waddingham
Standard Life Pension Managed One
Nominated by Glen Campbell, employee benefits director, PIFC Consulting
Insight Diversified Target Return fund
Nominated by Scott Wylie, investment manager, Kudos Independent Financial Services
Friends Provident Stewardship fund
Nominated by Michael Whitfield, managing director, Thomsons Online Benefits
Schroder Managed Balanced fund
Nominated by Tom McPhail, head of pensions research, Hargreaves Lansdown