Pension defaults ranked 20th out of 27 investment strategies

Pension default fund returns rank 20^th out of 27 different investor types over 10 years, with returns lower than the return from the average global passive fund, according to research from AJ Bell.

The platform’s research found £1,000 invested in an ‘average balanced pension fund’, calculated by the ABI Pensions Mixed Investment 40-85% Shares sector average, would have grown to £2,096 in the decade to the end of 2021, slightly ahead of a random fund picker, which would have returned £2,072, and less than half the £4,917 returned by a growth investor following the MSCI World Growth Index.

Bitcoin investors have received the biggest return over the 10-year period, with a more than tenfold increase to over £11,000. The pension investor return is almost half that of a ‘performance chaser’ that follows the best performing sector of the previous year, a strategy that would have returned £3,967, and significantly below the average global stockpicker fund, at £3,501. The average global ESG fund beat the average global stockpicker, returning £3,627.

Total returns in GBP to 31 Dec 2021, Sources: AJ Bell, FE, Morningstar, ONS, Refinitiv, Bank of England, Cointelegraph

AJ Bell head of investment analysis Laith Khalaf says: “In the mixed asset sectors, 60/40 investors (60 per cent equities/40 per cent bonds) and pension default investors find themselves in the bottom half of the league table over both one and ten years. Seeing as these strategies seek to limit equity risk this is perhaps not surprising. However, it does suggest that many pension investors, who may have 20, 30 or 40 years until they access their money, could do significantly better by pursuing an equity-based strategy. Over the last ten years a typical balanced pension fund has turned £1,000 into £2,096. A decent return, but significantly less than the £3,435 that same pension investors would have received by choosing a simple global passive fund.

“Professional investment strategies tend to be characterised according to four main style factors: growth, value, quality and momentum. However, it’s clear that consumers have a much broader approach to managing their finances, which encompass not just these stock market factors, but other assets such as cash, property and more recently, cryptocurrencies. Some consumers invest actively, others prefer index funds; some follow specialist strategies, while others look to limit risk.

“There’s no exhaustive list of investment styles, and many retail investors will mix and match. But there’s a dearth of literature which compares the different strategies that consumers, rather than professional investors, might pursue. The AJ Bell Investor Strategy League seeks to address this by looking at the performance of some key styles, strategies and asset classes that ordinary savers might adopt, ranking returns over one and ten years. This is the inaugural annual report, and we anticipate it will slowly change over time to reflect new investment trends, but each edition should reveal some of the key factors affecting investor returns and provide some context for financial decisions in the coming year.”

Investment strategy definitions

All performance is presented on a total return basis in GBP. Categories market with a * include an element of survivorship which is likely to elevate returns.

Bitcoin believers – Bitcoin price change.

Tech heads – Legal & General Technology Index fund.

Growth investor – MSCI World Growth Index.

Quality investors – MSCI Quality Index.

Momentum investor – MSCI Momentum Index.

World’s best investor – Warren Buffett’s Berkshire Hathaway.

Performance chasers – invest in the best performing fund sector of the previous 12 months, and switch investments at the beginning of each year.

Small cap backers – Investment Association (IA) UK Smaller Companies sector average.

ESG Champions* – performance of the average ESG fund in the IA Global sector.

Global stockpickers* – performance of the average active fund in the IA Global sector.

International indexers* – performance of the average passive fund in the IA Global sector.

Investment trust investors – performance of the AIC Global sector average.

Value investor – MSCI World Value Index.

Egg spreaders – 20% invested in each of the following sector averages and rebalanced annually: IA North America, IA UK All Companies, IA Europe excluding UK, IA Japan, IA Global Emerging Markets.

Sin seekers – the USA Mutuals Vice fund.

Contrarians – invest in the least popular retail fund sector of the previous twelve months, as determined by Investment Association fund flow data.

60/40 disciples – invest in a portfolio comprising 60% equities and 40% bonds, as represented by the Vanguard LifeStrategy 60% Equity fund.

Property tycoons – an investment in the average UK property with no borrowing. Price rises are determined by the ONS House Price Index, and rental yields are assumed to be 5% at outset, net of fees and void periods, and are increased annually in year in line with the ONS Index of Private Housing Rental Prices.

Income investors – the IA UK Equity Income sector average.

Pension defaulters – the ABI Pensions Mixed Investment 40-85% Shares sector average.

Binky the cat – one of 2,700 retail funds in the IA sectors selected at random each year.

Herd investors – invest in the most popular retail fund sector of the previous twelve months, as determined by Investment Association fund flow data.

Institutional fund investor – invest in the most popular institutional fund sector of the previous twelve months, as determined by Investment Association fund flow data.

Bond buyers – the IA UK Gilts sector average

Bargain hunters – invest in the worst performing fund sector of the previous 12 months, and switch investments at the beginning of each year.

Gold bugs – gold price change

Cash savers – effective interest rate paid on the average Cash ISA account.