The ultimate choice

Now in its fourth year, the Corporate Adviser Ultimate Default Fund competition has tracked the investment strategies that have attracted intermediaries.

We may not like the name ‘default’, but these funds are not only here to stay, but with the focus moving from the hunt for star fund managers to a more realistic emphasis on charges and asset allocation, they are likely to see an increasing role in workplace pensions.

Default funds are coming under scrutiny in a way that has never previously been seen. With the Government soon to launch its own mega-default fund, advisers and providers have been focusing on how to come out with something better. Tracker, target return, multiasset, balanced or cautious, all have fared differently in the rollercoaster that has been the last few years of market turmoil. And the idea that default funds are good, and not bad, is gaining ground. These factors have given renewed impetus to the industry’s search for the Ultimate Default Fund. Corporate Adviser readers know and understand better than anyone else what a good default fund should look like, and this online poll is our
opportunity to see where the default debate is taking us.

This is your chance to have your say in the great default fund debate, and win a case of 12 bottles of champagne. The shortlist for this year’s poll has been selected by our panel of experts and extends across a range of solutions available to advisers. Last year’s poll was conducted against a backdrop of the most extreme financial pain for pension investors. Markets have since rebounded.

To see how advisers’ views have developed, have decided to keep both last year’s winning fund, the Invesco Perpetual Distribution Fund and the previous years winner, the BGI Global Equity (50:50) Index fund, the only tracker in the list. We have also kept in the fund that has performed best through the recent years of stockmarket volatility, the Ruffer Total Return Fund, which has returned 41 and 67 per cent over three and five years respectively.

The last 12 months has seen the development by insurers of default solutions which include some form of governance, taking on the role of switching assets between funds on behalf of schemes. To accommodate this trend we have extended the remit of our poll to not only cover default funds, but default fund solutions, and the Scottish Life Governed Range makes the shortlist. Our shortlist is completed by strong contenders in the shape of the Newton Real Return Fund and the Skandia Index Balanced Fund.

The shortlist we have before you may not be definitive – but it does give a representative view of some of the more popular approaches to defaults available on the market today. Over to you to vote and win.

THE SHORTLIST and how the experts justify their nominations

SKANDIA INDEX BALANCED FUND
Nominated by Joel Adams, chief executive of Chartwell-Financial

The Fund we would use in these circumstances is the Skandia Index Balanced Fund, overlaid with a 5 year “lifestyle” switching strategy.

The Skandia Index Balanced Fund invests in a well diversified portfolio with a long term asset allocation of global equities and global fixed interest securities and cash, with a bias towards the UK. The TER of the fund is only 0.2 per cent a year, making it a very compelling choice for a default fund.

Performance is sought through a combination of stock selection and asset allocation between markets and the performance of the fund is therefore determined by movements in both asset prices and currency exchange rates.

The investment selection and monitoring decisions for the fund are delegated to Skandia Investment Management Ltd, enabling investors to benefit from their unique “Managing the Managers” approach. Through this approach, the best managers are identified and blended to offer the best mix of investment style and process in each sector; if a manager fails to meet their objectives, they are replaced.

The fund is expected to be a consistently steady performer and has successfully achieved this target by outperforming the median fund in the balanced managed sector over every discrete timescale from 6 months to 5 years.

NEWTON REAL RETURN FUND.
Nominated by Jesal Mistry, consultant, Aon Consulting

The search for the ‘ultimate default fund’ has seen many different ideas and structures. Our view is that a default fund should seek to provide equity-like long-term real return whilst limiting the member’s exposure to downside risk. Its investment strategy and its performance measurement must be clear and easily understood – after all, the ultimate aim of the default fund is to give members a straightforward method of pension investment.

Our preference is to use a fund that targets absolute return for the default fund. The advantage of diversification in an unconstrained environment is that the manager is able to use his knowledge and expertise to deal with the various different market conditions. This is very different to the traditional balanced managed approach, which often restricts a manager’s control over the fund.

The Newton Real Return Fund (formerly the Absolute Intrepid Fund), although not currently available through all of the insurers, provides a healthy balance between protecting capital and retaining growth, and is easier for members to understand than some similar funds within this space because it invests mostly in traditional liquid and listed investments.

The fund’s performance over the last three years has beaten its target and produced this with a much lower volatility than not only equities, but also a lot of peer funds. The combination of an experienced manager together with an effective strategy means that we believe the Newton Real Return Fund is the Ultimate Default Fund.

SCOTLIFE GOVERNED RANGE.
Nominated by Jason Walker, senior manager at AWD Chase de Vere
In the current climate, and with the general lack of trust in the pension market, governed strategies make sense.

As more and more final salary schemes close, GPPs will become more important and responsibility for investment decisions will be passed from trustees or employers to the employee. Increasingly, employees will seek help, either advice from the IFA or help in the form of a carefully planned and well designed default option.

Advisers in the GPP market are under increased pressure, yet still need to provide top quality service in this demanding environment. To help advisers achieve this, a flexible default range is needed — one that matches individuals’ attitudes for risk; reflects different lifestages during the working lifetime; and has a level of governance that ensures ongoing quality and suitability for the individual. So no “one size” solution will fit all needs, and a ‘default’ fund, in my view, cannot be a straightforward concept. Ideally it needs to offer choice, flexibility and governance.

Scottish Life have developed their Governed Range to enable advisers to deliver exactly this. There are a range of risk profiled portfolios, automatic rebalancing for investors and increased flexibility for life styling. The governance means that there is a formal review process, which includes an investment advisory committee to review +investments and the use of analysis from investment risk management experts Barrie and Hibbert. The Scottish Life Governed Range offers the flexibility and governance that I believe a default option should have in order to meetclient and adviser needs in an increasingly complex market.

RUFFER TOTAL RETURN FUND.
Nominated by Andrew Coveney, investment director, Barnett Waddingham
During the last few years, we at Barnett Waddingham Investments have referred to the global economic environment as “The Great Experiment”.

This phrase refers to de-leveraging and lack of demand in private domestic economies (deflationary?) and the huge increase in borrowing and money creation by governments in an attempt to counter this (inflationary?). Adding to this, it has become apparent that some countries have weathered the financial storm far better than others. Historically stable financial environments such as those in the UK and US have been far less stable than investors had predicted.

One thing is clear, the scale of the imbalances and ‘remedies’ administered by governments mean that investors are faced with a set of circumstances unlike those most would have experienced during their lifetimes. That said, investors still have decisions to make with their money. Default funds are still likely to attract the bulk of contributions to workplace defined contribution plans.

With these thoughts in mind, our choice for the Ultimate Default Fund remains the Ruffer Total Return Fund. Rather than past investment performance, it is the consistent philosophy followed by the manager and the care and innovation with which research and fund management are carried out which continue to attract.

BGI GLOBAL EQUITY (50:50) INDEX FUND.
Nominated by Martin F West, senior actuary, Capita Hartshead
Although it’s been a challenging decade for most funds with significant equity content, I think the BGI Global Equity (50:50) is still the most appropriate fund for the accumulation part of a default programme.

The fund is not aiming to outperform the sector, however, the fact that it is firmly in the second quartile over 1 and 5 years to 30 November 2009 demonstrates how passive management has consistently compared well with active management. This reflects the difficulties that active managers have had in outperforming indices in recent years, and the typically lower charges which apply to passively managed funds. Over 5 years the fund has increased by 40 per cent or an annual average return of 7 per cent.

I believe the 50:50 weighting between the UK and Overseas markets remains appropriate. This remains the right balance to obtain the benefit of diversification and exposure to overseas economies. Overseas Equities generally did better than UK Equities over a 5 year period so the higher than average exposure to Overseas Equities has helped this fund.

So the question is really whether a Global Equity fund is appropriate. For the long term investor I believe it is, they can afford to take the risk, and therefore gain the reward, of being a long term investor. Short term volatility, even on the scale seen over the last two years, is not a concern if you are not going to be taking benefits for at least 10 years. Looking over the last 5 years equities have performed better than the other main asset classes, property, bonds and cash.

Many employees will be paying contributions in on a monthly basis so achieving the benefits of pound cost averaging, where more units are bought when unit prices are low.

INVESCO PERPETUAL DISTRIBUTION FUND.
Nominated by Peter Duerden, formerly investment adviser at Taylor Patterson Wealth Management
Peter Duerden is no longer with Taylor Patterson Wealth Management, but he said this when he nominated the Invesco Perpetual Distribution Fund last year.

“The main two asset classes available for UK investors are equities and fixed interest securities. The Invesco Perpetual Distribution fund, which is in the IMA Cautious Managed sector, aims to provide a balanced return of income and long-term capital growth by investing in these areas. At least 60 per cent of the fund is invested across a diversified range of bonds with a significant exposure to high-yielding bonds, which means that there is more risk to capital and income than from a fund investing in Government or investment grade bonds. The remainder of the portfolio invests primarily in large UK blue chip stocks seeking companies with stable cashflows, attractive valuations, strong dividend growth and low levels of debt.”