Adviser attitudes to illiquid assets

The provider asset allocation tables show a massive variation in approach to growth and volatility control at all stages of the savings journey. Approach to risk is

Given the high importance that consultants and advisers place on the quality of the default fund, providers will be expected to innovate to remain competitive, requiring them to apply resources to improving their offering. Feedback from advisers, consultants, providers and asset managers indicates that diversifying into asset classes not currently used by DC schemes is one avenue likely to gain approval from intermediaries. Intermediaries are divided over their attitudes to asset allocation, but all want improved returns and lower risk. Diversification that can move a provider’s proposition to a more efficient risk/return position will be welcomed by intermediaries as likely to improve member outcomes.

Given auto-enrolment schemes’ cash-generative position, illiquid assets typically used by defined benefit schemes, such as infrastructure, property and private equity, can arguably bring diversification benefits to default schemes.

A majority of consultants and advisers (57 per cent) believe schemes should be seeking exposure to illiquid asset classes as soon as they have sufficient scale.

a contentious issue for advisers and consultants, with opinions over the extent of equity and other high risk/return asset exposure in the growth phase strongly divided between those backing an all-out pursuit of growth in the belief long-term investors can afford to take the rough with the smooth, and those seeking to smooth the peaks and troughs to avoid member disengagement in the event of a downturn.

The average default fund had an equity exposure of 74.6 per cent, as at 31.3.18, for savers in the growth phase, but individual schemes demonstrate widely varying levels of equity exposure, ranging from 38 per cent to 100 per cent. Some schemes with a low equity exposure also had some exposure to other growth assets, but the overall range of approaches varied considerably.

Consultants and advisers have a wide range of views on approach to the level of risk to be taken through the asset allocation structure of defaults. More than a third of consultants and advisers (35 per cent) believe that for growth-phase investors, 100 per cent of default fund assets should be in equities and other high-risk assets. Almost half (49 per cent) wanted some form of volatility damping, while 16 per cent saw a strong emphasis on controlling volatility as a top priority.