All-out growth or volatility control? When it comes to savers with decades to retirement it is surely one of the greatest questions those charged with managing defaults face.
Of the more than 30 default funds reflected in the www.capa-data.com data set, it is a relative minnow, the £40m, 5,000-member Supertrust UK Master Trust, which has Lord Ashcroft as a prime scheme funder, that has delivered the highest level of return over the last five years.
Supertrust UK director Malcolm Delahaye fully accepts that his scheme has been lucky, as have its members, who are now sitting on cumulative growth of 65 per cent over the five years to the end of 2018, more than double the return of some very large master trusts that opted for a more cautious approach. The fund – which is in the eye of the authorisation storm, having received an extension until 16th May – has delivered a five-year annualised return of 10.6 per cent for growth-phase savers, significantly above the 7.78 per cent mean for the sector, the Corporate Adviser Pensions Average (CAPA), which covers more than 95 per cent of the multi- employer DC market.
“When it comes to performance, we have been lucky, but that has been on the basis that we have gone for growth. We have had the conviction to do that,” he says. “Why would you suppress growth during the growth phase to reduce volatility?”
You don’t need to be an investment genius to understand that schemes that take a high level of risk will perform better in the sort of long-term bull market we have enjoyed since the onset of auto-enrolment.
As the www.capa-data.com risk/return tables show, the Supertrust UK default fund is the second riskiest in the peer group, with a five-year annualised risk of 9.9 per cent for the growth phase, compared to just 5.23 per cent for Standard Life’s master trust and GPP default. That fund has not surprisingly trailed in the performance stakes – but would have likely topped the tables if markets had been less generous. But it is notable that Standard has just dropped its GARS absolute return element from its default, while increasing its equity holdings.
Pension consultants are divided as to the value of volatility controls for younger investors. The extent to which members will opt out if they see falls in their fund is contested. Delahaye accepts there are asset classes that lack of scale will preclude the scheme from – illiquids are off the agenda for the present at least, he says – but he argues there are advantages to being nimble.
“It is a mistake to think that scale will guarantee the best outcomes. There is a misconception that the price you pay for investment has a significant impact – we think we pay the same for investment as bigger schemes.”
“But some of the bigger providers must be cumbersome because they have got FCA regulations as well as those from TPR and when they want to do something, are they doing it to achieve value for the member or to push their products?
“Then if they do want to change their products, they can’t just tweak them without having to explain what they are doing to lots of advisers across the market,” he says.
While big defaults will always struggle to switch asset managers, because the market can see them coming and move against them, smaller schemes can be much more flexible, he argues.
The Supertrust UK Master Trust has used four different asset managers over the last decade, including Close Brothers and Dimensional and is now with LGIM.
“We have changed investment managers on the basis of governance and price of products, not on the basis of performance,” says Delahaye. “We have 14 core funds of which six are used within the lifestyling strategy. Others can be used on a self- select basis.”
The default for young investors is very simple – 90 per cent global equities and 10 per cent UK equities – and Delahaye finds it hard to justify going away from that.
“We won’t be doing any illiquid assets. If we were bigger then we would be looking at infrastructure, etcetera. But the problem with that is when you start looking to diversify, you start getting into decisions and second-guessing how markets are doing. There is a lot is to be said for simple and low-cost. Defaults should be simple and low-cost. This should encourage more people to go and self-select,” he says.
Supertrust previously also had a relationship with Margetts Wealth Management, and Delahaye likes the idea of a default and then a small range of funds from a boutique for those that want to opt out.
The all-out growth approach is something of an evolution for Supertrust – in part precipitated by pension freedoms, but also by cost. Prior to that it was operating a managed DC strategy with Dimensional. “The idea there was to run each individual on an actuarial strategy based on their demographics, their age, their state pension – a smart default. You would apply a set of algorithms and come up with the replacement ratio. It was an LDI DC fund, but the cost was too high.
“All the consultants we spoke to thought it was a great idea – we tried it for three years – but whenever you met employers they would say, ‘what is your investment return?’ We would say that it is not about return, it is about the target.
“The market is not ready for that approach. It was an approach that would have worked when you had to buy an annuity,” says Delahaye.
But cost also proved to be a factor. Delahaye says the managed DC fund worked out at about 1.25 per cent a year. “This was because there was a lot of actuarial support in the black box – every individual, every month, had a funding target recalculated so you would de-risk or re-risk,” he says.
Cost is also clearly an issue for Delahaye when it comes to ESG. “We are supportive of the concept, but it comes down to price. We think it will increase the cost more than it will increase the return. We believe in managed DC but didn’t think that we could do it properly at the price. It is the same with ESG. You can only do it if the price is right and we think that involves 50 to 65 basis points to get it right, with active global funds,” he says.
Delahaye thinks Supertrust UK is the first DC master trust set up specifically for compulsory workplace savings.
“It started back in 2005 when the idea of Personal Accounts came out. At the time it was not possible for retail providers to sell products and make them compulsory. The concept of the DC master trust had not really been tested and HMRC did not like the concept of common trust funds. Then it leaked out that HMRC would exempt multiple employers in a single trust. So we set it up, but didn’t expect the ABI would lobby for contract-based providers to offer what was then Personal Accounts,” he says.
“We have a scheme funder but it has no power. The prime member of our scheme funder is Lord Ashcroft. He liked our story. He thought it was worth backing, but I don’t think he is into it for the money. I doubt much more than £1 million has gone in from the scheme funder. It has been self- financing for quite some time although that said, expenses have tripled with auto authorisation,” he says.
And is Supertrust UK looking to exit the market any time soon? “We have had approaches from the big master trusts. But we think our model has not yet fully developed its value. Our infrastructure and governance are as they should be and once we have got authorisation we will be one of only a few players and in a push to scale up,” he says.
“Buying other master trusts though is a mugs game. The revenue per member is next to nothing. We have looked at a few and they were basket cases.”