The rise in the use of master trusts over the past seven years has been phenomenal, going from a relatively niche option serving the needs of smaller employers, to now often being seen as the defined contribution (DC) vehicle of choice. Up until recently, there has been very little in-depth analysis of the investment performance of the master trusts in this rapidly growing market, particularly at different stages of the retirement journey.
Recognising that there are distinct phases in the retirement savings journey, which may require a different investment approach in each phase, our latest analysis (to 31 December 2018) compares performance at each of these phases, which include:
• Growth phase - thirty years to retirement, lower fund amounts where contributions dominate, savers are relatively unengaged and won't notice volatility. This is also the phase where savers benefit most from pound cost averaging on returns
• Consolidation phase - ten years to retirement, savers more engaged with fund levels and sensitive to the impact of volatility on returns
• Pre-retirement phase - one year to retirement, savers highly engaged and sensitive to any negative returns
Growth phase overall performance
Equity markets fell over the course of 2018 and this led to negative annual returns across the growth phases of all providers. However, over a five-year timeframe, equities have significantly outperformed most other asset classes, despite the blip last year.
Those providers with a higher allocation to equities have generally outperformed, all else equal. The decision to currency hedge global equities (back to sterling) or not was another significant driver of growth phase returns.
Consolidation and pre-retirement phases
The more diversified nature of the investments within the consolidation phase did improve returns relative to the growth phase in 2018, but not enough to generate positive returns among the majority of providers. We've provided more in-depth insights in the section below on the types of return profiles that were generated in 2018, based on the style of diversified funds employed within different consolidation phase strategies.
Up until recently, there has been very little in-depth analysis of the investment performance of the master trusts
After analysing the data trends in the pre-retirement phase, we found that they were remarkably similar to the trends that occurred as the consolidation phase.
Dynamic vs static approaches
In previous default fund investment performance analysis we've carried out, it has been noted that most of the master trusts who employ a more strategic / static asset allocation approach in their default investment strategies, have tended to outperform relative to those with more dynamic, "go-anywhere" approaches. We have also observed that those who used more dynamic approaches were also generally more defensive (in terms of investment strategy) over the measured periods.
Prior to 2018, these more defensive strategies would have struggled to keep up against strategies that allocated heavily to equities over the previous three years. In 2018, there were two significant episodes of equity market downturns - one towards the start of the year and another towards the end. These downturns provided a chance for the more dynamic and defensive approaches to demonstrate their ability in a more volatile environment.
However, the actual performance results proved far from conclusive when it came to assessing whether the dynamic approaches had actually done better and delivered better value for money in 2018. The results were also complicated by the fact that there has been an equity market rebound at the start of 2019.
With the benefit of hindsight, the ideal scenario for the more dynamic strategies would have been to be defensively positioned from Q4 2018 and adding significantly more equity risk from January 2019. In practice, and on average, this has not been the case for the master trust default funds we analysed. With the significant increase in market volatility, the results of glidepath design have been fairly intuitive.
Those adopting the more traditional lifestyling or target date approach have seen their members who are further from retirement experience lower returns than those members who are closer to retirement (as these glidepaths / target date funds generally adopt more defensive positioning as members approach retirement).
The only true way to measure success within a DC context is to monitor performance relative to objectives over the appropriate time horizon that usually corresponds to a retirement date. Even this date is uncertain despite the best intentions of members.
We are starting to see track records of the master trusts highlighted in this article build out and include cycles of strong and weak market returns. The remainder of 2019 will be interesting as we monitor how many of these strategies will navigate an even more prolonged lower-for-longer environment
Michael Ambery is a Senior Consultant at Hymans Robertson
