GET IN TOUCH
This is the 11th annual investigation Barnett Waddingham has conducted into the investment strategies of UK with-profits funds.
Participating firms
AEGON
Aviva
Chesnara
Cirencester
Dentists' Provident
The Exeter
Foresters Friendly
Forester Life
Healthy Investment
LV=
Metfriendly
M&G
National Friendly
NFU Mutual
Original Holloway
PG Mutual
Phoenix
Royal London
Scottish Widows
Sheffield Mutual
Shepherds Friendly
The Oddfellows
Wesleyan
Zurich
About the survey
The report is written for persons involved in the management of UK with-profits funds.
Our aim is to help UK life insurers determine whether their with-profits asset allocations remain appropriate for them, and whether their asset manager has performed well compared to peers.
The data* used in our report is private information that is not in the public domain. We approached the majority of firms who have with-profits funds in the UK, asking for information on asset allocations and investment returns. Our analysis this year covers £239bn of assets spread over 76 funds from 24 insurers.
The information in this report should not be considered sufficient for making decisions, nor should it be used in place of professional advice. This report (and the work carried out to produce it) is subject to and, in our opinion, complies with the Financial Reporting Council's technical actuarial standard (TAS) 100: General Actuarial Standards.
*We have used the information provided without any independent verification, although we have queried responses where these looked to be outliers. Where a small amount of data has been missing from our data request, we have populated it to be internally consistent with other data provided. Where this has not been possible, or where there have been large amounts of data missing, we have asked the survey respondent for clarification.
Executive summary
Looking back at 2023
Numerous events took place during 2023 that have contributed to it being a challenging year for investment performance. The key events include:
With-Profits
Funds
INVESTMENT PERFORMANCE AND STRATEGY
Helping insurers understand the drivers of performance
Analysis as at 31 December 2023
Persistently high, but falling, inflation and significant increases in interest rates from the Federal Reserve, European Central Bank and the Bank of England to counter high inflation.
Silicon Valley Bank, Signature Bank and Credit Suisse failed in March 2023. However, the overall market impact was limited as the US and Swiss governments and central banks stepped in.
Geopolitical tensions remain elevated due to ongoing Russian invasion of Ukraine and the Israel-Hamas war following the 7 October 2023 attack. However, the economic impact of the conflicts has stabilised compared to the impact of sanctions and commodity disruption in 2022.
Rising interest rates dampened property markets, with UK commercial property returning -0.5% and UK residential property prices falling by 1.4% over 2023. Global property also suffered disruption from rising interest rates but considerable differences across major economies.
Investment returns
Despite this challenging backdrop, every with-profits fund experienced a positive total return, with the average return being 8.32%. While on average, with-profits funds underperformed our benchmarks for most asset classes, we note that at an individual fund level large numbers outperformed the benchmarks on both a one-year and a five-year horizon. We note the funds may be managed to another benchmark as the benchmark used in this survey is chosen by us.
8.32%
Asset mixes
Most individual funds have a balanced asset mix backing their asset shares, and the average asset mix has remained relatively stable for many years, demonstrating a long-term investment view. There has been a switch within equity investments, with fund managers increasing the allocation of overseas equities and reducing the allocation of UK equities since 2022. Similarly, fixed interest holdings have shifted since 2022, with increased corporate bond allocations and decreased allocations of government bonds and cash.
The changes in equity allocations from UK to overseas was suggested in our survey from last year, as was the increase in corporate bond holdings. However, for most funds, the asset holdings are largely unchanged.
Survey responses suggest the main risk funds view as likely to affect asset allocation is actions of central banks. This follows on from a year of frequent interest rate rises. Geopolitical risk is the second most common risk identified, closely followed by asset/market value risks. Domestic political risk has dropped significantly as a risk factor, perhaps reflecting market confidence in the prospect of a new government. Survey responses were received throughout May, June and July 2024.
We note larger funds have a higher equity (including property) backing ratio (51%) compared to smaller funds (34%). The difference in the equity backing ratio between larger and smaller funds exists for open funds and is bigger for closed funds.
Sustainability
The proportion of funds being managed using sustainability targets or criteria has increased again this year. Most of this increase has come from smaller funds, suggesting they have begun to learn from and catch up with their larger peers.
Efficient frontier
Our analysis suggests there is scope for many funds to review their asset allocations to increase their expected returns by 20-60 bps without increasing the volatility of their portfolio.
However, we do recognise managing the investments of a with-profits fund is complex and has multiple dimensions and constraints that cannot be shown on an efficient frontier.
Manager approach
Funds that have used multiple asset managers (to manage separate asset classes) have outperformed those using a single asset manager by 0.9%-1.0% p.a. over the last five years. This supports the theory that accessing specialist managers for each asset class or establishing a high-quality internal team can lead to greater returns.
Consumer Duty
Open funds have had to comply with the Consumer Duty since 2023, and closed funds since 2024. Many funds have already completed actions to improve outcomes by reducing investment management fees.
The largest priority for funds is now in relation to improving internal management information to monitor how investment performance impacts consumer outcomes, and enhancing external communications to increase consumer understanding and investment transparency.
Interactive Tableau dashboard
This report is accompanied by an interactive Tableau dashboard. Participating firms are given secure online access and can use the dashboard to review results in more detail than presented in this report, and to carry out their own bespoke benchmarking analysis.
We hope you find the report informative. Please get in touch with any questions and comments you may have.
Craig Turnbull
Partner, Head of Regulatory Advisory
Craig Turnbull
Partner, Head of Regulatory Advisory
craig.turnbull@barnett-waddingham.co.uk
0141 447 0749
Amit Lad
Principal, Insurance and Longevity Consulting
Amit Lad
Principal, Insurance and
Longevity Consulting
amit.lad@barnett-waddingham.co.uk
0207 776 3876
The data we're reporting on
Grouping of funds
This investigation covers 76 funds across 24 insurers, which provided information on their asset allocations and investment performance to us privately.
Classification
Fund size (£m)
Number of open funds
Number of closed funds
Total number of funds
L
> 1,500
6
14
20
M
250 - 1,500
5
15
20
XS
< 70
8
10
18
S
70 - 250
6
12
18
Table 1: Fund classification used in this investigation
The distribution of funds by size of total with-profits assets as at 31 December 2023 is illustrated on a logarithmic scale in Figure 1 on the right.
We have split the analysis in this investigation by fund, as different funds within an insurer can have materially different risk characteristics. We have grouped funds by fund size and whether the fund is open to new business as set out in Table 1.
Figure 1: Total with-profits assets by fund (ranked)
Asset allocation - assets backing asset shares
This section includes data from 75 out of the 76 funds surveyed. The excluded fund is the estate of a with-profits fund that has been reported separately.
Figure 2 shows the average asset allocation for assets backing asset shares split by size classification.
Figure 2
Figure 3
Figure 4
Figure 5
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
L
M
S
XS
UK equity
Overseas equity
Property
Corporate bonds
Government bonds
Cash
Other
10%
2%
14%
23%
10%
28%
13%
9%
3%
20%
28%
5%
22%
13%
8%
4%
31%
23%
5%
20%
9%
4%
8%
22%
37%
4%
14%
11%
Figure 2: Asset allocation for assets backing asset shares as at 31 December 2023
Figure 3 shows how the average asset allocation across all funds has changed from 31 December 2022 to 31 December 2023.
Figure 3: Aggregate changes in asset allocations from 31 December 2022 to 31 December 2023
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-1.6%
1.8%
0.3%
1.4%
-0.4%
-0.2%
UK equity
Overseas equity
Property
Corporate bonds
Government bonds
Cash
Other
-1.2%
Following the same approach as last year, we asked firms which risks they think are likely to change asset allocation over 2024, and how they anticipate the exposure to each asset class may change over 2024. Figure 4 shows the proportion of funds that anticipate either an increase or a decrease to the asset mix for each asset class over 2024.
Figure 4: Expected changes to asset allocations over 2024
UK equity
Overseas equity
Property
Corporate bonds
Government bonds
Cash
Other
-28.8%
-20%
-11.5%
-14%
-9.6%
-7.7%
-36.5%
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
Decrease
Increase
3.8%
4%
30.8%
28%
1.9%
42.3%
5.8%
Figure 5 shows the key risks firms view as likely to influence asset allocation over 2024.
Figure 5: Top risks likely to influence asset allocation over 2024
80%
70%
60%
50%
40%
30%
20%
10%
0%
14.6%
20.1%
38.4%
Central Bank actions
1st most likely
2nd most likely
3rd most likely
Geopolitical risk
Asset/market value risk
Asset/market volatility risk
Liquidity
Climate related factors
Domestic potential risk
32.9%
36.6%
12.8%
29.3%
23.8%
25.6%
9.1%
12.8%
5.5%
16.5%
1.8%
3.7%
14.6%
Click to toggle between data visuals
INTERACTIVE TABLEAU DASHBOARD
INTERACTIVE TABLEAU DASHBOARD
Our interactive Tableau dashboard allows users to analyse:
Asset allocations split by open/closed funds as well as, or instead of, by fund size.
Variation in asset allocations around the mean using box plots.
Anticipated change in asset allocation by open/closed funds as well as, or instead of, by fund size.
Risks likely to influence asset allocation by open/closed funds as well as, or instead of, by fund size.
Our insight
Different funds have a wide range of different asset allocations, although most could be described as balanced funds with a mix of all the major asset classes.
A wide variety of different types of assets were included under 'other'. This did not appear to differ by fund size and ranged from private equity to derivatives to holdings in collective investments that cannot easily be split into their component asset classes.
At an aggregate level, the observed change in asset allocation is an overall increase in overseas equity, property and corporate bonds, and an overall decrease in UK equity, gilts and cash. However, underlying this, we have seen many individual funds have the opposite changes (e.g. decrease in cash and gilts, and an increase in equity, property and corporate bonds). There is no clear correlation between the change in allocations and the fund size.
Only a relatively small number of funds appear to have made the asset allocation changes they reported as planned in the previous year's survey. Volatile markets may have been a contributing factor for this.
More than half of funds expect their asset allocation to change over 2024. The general trend is for most funds to:
Decrease allocations to UK equity, property, cash and other assets.
Increase allocations to overseas equity, corporate bonds and gilts.
We note there has been a clear bias for UK equities over overseas equities for a number of years. The average fund in our analysis has approximately a 35% of its equity investments in UK equities, whereas UK equities make up approximately 4% of the global equity index.
Central Bank actions are viewed as the biggest driver of asset allocations over 2024. This is likely due to the Bank of England, the Federal Reserve, and the European Central bank all increasing interest rates over 2023 to the highest levels seen since the 2008 global financial crises.
This is closely followed by geopolitical risk. Both the Russia-Ukraine war and the Israel-Hamas war are ongoing and have likely played a role in funds selecting geopolitical risk as one of the top three risks.
While there is a fairly consistent view on the risks affecting asset allocation decisions between smaller and larger funds, smaller funds perceive asset volatility risk as a more significant driver. This suggests that smaller funds may prioritise asset allocation decisions aimed at smoothing investment returns over time. This could be for a range of reasons, for example risk appetites, or financial strength. Additionally, smaller funds see liquidity risk as a more critical factor in asset allocation compared to larger funds, likely due to having smaller estates (in absolute terms), making them more sensitive to liquidity challenges.
Interestingly, less than a fifth of funds think clilmate-related factors will cause asset allocation changes over 2024. As you can see from the sustainability section, over 90% of funds are using some form of sustainability criteria to manage their funds. This suggests any short-term asset allocation changes arising from sustainability factors and climate change have already taken place, and the residual climate risk may only affect asset allocations in the longer term. It may also be that funds are achieving their sustainability objectives by, for example, screening within an asset class, without changing the asset class invested in.
Asset allocation - other with-profits assets
Figure 6 shows the average asset mix for those funds that provided a separate asset mix for their other with-profits assets, compared with the average asset mix for the assets backing asset shares for those funds. Of the 76 funds surveyed, 24 provided separate data on the allocation of assets not directly attributable to asset shares.
Figure 6: Asset allocation for other with-profits assets compared with asset shares as at 31 December 2023
100%
80%
60%
40%
20%
0%
-20%
10%
2%
16%
25%
10%
25%
13%
32%
21%
36%
3%
5%
3%
Asset shares
Other assets
UK equity
Overseas equity
Property
Corporate bonds
Government bonds
Cash
Other
INTERACTIVE TABLEAU DASHBOARD
INTERACTIVE TABLEAU DASHBOARD
Our interactive Tableau dashboard allows users to analyse:
Asset allocations split by open/closed funds and/or by fund size.
Variation in asset allocations around the mean using box plots.
Our insight
There is a stark difference in the investment mix between the two pools of assets, reflecting their different purposes. The purpose of the assets backing asset shares is to deliver a return for policyholders in line with their reasonable expectations and attitude to risk. The purpose of the other with-profits assets might vary slightly from firm to firm, but typically it is to provide the capital of the fund, to absorb losses under stress and (for open funds) to finance the capital strain on new business. The other with-profits assets are predominantly invested in safer assets such as fixed interest assets and cash.
The average fund this year has more cash, more corporate bonds, and less government bonds in its other with-profits fund than the average fund last year.
Interestingly, we saw no significant variation in the propensity for closed funds to adopt a separate asset mix when compared with open funds. However, we did note that for closed funds, the amount of other with-profits assets allocated to cash was approximately four times the allocation in open funds.
Around 70% of the large funds reported a separate pool of with-profits assets not backing asset shares, compared to less than 20% of the remaining funds. This implies that smaller funds are more likely to be managed with a single investment strategy covering all assets in the fund. As expected, the other with-profits assets were invested predominantly in fixed interest assets and cash.
Investment returns by asset class
This section includes data from 54 out of 76 funds surveyed. We did not receive individual investment returns by asset class for 21 funds. One further fund is excluded where the estate of a with-profits fund has been reported as a standalone fund.
Figure 7 shows the average return on each asset class across all funds in the survey over 2023, in comparison to an appropriate index. The indices used are set out in Table 2. Note that no index return is shown for 'other', due to the diverse nature of this asset class.
Figure 7: Investment returns by asset class compared with index returns over 2023
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
7.5%
7.9%
UK equity
Fund returns
Index return
INTERACTIVE TABLEAU DASHBOARD
INTERACTIVE TABLEAU DASHBOARD
Our interactive Tableau dashboard allows users to analyse:
Results split by open/closed funds, by fund size or both.
Variation in investment returns around the mean using box plots.
Our insight
Regardless of size, and open/closed status, the majority of funds achieved a positive return on all but the property asset class. Similarly, the benchmarks used achieved a positive return on all asset classes, with exception of property. The key driver for the equity markets has been the valuation impact of the boom in artificial intelligence and other tech innovations. The key driver for corporate bond returns has been a narrowing of spreads, which in turn was due to bringing inflation under control, and lower perceived credit risk.
It is disappointing to note that the average returns on with-profits assets have lagged the benchmarks chosen for all asset classes, with the exception of government bonds. We have noted a similar trend when considering five-year performance. However, when we consider the performance of individual funds within each asset class on a one or five-year basis, available on our interactive dashboard, we are pleased to see that many funds outperfrom the indices.
It is also important to note the benchmark shown is chosen by us, and funds may be managed to a different benchmark. There may be valid reasons for the average performance being different to the benchmarks shown. Examples are below:
For overseas equity, it may reflect a different portfolio composition between different overseas markets relative to the index, as there was considerable variation between different markets over the year.
For fixed interest assets, it may reflect that the assets held may be of a different duration than the average duration in the index.
Table 2: Indices used by asset class
Asset class
Index
UK equity
FTSE All Share Index
Overseas equity
FTSE All World (ex UK) Index (Sterling TRI)
Property
IPD UK All Property Index
Corporate bonds
iBoxx Non-Gilts All Stocks Index
Government bonds
FTSE Gilts All stocks Fixed Interest Index
Cash
Bank of England Base Rate
Other
N/A
Inflation has continued to fall across the world and in the UK fell back to the Bank of England's 2% target for the first time since July 2021. While this fall has been slightly slower than market expectations, the broader trend is encouraging, and some central banks have begun to cut rates.
This trend has removed some of the uncertainty over the path of the global economy and in our view the probability has increased that the economy is on track for a 'soft landing', where interest rates will fall gradually as inflation slows and the economy avoids a deep recession. Therefore, we have upgraded our view on some risky asset classes. However, the potential for periods of volatility still remain as the economy has not yet fully adjusted to a prolonged period of elevated interest rates, the path of rate cuts remains uncertain, and the US presidential election draws closer.
Investment outlook from our investment consultants
UK equities
If interest rates fall faster in the UK than in the US this should weaken sterling and boost UK equities which earn most of their revenue outside the UK. If rates do not fall as fast then financials, which are a large part of the index, should offset the reduced performance elsewhere. Valuations are cheap relative to the US but have been for many years and while the UK may do well for a period, the historical trend of underperforming the US and therefore global markets for extended periods is likely to continue.
Global equities
The prospect of a 'soft landing' should continue to support equity markets, particularly in the US, where government deficit spending is expected to continue to assist growth. However, the market consensus around a soft landing means volatility in recent months has been very low and downside scenarios may not be fully reflected in pricing.
Property
Weak demand for UK core commercial property continues to depress sale prices. Other long-term issues could also reduce returns such as the significant investment needed to meet energy efficiency standards. However, with interest rates expected to fall the worst may have passed for property markets. Our outlook for global property remains more negative as US office vacancy rates have reached all-time highs and are expected to deterioriate further and Chinese property markets remains in a multi-year long slump.
Corporate bonds
Global credit spreads remain close to their 21st century low points and downside risks remain a concern, especially for those borrowers who will need to refinance debt at significantly higher rates which may lead to higher spreads. Therefore, we continue to believe that spreads are not sufficient to fully compensate investors for these downside risks.
Government bonds
Long-term gilt yields remain above our expectation of their neutral rate (the rate justified by the long-term fundamentals of the UK economy). We expect yields to fall faster than is currently priced in as the Bank of England cuts interest rates later over 2024. The duration position of any bond holdings should be an important consideration for investors.
Overseas equity
Property
Corporate bonds
Government bonds
Cash
Other
14.3%
16%
-1.9%
-0.5%
8.9%
9.7%
4.6%
3.7%
3.9%
5.3%
7%
Fund-level investment returns
Click to toggle between data visuals
Figure 8 shows the investment returns achieved in 2023 on assets backing asset shares by fund, ordered from highest return to lowest return. Figure 9 shows the average investment return achieved in each of the last five years by fund size classification and Figure 10 then shows how this translates into relative performance over a five-year period.
75 out of 76 funds are included in this section of the analysis, with only the fund which does not have assets directly attributable to asset shares being excluded.
Figure 8: Investment returns in 2023 by fund (ranked)
Figure 9: Investment returns by year and fund size classification
15%
10%
5%
0%
-5%
-10%
-15%
13.4%
11.4%
10.4%
9.7%
2019
2020
2021
2022
2023
Figure 8
Figure 9
Figure 10
Figure 10: Annualised investment returns by size classification over five years
Figure 5 shows the key risks firms view as likely to influence asset allocation over 2024.
Figure 5: Top risks likely to influence asset allocation over 2024
80%
70%
60%
50%
40%
30%
20%
10%
0%
14.6%
20.1%
38.4%
32.9%
36.6%
12.8%
29.3%
23.8%
25.6%
9.1%
12.8%
5.5%
16.5%
3.7%
14.6%
1.8%
Central Bank actions
Geopolitical risk
Asset/market value risk
Asset/market volatility risk
Liquidity
Climate related factors
Domestic potential risk
1st most likely
2nd most likely
3rd most likely
INTERACTIVE TABLEAU DASHBOARD
INTERACTIVE TABLEAU DASHBOARD
Our interactive Tableau dashboard allows users to analyse:
Returns on specific asset classes rather than total returns.
Results split by open/closed funds as well as, or instead of, by fund size.
Variation in investment returns around the mean using histograms and box plots.
Performance attribution into asset allocation and stock selection.
Rankings of investment returns over periods of one, two, three, four or five years.
Cumulative investment returns over periods of one, two, three, four or five years.
Our insight
All funds achieved a positive return over a one-year period. The spread in returns over one year has been approximately 13.8%, with the highest return being 16.5%. The top three funds had a notably higher return than the others. These funds have had either a high equity allocation, or a high 'other' allocation, where the other assets have been invested in a range of collective investment schemes and derivatives.
The key themes to positive investment return over 2023 have been:
Central bank action from the Federal Reserve, the European Central bank and the Bank of England to raise interest rates.
Strong performance of companies linked to the research and development of artificial intelligence.
These positive returns have been despite the backdrop of:
Silicon Valley Bank, Signature Bank and Credit Suisse failed in March 2023. However, the overall market impact was limited as the US and Swiss governments and central banks stepped in.
Geopolitical tensions remain elevated due to the ongoing Russian invasion of Ukraine and the Israel-Hamas war following the 7 October 2023 attack. However, the economic impact of the conflicts has stabilised compared to the impact of sanctions and commodity disruption in 2022.
Rising interest rates dampened property markets, with UK commercial property returning -0.5% and UK residential property prices falling by 1.4% over 2023. Global property also suffered disruption from rising interest rates but with considerable differences across major economies.
Figure 10 shows that large funds have, on average, performed better than other fund sizes over the most recent five-year period, with individual annualised fund performance ranging between +3.4% and +9.0%. However, figure 9 shows that over 2023, size has not been the differentiating factor between the average fund.
Investment return on assets backing asset shares
2.9%
5%
3.3%
4.2%
9.8%
5.6%
5.2%
3.6%
-8.8%
-11.1%
-11.5%
-12.4%
8%
8.6%
8.7%
7.9%
L
M
S
XS
6%
5%
4%
3%
2%
1%
0%
4.8%
3.6%
2.7%
1.9%
L
M
S
XS
Size classification
Sustainability
Regulatory pressure and consumer demand have caused sustainability considerations (which encompasses environmental, social and governance (ESG) factors) to be important considerations in investment management. This section was completed by 55 out of the 76 funds surveyed. All 21 of the funds who did not complete this section of the survey provided information last year and we have assumed this is unchanged.
Figure 11 shows the proportion of funds that apply specific sustainability criteria to all, some or none of their assets. Table 3 sets out several approaches that could be used to set sustainability targets and criteria. Figure 12 shows a breakdown of the proportion of funds using each of these approaches. Funds can use multiple approaches, and 42% of funds used all four approaches.
Approach
Description
Screening
Certain sectors are excluded from the portfolio (e.g. coal)
Table 3: Possible approaches to sustainable investment
Figure 11: Proportion of funds that apply a specific sustainability target or criteria to all, some or none of their assets
Tilting
Certain assets are favoured, using metrics such as ESG ratings
Carbon reduction
Carbon emissions data is used to exclude heavy polluters
Climate aware
Portfolio is selected to align to specific climate targets
All
Some
None
84%
9%
7%
Figure 12: Proportion of funds using each approach
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
87%
Screening
Tilting
Carbon reduction
Climate aware
Approach
61%
59%
54%
INTERACTIVE TABLEAU DASHBOARD
INTERACTIVE TABLEAU DASHBOARD
Our interactive Tableau dashboard allows users to analyse:
Results split by open/closed funds, and/or by fund size.
93% of funds are managed with at least some of their assets having a specific sustainability target or criteria (2023: 82%). Historically, these targets and criteria have been more prevalent among the larger funds. However, the proportion of small funds with targets and criteria is increasing every year and is now almost level with the larger funds.
The proportion of funds that apply sustainability targets or criteria to at least some of their funds was similar for open and closed funds, which suggests sustainability is seen as more than just a selling point for new business and is at least being considered by the funds as a risk factor.
Of the different possible approaches to sustainable investment, screening is the most common, used by 87% of all funds and 93% of funds that have a sustainability target or criteria. The climate-aware approach is the most sophisticated approach, and it is the Prudential Regulation Authority's (PRA) metric of choice. 54% of funds in our analysis are using it this year.
For more information on sustainable investment, please visit the Sustainability hub on our website.
Our insight
We are encouraged by the pace of change of sustainability integration within the market across asset managers, pension schemes and insurance companies, and we are confident the with-profits sector is well placed to help drive forward sustainability issues in the years to come.
The pensions industry has been an example of an industry that has experienced significant change. Over the years, UK pension schemes have been required to do more in terms of sustainability. Such requirements have raised the bar within the pensions industry, and increased the demand for products and services to enable schemes to meet their sustainability objectives. Examples have been improved offerings from asset managers and consultants, as well as Bulk Purchase Annuity (BPA) providers.
In terms of BPA providers, our recent study suggests sustainability credentials of BPA providers are wide ranging. Specifically, we have identified two providers that are clearly ahead of their peers within this space, while at least one provider is lagging their peers. Those ahead of their peers tend to be thinking about sustainability 'beyond climate', are signatories to relevant initiates and/or have robust climate transition plans in place.
Over the past decade, we have seen significant advances in the industry in terms of how sustainability and ESG factors are integrated into investment strategies. Key drivers of these changes have been: (i) regulatory changes; (ii) the recognition of the risks and opportunities posed by sustainability issues; (iii) consumer habits; (iv) the want to 'do no harm', coupled with the realisation of negative impacts, such as global warming; and (v) stakeholder pressures. While, historically, integrating sustainability was mostly limited to the use of an exclusionary policy, methods of integration have become more sophisticated and holistic (i.e. wider than climate change, such as nature and social considerations, and how they interact with climate risks and opportunities). Furthermore, there has been an increasing focus on stewardship (namely voting and engagement with regards to underlying holding) and the positive impacts such activities can have.
Sector benchmarking from our investment experts
Efficient frontier
Figure 13 shows the efficient frontier for the asset shares for a balanced with-profits fund. We have overlaid the expected returns and volatility of returns for each fund in our survey. The chart also shows the return/volatility of a 100% investment in each asset class.
Click to toggle between data visuals
Figure 13: Funds plotted on the efficient frontier
Table 4: Expected return and volatility assumptions for each asset class
Figure 13
Table 4
Table 5
Table 5: Correlation assumptions between asset classes
INTERACTIVE TABLEAU DASHBOARD
INTERACTIVE TABLEAU DASHBOARD
Our interactive Tableau dashboard allows users to analyse:
Results split by open/closed funds and/or by fund size.
Our insight
Our expectation is most funds will set their asset allocations by defining their risk tolerance, and then selecting the optimum portfolio that maximises the expected return within the risk tolerance.
From our analysis, most funds are below the efficient frontier, suggesting they could increase their expected returns by around 20-60 bps without increasing their overall volatility.
There may be valid reasons for funds to be below the efficient frontier:
Different funds may have different views on future expected returns, and volatilities; particulary if the duration of their liabilities are materially different.
Furthermore, funds will have a more detailed understanding of their 'other' assets and so can take this into account in their analysis.
The transition costs for rebalancing may be too high relative to the increase in return.
Funds may have other management metrics that are not captured in this analysis, for example, liquidity levels, SCR coverage, or diversification between geographies/industries.
Overall, larger funds appear to have larger risk appetites with larger allocations to growth assets, which suggests asset volatility is less of a significant risk for them. This is consistent with large fund responses in the asset allocation section of this survey. However, the spread in expected volatility is very wide across all sizes of funds, suggesting size is not the only driver of risk appetite.
Table 4 sets out our return and volatility assumptions for each asset class, and Table 5 sets out our correlation assumptions between each asset class.
The return and volatility assumptions have been set using the results of Barnett Waddingham's Economic Scenario Model as at 31 December 2023, calibrated over a 10-year time horizon, with an overlay of expert judgement. We have insufficient information to set a return and volatility assumption for the 'other' asset class. Where a fund has other assets, we have allocated these investments to equity, property, cash and fixed interest in proportion to its existing allocation.
Name
Expected return
UK equity
7.0%
Volatility
17.5%
Overseas equity
7.5%
18.5%
Property
6.5%
14.0%
Corporates
5.0%
10.0%
Cash
3.5%
1.0%
Government
4.0%
7.5%
Name
UK equity
UK equity
100%
Table 4 sets out our return and volatility assumptions for each asset class, and Table 5 sets out our correlation assumptions between each asset class.
The return and volatility assumptions have been set using the results of Barnett Waddingham's Economic Scenario Model as at 31 December 2023, calibrated over a 10-year time horizon, with an overlay of expert judgement. We have insufficient information to set a return and volatility assumption for the 'other' asset class. Where a fund has other assets, we have allocated these investments to equity, property, cash and fixed interest in proportion to its existing allocation.
The overseas equity volatility assumption assumes that currency risk is unhedged.
Overseas equity
75%
Property
50%
Corporates
50%
Cash
0%
Government
25%
75%
100%
50%
50%
0%
25%
Overseas equity
50%
50%
100%
25%
0%
25%
Property
50%
50%
25%
100%
0%
25%
Corporates
0%
0%
0%
0%
100%
0%
Cash
25%
25%
25%
25%
0%
100%
Government
Manager approach
Funds have a choice as to whether they:
appoint a single investment manager to manage their investments; or
appoint multiple managers, typically with different managers managing different asset classes.
The investment manager could be in-house or external.
Figure 14 shows the five-year unweighted average investment returns for equity and bond asset classes, split by approach taken. The total bars show the aggregate average five-year total returns for 40 funds where we have the manager breakdown and five years of total returns. The equity and bond returns are shown for 19 and 20 of these funds, respectively, where we have the five-year breakdown of returns by asset class.
Figure 14: Five-year average investment returns
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
2.81%
3.55%
Total fund return
Overall equity return
Overall bond return
Single
Multi
INTERACTIVE TABLEAU DASHBOARD
INTERACTIVE TABLEAU DASHBOARD
Our interactive Tableau dashboard allows users to analyse:
Differences between funds managed by a single manager, and those managed by multi-managers.
Using a single manager to manage investments will usually be less expensive for funds. This approach would typically require less governance (once set up) and will typically have more efficient downstream processes as there is a single data source for investments.
On the other hand, using multiple managers:
enables specialists for each asset class, which could lead to superior investment performance;
diversifies manager risk; and
diversifies investment style bias.
Our survey data shows using multiple managers outperformed funds using a single manager. This supports the theory that accessing specialist managers for each asset class or establishing a high-quality internal team can lead to greater returns.
The results above are based on the data available to us.
Our insight
6.26%
7.90%
-0.33%
0.99%
Consumer Duty
The FCA introduced the Consumer Duty (CD) principle which requires firms must act to deliver good outcomes for all retail customers. This new principle applies to all open contracts from 31 July 2023 and for closed contracts from 31 July 2024, however, implementation plans needed to be approved and signed off in advance of 2022. Of the 76 funds surveyed, 50 funds responded to at least part of this section, however fewer completed every section. The percentages below for each CD action are shown as a proportion of responses to each individual CD action. We have made no assumptions for incomplete surveys.
We surveyed fund managers on five pre-specified CD actions which could lead to better outcomes for customers. The first two were related to fees, the third on strategy, the fourth on external communications and the final action was related to internal MI. Figure 15 below shows the proportion of respondents for each action who have completed or are planning on making changes due to Consumer Duty for each action. Where the bars do not sum to 100%, the remaining percentage represents firms that did not consider this action necessary when it carried out its assessment.
Figure 15: Consumer duty action progression
INTERACTIVE TABLEAU DASHBOARD
INTERACTIVE TABLEAU DASHBOARD
Our interactive Tableau dashboard allows users to analyse:
Results split by open/closed funds, and/or by fund size.
We can see from responses to the survey the priority for funds has been related to progressing actions which will reduce fees for customers, with most of the funds which are planning these measures having already completed the action.
For most funds, the current priorities are with respect to improving internal management information (71%) and enhancing external communications (64%).
Very few funds (18%) are planning on changing their strategy asset allocation to increase returns as a result of CD.
We can see that open funds are further along their CD journey than closed funds, with a greater number having completed CD actions, however, the difference is not significant. This is likely due to the CD requirements being applied to open funds a full year ahead of it being required for closed funds. There is no strong correlation between the size of fund and CD actions taken.
A number of funds also commented that investment strategy and fees were under regular review, and this has not been impacted by the implementation of CD.
Our insight
Enhance internal management information in relation to consumer outcomes related to investment performance
71%
0%
Completed
In progress or planning to
Enhance external communications to increase consumer understanding and transparency of fund investments
Change investment strategy to increase expected returns (e.g. greater allocation to growth assets)
Change investment strategy to reduce fees (e.g. active to passive)
Negotiate reduced fees or costs for managing investments
64%
9%
18%
0%
17%
34%
21%
27%
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and Longevity Consulting
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About us
Executive summary
The data we're reporting on
Asset allocations
Investment returns
Sustainability
Efficient frontier
Manager approach
Consumer Duty
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About us
Executive summary
The data we're reporting on
Asset allocations
Investment returns
Sustainability
Efficient frontier
Manager approach
Consumer Duty
Table 4 sets out our return and volatility assumptions for each asset class, and Table 5 sets out our correlation assumptions between each asset class.
The return and volatility assumptions have been set using the results of Barnett Waddingham's Economic Scenario Model as at 31 December 2023, calibrated over a 10-year time horizon, with an overlay of expert judgement. We have insufficient information to set a return and volatility assumption for the 'other' asset class. Where a fund has other assets, we have allocated these investments to equity, property, cash and fixed interest in proportion to its existing allocation.
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Copyright © Barnett Waddingham 2024
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Stay ahead with our latest comment, expert insight and event notifications
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FOLLOW US
Accessibility
Consumer duty
Data management
Legal notices
Privacy
Sitemap
Slavery and human trafficking
Sustainability
FURTHER READING
