"Exceptionally volatile" markets are expected to continue throughout 2025 and may cause a reversal of the performance of fiduciary managers (FMs) seen in 2024, XPS head of fiduciary management oversight, André Kerr, has suggested.

XPS' Fiduciary Manager Review for 2025, which analysed 17 UK fiduciary management growth portfolios and insights into FMS' performance throughout 2024, revealed a mixed picture.

According to the report, 2024 saw positive returns across all FMs, with the highest performer achieving a 12.5 per cent return. Most FMs also outperformed their stated target return, with two having more than 3 per cent in excess returns above target.

The range of returns was largest in Q1 and Q4 2024, which saw the greatest resurgence of equity markets, especially in tech stocks.

Indeed, the report highlighted a strong correlation between larger equity allocations and greater positive absolute returns. In contrast, active management and tactical asset allocation varied in their contribution to returns, emphasising the need for trustees to assess the value of these strategies against higher fees.

However, the report revealed notable performance variations among FMs, with a 7.3 per cent difference between the highest and lowest performers. This divergence was especially evident in the first and last quarters of 2024, reflecting market volatility during those periods.

Risk-adjusted returns also varied, with most FMs outperforming diversified growth funds (DGFs) over a 5-year market cycle, but not all adding value.

Meanwhile, gilt performance was negative over the year, resulting in a rise in yields driven by persistent inflation and central banks acting perhaps more cautiously in cutting rates than had been anticipated by markets going into 2024, the report suggested.

Actual scheme growth portfolio returns often underperformed materially relative to the FMs' model portfolios, raising questions about the appropriateness of growth portfolio targets and the alignment of model assumptions with real-world outcomes.

Looking ahead, Kerr said he expected FMs' performance and clients' experience to be "vastly different" due to market volatility.

He also predicted that schemes' requirements would "fundamentally change" as defined benefit schemes continue to mature and decide upon their long-term funding objectives.

"The fiduciary management governance model will need to evolve to meet these requirements," Kerr added.

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