All fiduciary managers (FMs) in the pensions industry delivered positive returns in 2023, although there was a wide divergence in terms of their investment performance, according to research from XPS Pensions Group.

The survey, which looked at the performance of 20 growth portfolios managed by 17 FMs, found that although all portfolios made positive returns, there was a gap of 12.9 percentage points between the highest- (+13.4 per cent) and lowest-performing (+0.5 per cent) portfolios.

In addition to this, the analysis showed that, despite a strong year for global markets, only one FM outperformed a traditional 60/40 portfolio across the year, while some underperformed their targets by 3 per cent or more.

There was also a "clear link" to illiquid allocations and lower absolute returns, as the research found that the portfolios that were most exposed to illiquid assets like infrastructure and real estate were most likely to see lower returns.

This was in direct contrast to the experience of FMs in 2022, when illiquid assets drove higher returns, with XPS suggesting that this could be down to continued tail effects from the gilts crisis of late 2022.

However, the research showed that the majority of FM growth portfolios outperformed diversified growth funds on a risk-adjusted basis over the one- and three-year periods to 31 December 2023.

In particular, it found that, for higher returning portfolios, exposure to equities and credit made up significant proportions of overall returns, although some FMs provided significant negative returns due to equity hedging and downside protection strategies.

In light of the findings, XPS suggested that trustees should check whether their FM added value, as well as checking the liquidity of their growth portfolio and whether illiquid allocations have now been rebalanced post gilt liquidity crisis in 2022.

It also encouraged trustees to assess their FM growth portfolio’s return over the longer term against peers in the FM market, and consider their FM’s management fees and costs against the market benchmark and whether higher costs lead to added value.

Looking ahead, XPS also emphasised the need for trustees to have a growth portfolio in place that sets the right pace, whatever their endgame objective, emphasising that whilst buyout may still be considered the blue-ribbon race by many trustees, the Mansion House reforms could see some schemes "carry on for a few more laps of the track yet".

XPS Pensions Group partner, André Kerr, said: “It is surprising to see this level of variance in the investment performance of fiduciary managers across 2023, despite it being such a strong year for global markets.

“With the government exploring ways to give pension schemes access to surplus, there are now more options for schemes around their endgame, which may change investment calculations.

“Regardless, schemes should keep a watchful eye on whether the strategy being employed by their fiduciary manager aligns with their investment goals.”

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