Defined benefit (DB) schemes that held under-hedged positions, downside protection strategies and private market investments performed the best during 2022, according to a new report from Barnett Waddingham.

In contrast, the consultancy said that DB plans that cut hedging during and after the gilts crisis, relied on traditional return-seeking assets, and had significant cashflow matching assets.

In its third annual review of fiduciary manager investment performance, Barnett Waddingham said that the experience of last year’s liability-driven investment (LDI) emergency has shown trustees that it is “more important than ever” to consider scheme-specific analysis of performance, as there was huge variability resulting from the gilt volatility during the autumn of 2022, “even within a single fiduciary manager”.

The report explains that most fiduciary manager mandates have high hedge ratios as these have protected schemes over the past decade as yields have fallen.

It was more difficult to outperform from this position, however, in a period in which most asset classes fell, despite liabilities falling in value. Barnett Waddingham defines high hedging as 80% or more of a portfolio, while schemes with lower hedging levels have between 0% and 60% of their assets hedged.

“The question for underhedged schemes then becomes whether your fiduciary manager has taken advantage of any funding improvement,” the report said. "This could be through accelerating de-risking steps, or potentially advising a strategic change to the mandate in order to increase hedging.”

Extra care is now required when trying to compare investment returns, according to the report, as performance in 2022 was heavily reliant on individual scheme circumstances, with portfolio liquidity and hedging being key drivers.

As a result of scheme-specifics, there was significant dispersion in performance across schemes with similar return targets. The report also argued that fiduciary management may have helped ease the governance burden for trustees from an operational perspective, but the quality of communication was a key differentiator among fiduciary managers during the volatility and tended to shape trustee experience.

In addition, while GIPS data enabled better comparison across the industry, there are “limitations and caveats” to be aware of, which make comparisons harder in 2022.

Given this, the report strongly encouraged fiduciary managers to obtain independent verification of their GIPS data to increase its credibility and reliability.

Barnett Waddingham head of fiduciary manager evaluation, Peter Daniels, said the market volatility of last year not only made 2022 challenging for investment performance but resulted in a very wide range of outcomes for pension funds.

“The previous downward trending interest rate environment meant that highly hedged strategies painted fiduciary manager performance in a generally positive light,” continued Daniels.

“The sharp upward reversal in rates has created performance challenges for managers; it has also led to a fundamental re-think of how hedging strategies should operate and the importance of liquidity.

“Looking forward, there will inevitably be increased scrutiny of how fiduciary managers operate in a changing investment world. More so than ever before, the importance of independent challenge and evaluation will be critical.”


This article first appeared on our sister title, Pensions Age.

Share Story: