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Pension funds should change poor-performing investment approach

25 October 2013

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Defined benefit (DB) schemes in the UK could be losing millions of pounds in high costs and poor fund performance if they adopt static asset allocations using active fund managers, an investment adviser has said.

According to research by Evercore Pan-Asset (EPA), passive funds performed better than active funds in 13 out of 14 asset classes over the last five years, and said that this casts "serious doubts" over the common practice of using active fund managers.

The investment adviser said that trustees of smaller schemes should consider adopting a 100% passive approach, putting a great focus on asset allocation.

Bob Champion, EPA institutional business director, said: "We have long been advocates of the passive approach and this research is further evidence of how cost-efficiency can lead to better performance.

"Thanks to recent developments in the market for passive funds, there is no reason why any pension scheme cannot have highly diversified, highly efficient, low-cost portfolio, irrespective of their size."

He said that passive portfolios are "the way forward" and that liquid passive portfolios can help to put trustees "firmly in control".

As well as passive funds performing better than active funds over the last five years, EPA found that this trend was repeated over three years, where passive funds performed better in 12 out of the 14 asset classes.

On average, across all asset classes, passive fund out-performed active funds by 6.5% over five years.

A £50m scheme could have saved more than £3.6m with a passive portfolio.

EPA said that with DB pension schemes increasingly under pressure to review and shift their asset allocations as they mature, it questioned whether a preoccupation with active manager selection made sense when it is asset allocation that really mattered.

First published 25.10.2013

monique_simpson@wilmington.co.uk