Better by default

This month Corporate Adviser wants you, the advisers who actually select default options for pension schemes, to vote for the fund you think best meets the needs of British workers. John Greenwood ponders what an ideal default fund should look like.

They carry the retirement dreams of millions, yet default funds have been tested almost to breaking point in 2008. Trackers, target return funds, balanced and cautious managed funds have all plunged well into the red over the last 12 months, leaving employees digesting grim news as annual pension statements hit the doormat.

Performance of equities has been so poor that it has led some commentators to question the conventional logic that the stock market is the place to be for something with a time horizon as long as a pension. The violent swings in markets have also prompted a discussion about the pros and cons of risk lifestyling.

Around 4m UK workers trust their pensions to default funds, the selection of which they have given no more thought to than the tick of a box. Yet default funds are a broad church, with a wealth of investment processes, strategies and fund management houses and even individual fund managers to choose from, all of which will contribute to the wealth – or poverty – of the end employee. The responsibility of selection of default funds is huge both for employers and employees, and with the Personal Accounts Delivery Authority in the process of creating its own giant investment fund to compete with what the private sector has to offer, it is no surprise that the role of default funds is taking centre stage. Against this backdrop, Corporate Adviser is canvassing the views of you, the advisers who know and understand better than anyone else what a good default fund should look like, to see where the default debate is taking us.

To see how advisers’ views have changed over this most testing of years we have decided to keep both last year’s winning fund and the fund that has performed best since last January in the shortlist for this year’s Ultimate Default Fund competition, the BGI and Ruffer funds respectively. The shortlist we have put before you may not be definitive – but it does give a representative view of the more popular approaches to defaults available on the market today.


Vote for the fund you think deserves the title the Ultimate Default Fund for a chance to win a case of champagne.

The Corporate Adviser Ultimate Default Fund poll is your chance to vote for the fund that you believe best fills the retirement saving needs of employees not getting independent financial advice.

The shortlist BGI Global Equity (50:50) Index fund

nominated by Martin F West, director, Gissings Invesco Perpetual Distribution fund

Nominated by Peter Duerden, Investment adviser, Taylor Patterson

Wealth Management Ruffer Total Return fund

Nominated by Andrew Coveney, Investment director, Barnett

Waddingham Schroder Diversified Growth fund

nominated by Andy Cheseldine, consultant at Hewitt Associates Schroder Managed Balanced fund

Nominated by Tom McPhail, head of pensions, Hargreaves Lansdown CF MITON STRATEGIC FUND

Nominated by Jason Walker, senior manager, AWD Chase de Vere

How to vote

Go to exercise your vote and be entered in the prize draw

The challenge

We asked our panel of experts to nominate a single default fund that best matches the needs of a company with 1,000 employees with an average spread of ages and skill sets for the growth stage of their pension saving – the fund is expected to be used in conjunction with some form of process to manage risk in the years before retirement.

At least 80 per cent of members are not expected to be getting individual face-to-face advice and are likely to end up in the default option.

The Ultimate Default Fund is to be offered through a contract-based scheme and its objective is to achieve maximum returns for members without taking risks that employers are likely to find unacceptable.

Read on to see how panel members have justified their nominations

THE SHORTLIST and how the experts justify their nominations


Nominated by Tom McPhail, head of pensions research, Hargreaves Lansdown

We have used the Schroder Managed Balanced Fund as the default investment fund for some of our Group Sipp clients for a couple of years now. The fund gives members the benefit of multiple asset class exposure, weighted towards UK Equities, combined with the oversight of a fund manager who takes direct responsibility for the performance of the fund; unlike many lifestyle and target date funds which can hide from performance scrutiny. Recent research from Hargreaves Lansdown has confirmed that most of the time investors are better off not using a Lifestyle fund. Even where a lifestyle fund does outperform a Balanced Managed fund, the benefits are minimal both in absolute terms and when compared with the investment returns which a lifestyle fund sacrifices in the good times.

The Schroder fund also boasts very competitive charges for an actively managed fund, with an Annual Management Charge of just 0.8 per cent and a TER of just 1.18 per cent. The long term performance of the fund, managed by Andrew Yeadon since 2003, is comfortably ahead of the sector average, and we continue to view the Schroder Managed Balanced fund as being the best compromise fund for a diverse workforce.


Nominated by Jason Walker, senior manager,

AWD Chase de Vere

The CF Miton Strategic Fund represents the ideal default fund for a pension which can then be further tailored to specific investor requirements should the need arise.

The fund is a global cautious fund that prioritises capital preservation and low volatility across all market cycles.

The fund strategy is based on a conviction led approach to portfolio construction. The manager is not constrained by an index or benchmark when determining the asset allocation of the fund.

From inception on 26th December 1996 to end October 2008, the fund has produced a total return of 123 per cent, standing first in the IMA balanced managed sector over this period. Over five years, the fund has delivered a total return of 32.9 per cent, with an annualised volatility of 6.3 per cent. Over this period, the fund has had only one lead manager, Martin Gray.

For more expert views on the shortlist, see over…

THE SHORTLIST and how the experts justify their nominations


Nominated by Peter Duerden, investment adviser, Taylor Patterson Wealth Management

The main two asset classes available for UK investors are equities and fixed interest securities. The Invesco Perpetual Distribution fund, which is in the IMA Cautious Managed sector, aims to provide a balanced return of income and long-term capital growth by investing in these areas. At least 60 per cent of the fund is invested across a diversified range of bonds with a significant exposure to high-yielding bonds, which means that there is more risk to capital and income than from a fund investing in Government or investment grade bonds.

The remainder of the portfolio invests primarily in large UK blue chip stocks seeking companies with stable cashflows, attractive valuations, strong dividend growth and low levels of debt. The fund benefits from the combined active fund management and asset allocation expertise of Invesco Perpetual’s co-heads of fixed interest, Paul Causer and Paul Read together with the vast experience from the head of investment, Neil Woodford.

Within the current low interest rate cycle, real returns from cash deposits are unattractive after adjusting for the effects of inflation. With falling interest rates normally beneficial for bonds and equity markets, this fund provides an excellent opportunity for investors to benefit from the day to day management of three of the leading UK fund managers.


Nominated by Martin F West, director, Gissings

Although it’s been a challenging year for most funds with a significant equity content, I  think the BGI Global Equity (50:50) is still an appropriate fund for the accumulation part of a default program.

The fund is not aiming to outperform the sector. However, the fact that it is firmly in the second quartile over one, three and five years to 31 October 2008 demonstrates how passive management has consistently compared well with active management.  This reflects the difficulties that active managers have had in outperforming indices in recent years, and the typically lower charges applied to passively managed funds .

I believe the 50:50 weighting between the UK and Overseas markets remains appropriate.  This remains the right balance to obtain the benefit of diversification and exposure to overseas economies. Different weightings would not have significantly impacted performance over 5 years with the UK FTSE All Share returning an average of 7.7% and a typical Overseas equity portfolio returning 7.0% per annum.

So the question is really whether a Global Equity fund is appropriate. For the long term investor I believe it is,  they can afford to take the risk, and therefore gain the reward, of being a long term investor. Short term volatility, even on the scale seen over the last year, is not a concern if you are not going to be taking benefits for at least 10 years.


Nominated by Andrew Coveney,

investment director, Barnett Waddingham

It would be pleasing to claim that our choice of Ruffer Total Return Fund as the ideal Default Fund for 2008 was evidence of ‘something we knew last December which others didn’t or some special skill or system unique to Barnett Waddingham.

This is nonsense of course, although a reminder of the reasons for our suggestion a year ago and the simplicity of these may serve to explain why the fund remains our choice for the year ahead. The fund invests in high quality, liquid assets with twin aims of capital preservation under all market conditions, whilst also aiming to deliver a stable investment return, well ahead of that from cash, in markets both good and bad. In our view, a fund which can achieve these aims consistently will be well received by employers and pension plan investors alike.

After such a torrid time in 2008, the New Year may well bring a market ‘bounce’. Mr Obama appears to be a popular choice as 44th President of the United States and the US remains a significant driver of global sentiment and confidence as well as being the world’s largest economy. The goodwill he appears to enjoy globally could help market confidence, as might a new Government in the UK were a snap General Election to be called in early 2009. Ruffer Total Return Fund re -elected for 2009 is our view.


Nominated by Andy Cheseldine,

consultant at Hewitt Associates

The ideal default fund in the growth phase of a member’s pension portfolio should clearly seek to provide the greatest long-term real return net of fees. If this can be achieved without exposing members to increased investment volatility it can mitigate the behavioural problem of loss aversion (research indicates that they consider a loss of £1 as the equivalent, opposite, weight of a gain of £2 to £3.)

This means that where significant “temporary” market losses occur there is a danger of this precipitating a switch into inappropriately conservative funds or even reduced contributions. The rules of this challenge preclude us from recommending a mix of different unconstrained global equity (or other) funds to deliver the benefits of diversification, so we are restricted to selecting one fund that achieves equity-like returns with sub-equity risk characteristics.

One option would be to use a protected equity fund. However, for long-term investments these are likely to involve charges that impose too great a drag on performance to warrant inclusion within a growth portfolio.

Our preferred option would be a diversified growth fund that includes within its remit a range of actively managed alternative asset classes. There are now a number of these available in the DC space, many of which fit within Stakeholder pricing constraint, including for example Fidelity, BlackRock and Schroder.

On balance a well diversified fund such as the Schroder Diversified Growth Fund would be our pick for the Ultimate Default Fund based on the combination of its expected future risk/return strategy, proportionate use of alternatives, our rating of the manager and its availability on a number of platforms.