customising pension plan funds

danlightbulb

Hi all,

I'm with Blackrock on a company pension scheme. The provider allows individuals to customise where their funds are invested, in any percentage across a choice of about 80 or so funds.

This is all new to me.

The default option, set up by my company, is a 70/30 split across two funds. DC Aquila Life Market Advantage and DC Aquila 50/50 Global Eq Index. I don't know if these mean anything to you guys.

I can access performance information from all of the funds in the form of a 1 page report, detailing what the fund is and its 3 month/YTD/1year/3year/5year performance stats. These are expressed as percentage returns. Many of the 3 month and YTD are negative values, but most of the 1year/3year/5year are positive values ranging anywhere from 0 to 15%. I don't really know what this information means fully.

From my limited current knowledge, I'm invested 70% in DC aquila life market advantage which is 60% equities and 40% bonds. Then my other 30% is in Aquila 50/50 global equity index which is 50% uk equities and 50% overseas equities.

Some of my colleages have been adjusting their fund splits across a whole range of different funds, from cash to gold. One colleague has gone heavy on cash believing that equities have peaked. Another has gone heavy on gold (I don't know why).

Where do I start? I don't trust the current situation where my fund is mostly in equities because I do think that the system will come crashing down at some point. Yet I don't want to make a costly mistake by switching to low return funds.

Anyone able to offer some advice. I appreciate you can't tell me what to do, but where do I start and how do I come to a robust decision on where I put my funds. I have a £40k pot at the moment.

Thanks

Playing_with_Fire_2

Take a deep breath.

Ignore the 3 month growth and YTD numbers. A significant majority of funds are showing negative in the short term due to the China stock market drop. Do not react based on this, definitely do not move into cash now just because of this, it has already happened. Don't take the advice of either of the colleagues you mentioned.

Equities are generally used in pension funds because of the high growth over long periods. When you say that the system will come crashing down do you mean that the value of every company will reduce to zero or that there will be a reduction in the value of equities in the next few years? When investing in equities for the long term, reductions/bear markets/'crashes'/corrections every decade or so are not a big concern.

Balancing the risk between investing in equities (higher risk and higher return) and bonds (lower risk and lower return) is what you should do first. Do not invest in anything that is claiming to be 'guaranteed', 'the next big thing' or 'low risk and high return,' these are not real. Other types of assets are available, look into those later or never. In fact search for 'asset allocation monevator' online now, and read the first couple of articles.

Your current asset allocation is not bad, so you have time to learn more before you change anything around.

Here are some things to think about:

You are around 28% in bonds, this is about right if you are aged around 30 and have typical risk tolerance, or aged around 50 and have high risk tolerance or aiming for higher growth. If you dislike the idea of equities, having read a bit more, then you might want to increase the amount of bonds. Search for 'your age in bonds' to understand why I'm saying this.

You are heavy in UK equities (compared to the global value), if you think that UK companies are safer, more likely to grow than other countries or you want to have pension growth that matches the UK growth then that is a good thing.

If you want to learn more then read Monevator's website and Tim Hale's Smarter Investing. You could also pay to speak to an Individual Financial Advisor.

Again:
Do not panic
Do not move everything into gold or cash
Read about asset allocation
Think more about what your concerns over equities are
[Do not take advice from someone on the internet before validating it for yourself]

danlightbulb

Thanks!!

I will begin looking at the things you mentioned.

Regarding equities. I have observed that over the past 30 years or so that the markets have had roughly a 7 year cycle of peaks and troughs. We are now in a peak. The thinking of my one colleague is that if he cashes out now at the peak, then when it dips he can buy back in and reap the growth again over the next cycle. Anyone who hasnt cashed out before the dip would see their fund drop massively and yes it would then recover, but only to where it was before. This kind of makes sense, assuming there is going to be a crash.

LHW99

On the other hand there could be another 2-3 years of growth before a significant dip - and then he has to buy at a 'dipped price' that is actually higher than now.

The point of pension ivestments is time - not timing.

danlightbulb

But things can't go up and up and up forever can they? And a big crash/correction a few years before I'm due to retire could decimate my pension pot. Even 10 years before I retire could cause serious damage.

Easy to say in retrospect, but if I'd have cashed out just before the China dip, and then bought back in at the bottom, I'd have added an immediate 20% or so to my pension fund! Is that not the goal of this? To manage your fund so that you outperform the default funds you're put into?

Ive spent some time looking at the funds Im currently invested into by default.

The DC Aquila Life Market advantage fund is classed as just below medium risk on Blackrock's scale of risk. Its YTD performance is 1.1% and its 3 year performance is 5.3% pa.

Just looking through some of the other 80 odd available funds, I can see one called DC Aquila Consensus Index Fund. It is classed as medium risk (one notch above the above fund). Its YTD performance is 2.6% and its 3 year performance is 10.5% pa.

Now here is my question. My 'pension fund' is managed by a big company (Blackrock) and presumably some very very (very very very) well paid people. Why am I in the fund I'm in, rather than in the better performing fund? I have a trust issue here because clearly my fund is not being looked after as well as it can be. This realisation makes me significantly distrust these pension corporations.

dunstonh

But things can't go up and up and up forever can they?

Inflation pushes the value of things up. mergers and acquisitions pushes the price up. Increasing markets for trade pushes the price of things up.

There may be a ceiling on some of these things and some areas have less growth than historical but there is nothing to suggest we have hit a hard ceiling or that a hard ceiling is imminent.

And a big crash/correction a few years before I'm due to retire could decimate my pension pot.

most crashes take 12-24 months to recover. However, unless you are buying an annuity, you are unlikely to be stopping investing at retirement. The money could be in there for another 20-30 years beyond your retirement date.

Even 10 years before I retire could cause serious damage.

How? 10 years is plenty of time to recover (far more than needed) and the contributions you make in those years will go on to make more money as it recovers.

Easy to say in retrospect, but if I'd have cashed out just before the China dip, and then bought back in at the bottom, I'd have added an immediate 20% or so to my pension fund!

And at what point do you call the peak and what point to you call the trough?

is that not the goal of this?

No. That is a foolish way to invest. Typically you will pull out too early and go back in too late or go back in during the first phase of a decline only to be hit worse by the second.

To manage your fund so that you outperform the default funds you're put into?

What makes you think that you are better than the fund managers that have far greater research resources available than you?

ow here is my question. My 'pension fund' is managed by a big company (Blackrock) and presumably some very very (very very very) well paid people. Why am I in the fund I'm in, rather than in the better performing fund?

You are in that fund because you chose to be.

I have a trust issue here because clearly my fund is not being looked after as well as it can be.

Your fund broadly follows the sector average. a few peak and trough differences but that will more likely be down to risk differences.

This realisation makes me significantly distrust these pension corporations.

At least they are following a defined strategy with an asset allocation suitable for their objective and not following some potty idea that they can time the market. its not a great fund. Its not a bad fund. It is the perfect default fund. Never the best, never the worst, wont go wrong. You have a strange definition of trust as there appears to be no lies with this fund.

danlightbulb

I didn't choose to be in that fund. Its the one my company arranged for all employees as the default fund with Blackrock when they switched us all from our old provider.

With our old provider it was all managed for us. Now we have all these funds available and we can choose how much to put in each one. We can switch things around as often as we like using their website tool.

Shouldn't it be their responsibility though to ensure that the people paying in are in the most profitable funds? Isn't that what the job of a fund manager is, to make the best returns out of his/her assets? Buy low sell high and all that?

The fund I'm in is one of the lowest long term performers, looking at the performance of the 80ish other funds. I don't get how Blackrock can call that a successful outcome?

Other funds which are classed as medium risk have done much better. Why wouldn't they split my pension fund across more of these funds by default? For example if there are 20 funds all doing better than the standard fund, put 5% in each one and spread the risk?

dunstonh

I didn't choose to be in that fund. Its the one my company arranged for all employees as the default fund with Blackrock when they switched us all from our old provider.

You did choose. Your choice was to go with the default. Inaction to choose alternatives is a choice.

With our old provider it was all managed for us.

No difference between what you had before and what you had now unless you had an IFA running a portfolio or a discretionary investment service.

houldn't it be their responsibility though to ensure that the people paying in are in the most profitable funds? Isn't that what the job of a fund manager is, to make the best returns out of his/her assets? Buy low sell high and all that?

No, that is not the job of the provider or fund house. That is the job of your IFA or yourself if you choose not to use an IFA.

The fund I'm in is one of the lowest long term performers, looking at the performance of the 80ish other funds. I don't get how Blackrock can call that a successful outcome?

The sector it is in covers a wide spread of risks. That fund is a more cautious version than many in that sector. So, you would expect it to be where it is. It is doing exactly what it should be doing.

You cannot compare funds in the same sector on performance alone. You have to look at asset make up and risk.

Other funds which are classed as medium risk have done much better.

Provider risk scales tend to be unreliable for anything other than a rough ballpark. They tend to only have upto 7 scales with a wider spread.

Why wouldn't they split my pension fund across more of these funds by default?

What investment strategy would they follow?
Who is going to rebalance them?

For example if there are 20 funds all doing better than the standard fund, put 5% in each one and spread the risk?

Because its an absolutely awful way to invest.
What happens when a sector takes a downturn. Do you drop that fund? The higher volatility funds can be top one year and bottom the next. There is also probably multiple similar funds available to you and some sectors with very little coverage. So, picking 5% each would lack balance and increase risk through poor diversification.

danlightbulb

Right I see. Complex.

What we had before was a pension fund managed through an intermediary. I don't know how they made decisions on which funds to invest in, but when they did it they did it for everyone in the scheme collectively. So the 'manager' in this case was (as far as I know) actually managing the fund? Or maybe not. I don't know as it was all handled by the 3rd party and overseen by a company trustees board.

Now we have the option to do all this ourselves. Or sit on the default funds. There is no company trustees any more. No intermediate 3rd party. Just me and Blackrock where my money is.

Clearly I'm assuming things here that are not how things work. If I give you my money and trust you to invest it, then as you are an expert I'd expect you to know where to put it for best return, and flex that as appropriate. Why wouldn't you drop a poorly performing fund? But that's not what's happening here. I am the one expected to choose my fund(s). And I'm not the expert. It seems backwards, and potentially dangerous. Its dangerous to mess about with it but it seems dangerous not to as well (based on my assumption that previously the 3rd party was looking at this).

What if the fund I was in started to go downhill? In the previous situation the 3rd party intermediary or the trustees would have acted. However now, nobody will act on my behalf and if I'm not looking at it, no one else will and I'd sit in that fund until it dwindles to nothing.

Also I should add that the fund I'm in has underperformed its benchmark. Other funds have met their benchmarks. What does this tell me about this particular fund? Poorly managed?

dunstonh

What we had before was a pension fund managed through an intermediary. I don't know how they made decisions on which funds to invest in, but when they did it they did it for everyone in the scheme collectively. So the 'manager' in this case was (as far as I know) actually managing the fund? Or maybe not. I don't know as it was all handled by the 3rd party and overseen by a company trustees board.

Most intermediaries do not hold discretionary investment management permissions. That means they cannot make any changes without telling you each time in advance and you agreeing to it.

Either you had a portfolio of single sector funds that were auto-rebalanced or you had a single multi-asset fund where the investment decisions were made within the fund.

There are a small number of providers that have a governed solution that will use a sector allocation and drop in/out different funds based on their governance.

If I give you my money and trust you to invest it, then as you are an expert I'd expect you to know where to put it for best return, and flex that as appropriate.

I have been an adviser and investor for over 20 years. I cant tell you where the best return is going to be. Nobody can. This is why you diversify. Also, each area carries different risks. So, you need to balance the allocations in each area to match your risk profile as well as getting an optimal allocation.

Why wouldn't you drop a poorly performing fund?

Being able to measure why its poorly performing is the first thing.

A riskier fund will tend to go up more in growth periods and loss more in negative periods. So, you need to understand the risk differences as a poor period could be purely down to risk.
Some funds have a investment strategy that can work better in certain parts of the economic cycle. So, you need to adjust along with that.
The global regions and asset types will all have good years, bad years and nothing years. Nobody knows which will be best, worst or indifferent in the days, weeks, years ahead.
Individual managers can use research to try and improve returns. Some do that successfully. Many do not.

Lets look at some recent years and how investment areas can jump around using 13 major investment areas/types.

1 - Commodities in 2004, 5 & 6 did well and came 5th in each of those years and 2nd in 2007, 2009 and 2010 (2008 was below par at 10th). So, in all but one of those years, they had very good performance. However, in 2011, it was 9th and 2012 and 2014 bottom. 2013 was 12th. Four negative years in a row.

So, using your method, you would jump into that area because of those good years and bought high. Then suffered years of negatives. in reality, its a much better time to be buying them now (although given their high risk and highly volatile nature you wouldnt buy much of them and perhaps the years of gain pushed them into a bubble that burst and the new pricing level is more consistent with where they should be).

2 - UK Small cap was worst sector in 2011. So, you would have avoided/come out of that. It was best area in 2012 and 2013. Just as you go back in again using your method, along comes 2014 and they were second from bottom again.

You cant time these things.

Also I should add that the fund I'm in has underperformed its benchmark. Other funds have met their benchmarks. What does this tell me about this particular fund? Poorly managed?

Every fund is in a sector and by default is given a benchmark. However, the benchmark may not be a target figure for the fund. For example, the Aquila Life Market Advantage fund is in the mixed equity 20-60% shares sector. if you take a typical 1-10 risk scale, then funds in that sector will vary from risk 4 to risk 7. So, whilst they are all benchmarked together to give that benchmark, they are going to perform differently at different times as the asset make up will be different.

Property is one of the worst sectors for this as you have bricks and mortar funds mixed in with property share funds. Bricks and mortar funds are relatively cautious. Property share are highly adventurous. Yet they are in the same sector. In growth periods, the property share funds will be way ahead of the bricks and mortar funds but the reverse in negative periods. They are very different in risk and how they work but they share the same sector benchmark.

Your fund has outperfomed its sector average year to date. It was also quite a bit higher in 2014. it was under the sector average in 2013 but higher in 2012. However, if you average that out over between 28/02/11 and 16/10/2015 then there is virtually no difference between the sector average and the fund itself. You get odd periods slightly above or slightly below but its more or less in line with the sector average. Just as you would expect a default fund to be.

danlightbulb

Great info thank you.

Ive also read a couple of monevator articles on asset allocation. Interesting stuff.

So where do I go from here?

According to the one page reports I can get for each fund, my current funds are 2/7 risk rating and 3/7 risk rating. I could move a proportion of my pot into a slightly riskier fund or two as I'm 35 and so have 30 years left yet.

I quite like the idea of the Mr Average fund here: http://monevator.com/asset-allocation-types/

Is it a case of looking through the 80 funds I have access to and finding those asset mixes?

You suggested that spreading around all over the place is a bad idea.

So assuming I want to hold 30% bonds. I could spread my remaining 70% between say 3 to 5 equity funds with some different asset mixes? The asset mixes are available on these 1 page reports I can download from Blackrock.