White Paper Default Fund Benchmarking final word temp V2 · White Paper: Default Fund Benchmarking February 2018 ... The purpose of this paper is therefore to introduce a new value-based

White Paper: Default Fund Benchmarking February 2018

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Contents Contents ........................................................................................................................................... 2

1 Introduction ........................................................................................................................ 3

2 The Importance of Benchmarking ................................................................................... 4

2.1 Typical Benchmarks for Default Funds ............................................................................... 4

2.2 What Makes a Good Benchmark? ...................................................................................... 6

2.2.1 Restriction Premium ..................................................................................................... 7

2.2.2 Charges ....................................................................................................................... 7

2.2.3 The Failures of Modern Benchmarking ........................................................................ 8

3 Introducing the TBX Floor .............................................................................................. 10

3.1 The Principle ..................................................................................................................... 10

3.2 Setting the Floor ................................................................................................................ 10

3.3 Restriction Premium and Risk-Free Linkers ..................................................................... 11

3.4 Fund Asset Allocation Linker ............................................................................................ 11

3.5 Testing .............................................................................................................................. 13

3.6 Conclusions ...................................................................................................................... 15

4 Communicating TBX Floor ............................................................................................. 16

5 Appendix I: Testing – Benchmarking in Buoyant Markets .......................................... 17

5.1 Testing Criteria .................................................................................................................. 17

6 Appendix II: Testing – Benchmarking in Falling Markets ............................................ 21

6.1 Testing Criteria .................................................................................................................. 21

7 Appendix III: Morningstar EAA Categories (Snapshot) ............................................... 23

8 Appendix IV: References ................................................................................................ 24


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1 Introduction With nearly a decade of growth, following the 2008 financial crisis, benchmarking has perhaps been subject to reduced scrutiny. It is arguable that in largely rising markets, people are less concerned when a fund strays from its benchmark, as long as it is producing a high level of return, relative to more challenging conditions.

However, the stimulus applied by central banks to sustain economies after the last major crash, which resulted in an extended bull market for equities and bonds, is now starting to wane. As global reflation continues to take hold and interest rates increase, the underlying fuel for markets is diminishing and some economists are warning of lower growth in future.

In what has been a relatively easy time for the typical default growth fund, falling returns will require EBCs and advisers to do more consultative work with their clients on fund performance. This should lead to renewed debate about why funds are often compared to the average returns of their sector, when there is such a considerable span of holdings in growth assets. In other words, funds are often not compared on a like-for-like basis and this is a recognised issue within the industry.

Our view is that benchmarking should better reflect the value that the fund manager is delivering and should better communicate this value to governance committees and members alike.

The purpose of this paper is therefore to introduce a new value-based benchmark concept and to provide detailed insight into our methodology and testing. It is also important that we explain and justify how this concept will add value to our corporate investment governance processes.

Testing will continue over Q1 2018, with a view to a soft roll-out in Q2.

Should you have any questions, please do not hesitate to contact us.

Thomsons Pensions Technical Team

Luke Harris Pensions Technical Manager

Michael Probert Senior Technical Pensions Consultant

Kevin Brendling Senior Technical Pensions Consultant

E: [email protected] W: thomsons.com @ThomsonsOnline thomsons-online-benefits

Contact us


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2 The Importance of Benchmarking So, why do funds have benchmarks? Ultimately this is driven by the need of investors to be able to review the past performance of a fund, but it is also an important tool for the fund manager, who of course desires to attract new investors. As a result, a balance must be struck - should the fund manager set the bar too high, considerable outflows could ensue when/ if the fund falls below this level. On the other hand, if the manager can show that their fund consistently delivers returns in excess of the benchmark then inflows will increase as investors seek out the ‘best’ funds.

It is no surprise then that fund managers would prefer to err on the side of caution, with some of the funds launched post auto-enrolment providing no official benchmark for returns at all (just volatility). Whilst a volatility benchmark can be a valuable additional benchmark, the removal of a benchmark for returns is an unwelcome change of direction, as governance committees have a responsibility to review performance and therefore a measurable target for returns is a necessity.

2.1 Typical Benchmarks for Default Funds Usually the type of default funds used by GPP schemes are benchmarked against their sector average or against a composite benchmark that aims to replicate the asset allocation of the fund. The table below (fig 1) highlights some of the most popular benchmarks applied.

Risk Rating Benchmark

Growth: Progressive

• ABI Mixed Investment 40-85% shares

• FTSE All share

Growth: Cautious • ABI Mixed Investment 20-60% shares

• 25% FTSE Allsh, 25% M Iboxx Non Gilt15yr+, 25% FTSE Gilts+15yr, 8.35% USA TR, 8.35% FTSE AW Dv Europe exUK TR, 4.15% FSTE AW Dv AP ex JPN, 4.15% FTSE Japan

Pre-Retirement • ABI Mixed Investment 0-35% shares

• FTSE Gilts >15yrs

Cash/ Near Cash • ABI Deposit

• ABI Money Market

• LIBOR 3M

• Sterling Overnight Interbank Av.

In practice, performance against the benchmark should (in the first instance) be communicated via a table of discrete annualised returns. In addition, a chart of cumulative returns (fig 2) may also be appropriate, along with other graphical representations as this can better identify tracking errors and volatility.

Figure 1: Typical benchmarks applied for GPP default growth funds.


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Furthermore, the use of peer comparisons is also an important form of benchmarking, provided that it is applied on a like-for-like basis concerning asset allocation. This can simply be a comparison of returns, but can be more value-adding when applied on a risk-adjusted basis, as detailed below (fig 3).

These are well-recognised approaches that will be regularly used as part of performance reviews and recommendations, but more can be done and context is all important.

For the purposes of this paper we will focus on growth funds, as members will typically spend most of their time invested in these funds and because pre-retirement and cash funds tend to provide more appropriate benchmarks.

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Figure 2: Benchmarking example - chart of cumulative returns (1 year to 30.09.17)


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2.2 What Makes a Good Benchmark? With a growing focus within the industry on value-for-money (driven in part by the FCA’s asset management market study in June 2017 and formation of IGCs in 2015) it is imperative that well-governed schemes can comprehensively measure the value of a default fund’s performance and that this be communicated to members and key stakeholders.

As a means to assessing whether current benchmarking approaches are good or bad (or somewhere inbetween) it seems logical to establish some criteria for what defines good value or poor value. Once funds have been broadly grouped by asset allocation risk-rating, the following questions should be asked:

• Risk Premium - Are members being rewarded for the level of investment risk that they are taking, relative to other available options?

• Risk-Adjusted Returns - Is the fund taking a higher level of risk than its peers in order to generate its returns?

• Competition - Are there better-performing funds available on the provider’s platform, or with another appropriate provider?

• Restriction Premium - Are members being rewarded for investing in a pension fund, which they will not be able to access until age 55 (57)?

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Speculative fundsProgressive funds

Cautious funds'Risk-Free'

Figure 3: Benchmarking example – risk-adjusted returns (3yr pa to 30.09.17)


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• Charges - Is the fund charging more for the same or lower returns than other similar funds?

Whilst most of these questions can be answered to some extent by modern benchmarking techniques, the question of whether members are likely to achieve greater returns vs an alternative form of investment is less easy to quantify using traditional benchmarking.

2.2.1 Restriction Premium

In addition to risk, investors are likely to expect reward for sacrificing access. Tax incentives aside, employees have a number of retirement funding options available to them, including property, ISAs and other investment schemes. With pension schemes sponsored by the employer, the employer will rightly wish to know whether the value of their benefit spend is being maximised and the default fund is an obvious area of scrutiny, given that most members will be invested in it. Furthermore, default fund performance is a useful marker for comparing scheme providers and platforms.

With ISAs being heavily promoted by the Government to support retirement saving, as well as house purchasing, an important criterion for assessing value is whether a pension fund can deliver greater returns to compensate for the time that the money is locked up for. If not, then purely from the perspective of risk and return, it would be better to invest in an easy access cash account, where savings can be accessed if required. Therefore, an inaccessible investment should at least deliver returns equivalent to easy access cash.

This is an important aspect that traditional benchmarks do not cater for.

2.2.2 Charges

In June 2017, the FCA commented on the profitability of the asset management industry and its report cited ‘persistently high levels of profit,’ which indicate that investors ‘may not be achieving value for money.’(1)

. The report highlighted that the average asset manager has an operating profit of 36%, with some enjoying levels as high as 45%.

Whilst the FCA comments are a broad opinion based on the whole asset management industry (including funds where investors will be paying much higher charges than those provided under the pension charge cap), this raises a further benchmarking question – is the default fund good value for the charges paid? Traditional forms of benchmarking do not provide a comprehensive answer to this specific question.

However, whilst the charging cap is a blunt instrument (with some clear drawbacks), its introduction has narrowed the scope for charges. Once the charges for scheme administration are taken into account, most default funds will be restricted to a charge of less than 50 basis points. The obvious downside is that providers are forced to run their default funds in a very constrained environment, hence the rise of lower-cost passive solutions. However, this narrowed operating window does allow funds to be compared on a more equal basis.

Having said this, the opaque nature of many platforms means that the true cost of the default fund to members is not easily identified. Often the default fund charge is bundled within the member charge and the cost of the fund is simply reported as 0.0% above scheme level. Hopefully the FCA’s drive for value will

(1) Source: Citywire: http://citywire.co.uk/wealth-manager/news/fca-fund-managers-do-not-provide-value-for-money/a1028783


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deliver greater transparency in this area, allowing for charges to be better incorporated within the value equation.

2.2.3 The Failures of Modern Benchmarking

Within the GPP default fund arena, funds will typically operate in one of the following ABI pension sectors:

• Mixed Investment 40-85% shares

• Mixed Investment 20-60% shares

• Specialist (funds not accommodated by any other ABI sector)

Funds will often then be benchmarked against their sector average and this is something of an industry standard, given that there is some level of asset allocation alignment and general intent. The Mixed Investment 40-85% shares sector average is especially popular, given that most growth funds operate within this range of share holdings, and even funds from the Specialist sector (which apply a wide range of investment philosophies) are sometimes assessed against this dominant marker.

The issue, however, is that that a fund investing around 50% in equities/ 50% in bonds will usually be unable to generate similar growth to a fund investing 80% in equities/ 20% in bonds, despite being compared to the same benchmark.

Often, a manger is willing to go-along with a generic sector average benchmark when the fund performs within close proximity to it. However, when any disparity widens and the manager is forced to defend the fund’s performance, a different benchmark may be presented. At this point the manager may stress that the benchmark is simply a ‘broad’ target or the benchmark maybe downgraded from a sector average to a quartile three target. Alternatively, an ‘internal’ benchmark that better reflects the fund’s asset allocation may be presented – essentially a redefining of the goalposts!

When the lower equity funds underperform the sector average, the managers of these funds will typically make the point that they are taking less risk and therefore cannot be expected to produce the same level of returns. This re-labelling of a benchmark in more challenging conditions is clearly undesirable and identifies that there is sometimes too much wiggle room. Ultimately it devalues the benchmark to the extent that it is not trusted and not a reliable measure of performance for governance committees or members.

The crux of the issue then is that with sector average benchmarks, under/ over performance is really just a representation of a fund’s equity holdings versus the average. Therefore, in a sector where equity holdings can differ so widely the benchmark is incapable of defining whether a fund has performed well or not. Furthermore, when used in isolation, a sector average benchmark fails to deliver a comprehensive measure of value for money regarding the level of risk taken, restriction to access or the degree to which the manager diversifies across asset classes.

One example of this can be found in the arena of multi-asset funds, which seek to protect members from market fluctuations through greater asset diversification. Some of these funds are multi-asset in name only, investing predominantly in standard equity and bond classes and little else. In stark contrast there are multi-asset funds that invest in a wide spectrum of assets, aiming to deliver a very good level of risk-adjusted


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returns. However, a sector average benchmark for returns will not identify the funds that are looking to deliver better value outcomes for members, as it focuses solely on returns and does not incorporate volatility.

More recently, auto-enrolment inspired defaults have been launched with no official target for returns at all, instead focussing purely on volatility. This pendulum swing switches focus and is understandable given the scare stories about potential opt out rates prior to auto-enrolment, but it still focuses on just one metric within the package required to define value. For such funds, sector average benchmarks are a largely redundant for of benchmark and peer to peer comparison requires an alternative approach.

As the FCA pointed out in its asset management report (appendix IV), ‘there is no single measure of value for money’ and therefore a more comprehensive approach is required.


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3 Introducing the TBX Floor The ability to deliver a catch-all benchmark for a wide range of funds, which incorporates a number of value metrics is challenging. One option is to apply a number of benchmarks together, helping to provide a more comprehensive picture of value.

However, a level of simplicity is also desirable and ultimately members will want to know if it is worth committing their money to a pension fund – are the returns generated reasonable for the level of risk taken and does the fund perform well relative to its peers? Equally, employers require reassurance that they are fulfilling their governance responsibilities and delivering the best possible outcomes for members.

3.1 The Principle

TBX Floor aims to be revolutionary, by setting a minimum level of return alongside a fund’s published benchmark. In essence, over the long-term a fund’s returns should not fall below this floor. If the floor is breached, then the fund’s performance should be scrutinised accordingly. Therefore, the floor acts as a flag to indicate that a fund may not be delivering value on the identified metrics.

3.2 Setting the Floor The setting of the level for the floor, relative to each fund, requires three components:

• a restriction premium linker;

• a risk-free linker; and

• an asset allocation linker.

Ret

urns

Good Fund Official Benchmark

(non specific) TBX Floor

Positive value

Figure 4: TBX Floor Principle – identifying ‘good’

Poor Fund

Negative value


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3.3 Restriction Premium and Risk-Free Linkers

We wanted to convey value through the application of a ‘restriction’ premium – i.e. pension members should be rewarded for committing their contributions to a pension plan that restricts access to age 55 (57). A pension fund should therefore deliver greater returns than a product that does not restrict access – e.g. a cash savings account.

Equally a pension fund will usually invest in a proportion of growth assets with risk ratings that range from cautious to speculative. Therefore, the fund should deliver returns above the risk-free rate, otherwise members will rightly ask why they should take higher risk for no additional return.

We therefore considered whether a cash +x% or inflation +x% target could be successfully utilised to represent the risk premium and returns above the risk-free rate.

The debate about cash vs inflation is nothing new and both are commonly used. We therefore first considered whether one is likely to set the bar higher than the other over the long-term.

Invesco Perpetual produced a paper (appendix IV) that covered this very topic and their conclusion was that via the setting of interest rates to influence price inflation, cash returns naturally incorporate inflation over time. Therefore, whilst differences will arise, these smooth out over time and there is no clear advantage of using one over the other.

We then considered which is the most tangible for members to understand and our conclusion was that there is little to choose between them. Both are frequently discussed in the media but cash is perhaps a little simpler to communicate, as there is just one base rate and inflation has different monikers and different calculations.

With pensions being challenged to some extent by Individual Savings Accounts (ISAs), which often apply limited restrictions on access, the option to apply cash seemed logical. Cash ISAs are popular, with subscriptions totalling 9 million subscribers in 2016/17(2), which is around 22% of the UK adult population. The increased savings thresholds in recent years across the ISA range have made this high street product increasingly popular.

Cash was therefore judged to be the better option for the base of the floor, with cash funds selected based on their long term track record. The returns of these funds were averaged to produce a useable cash figure for our floor. The setting of the level of ‘x’ would still need to be calculated, but first there would also need to be a link to a fund’s asset allocation to ensure that the benchmark is reflective of the fund’s construction

3.4 Fund Asset Allocation Linker The option to create or even apply a combination of indices to reflect a fund’s asset allocation is one solution, but this would be more realistic when only dealing with a small number of funds, given the need to regularly update the holdings. However, where a regular review of many funds is required, a more scalable solution becomes a necessity.


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Typically a sector average might be used but, as identified earlier, the asset allocation within a sector can vary considerably. A new solution was therefore required and we turned our attention to different categories published by Morningstar Direct.

The EAA (Europe, Asia, Africa) categories were identified as a potential solution, as these provide a GBP bias and are included within the universe of UK Life and Pension Funds. Morningstar’s paper (appendix IV) defines these as follows:

‘The Morningstar Categories for funds in the Europe/Asia/Africa universe were first established in the early years of the UCITS (Undertaking for Collective Investment in Transferable Securities) Directive to help investors make meaningful comparisons between Investment funds. Morningstar regularly reviews the category structure and the funds within each category to ensure that the system meets the needs of investors and keeps pace with market developments. The categories are based on the following principles:

• Proper Evaluation: Every rated category should form a benchmark against which a manager’s ability to add value relative to peers with similar investment exposures can be meaningfully measured.

• Transparency: The rules defining each category should be clearly stated such that asset managers and investors can easily determine the rationale for a fund’s classification.

• Independence: A fund’s classification is based on Morningstar’s independent analysis of its holdings, objective and performance.

• Stability: With the exception of a clear change to a fund’s strategy which will be addressed at such time as the change is evident, a fund’s categorisation is based on its positioning through time with the trailing three years the default period evaluated.

This enhances the stability of the classifications and is aligned with the interests of fund investors, who generally use funds as longer-term investments. The categories include funds domiciled in European markets, major cross-border Asian markets where material numbers of European UCITS funds are available (principally Hong Kong, Singapore and Taiwan), South Africa, and selected other Asian and African markets where Morningstar believes it is of benefit to investors for the funds to be included in the EAA classification system.’

One initial concern with these categories was the perceived absence of US assets, especially US equities. However, having run the full list of funds included, it is clear that US assets are included within the captured funds, which include UK insurance company’s and multi-asset funds (e.g. Aviva multi-manager 40-85% Shares (23% US equity) and Scottish Widows Progressive Portfolio Two (30% US equity). (A snapshot of included funds is included in appendix III).

We are therefore satisfied that these categories cover an appropriate range of assets for the funds that we wish to analyse and the number of funds captured exceeds those typically delivered through a single ABI pension sector. Furthermore, these categories provided tighter risk bands, allowing for a more appropriate risk-adjusted comparison to be made, as detailed in the table below

(2) Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/640743/Full_Statistics_Release_August_2017.pdf


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Risk Rating ABI Benchmark EAA Categories

Progressive • ABI Mixed Investment 40-85% shares

• EAA GBP Adventurous (>80% shares)

• EAA GBP Moderately Adventurous (60-80% Shares)

• EAA GBP Moderate Allocation (40-60% Shares)

Cautious • ABI Mixed Investment 20-60% shares

• EAA GBP Moderate Allocation (40-60% Shares)

• EAA GBP Moderately Cautious Allocation (20-40% Shares)

Pre-Retirement • ABI Mixed Investment 0-35% shares

• EAA GBP Moderately Cautious Allocation (20-40% Shares)

• EAA GBP Cautious Allocation (<20% shares)

The application of these categories is also key, as we are not looking to set a bar for a fund to aspire to, rather to identify a level that it should reasonably be expected to not fall below. Therefore, rather than applying an average return from each category we sought to apply either an average fourth quartile return or a 75th percentile return. We therefore ran a series of tests, across multiple funds and sectors, in both rising and falling markets. A snapshot of these test results is featured below, with further findings listed in appendix I.

3.5 Testing The criteria for the tests was set as follows:

• (A) TBX Floor should not exceed the returns of the fund, unless it identifies poor fund performance

• (B) TBX Floor should not exceed the ABI sector average for the fund, unless it identifies poor fund performance

• (C) TBX Floor should not sit more than 50% below the level of the fund’s return, unless the fund has displayed exceptional performance.

The two charts below make a comparison over a five year period and demonstrate our rationale for applying a 75th percentile risk-adjusted return rather than average fourth quartile returns. The full results are provided in table format and appendices I and II.

While both approaches identify the underperformance of some funds and pass the three tests, the fourth quartile approach sets the bar a little too low to be a valuable form of benchmark. For example, over three years the 4th quartile approach sets the TBX Floor at 6.31%pa with average fund returns set 9.56%pa. A similar gap is present over the other periods measured.

Figure 5: Morningstar EAA Categories


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In contrast, applying 75th percentile returns allows TBX Floor to sit closer to average fund returns and over three years makes the TBX Floor 7.05%pa versus average returns of 9.56%. We also considered whether to raise the floor any higher, but this would increase the floor to the extent that it ceases to be a floor and becomes more a target to achieve, which is contrary to our aims.

The charts above make a comparison of funds versus the proposed TBX Floor in what have been relatively positive equity and bond markets. It was therefore important to establish whether the floor would also be effective in falling markets and examples of this testing are included in appendix II.

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Figure 6: TBX Floor – applying average 4th quartile returns of MS EAA Category (Moderately Adventurous) - 3yr pa to 30.09.17.

Figure 7: TBX Floor – applying 75th percentile returns of MS EAA Category (Moderately Adventurous) - 3yr pa to 30.09.17.


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The outcome from these tests was that applying 75th percentile returns was more effective in identifying underperformance and again, whilst both approaches passed the established tests, the fourth quartile average returns resulted in a bench that was too low to be effective.

3.6 Conclusions

The purpose of the testing conducted was to establish whether the TBX Floor could be set at an appropriate level to provide value as a secondary benchmark option. In order for this floor to most effective it will need to deliver value in both rising and falling markets and be appropriately matched on a risk-adjusted basis.

The conclusions of the testing to date are that the TBX Floor (EAA GBP risk-adjusted returns + average cash ISA returns) can potentially deliver an alternative and value-based benchmark to be used alongside the typical sector average returns that many GPP default growth funds are typically benchmarked too.

Scheme sponsors, and members alike, should regularly review the performance of their pension investments and should be asking the following questions:

• Is value being delivered by paying contributions into a restricted access product?

• Is value being delivered, relative to the level of investment risk being taken?

• Is greater value achievable through alternative funds on the provider’s platform or on alternative platforms?

• Is my pension provider able to define and demonstrate these value metrics?

TBX Floor addresses the need to better identify and define value, supplies clear value metrics and can flag funds that are underperforming against these measures. The ability to hold fund managers to closer account is long overdue and with potentially more challenging market conditions ahead, TBX Floor has been designed to help drive better investment governance outcomes.


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4 Communicating TBX Floor Many default fund benchmarks are loose targets for returns, which afford the manager a lot of wiggle room.

• Typically these targets are the average returns of the ABI Mixed Investment 40-85% Shares or ABI Mixed Investment 20-60% Shares sector.

• TBX Floor is a secondary performance marker to be used alongside official benchmarks.

• TBX Floor aims to identify the value of a fund’s returns on a risk-adjusted basis, incorporating the returns available from a Cash ISA.

• A default fund requires members to invest for a long period of time (e.g. 30 years) and members cannot access their savings until age 55 (57). Members should therefore be rewarded for this lack of access (‘restriction premium’) and should expect to achieve higher returns than via a restriction-free investment – e.g. cash ISA.

• The returns of the fund should also reflect the asset allocation and therefore the risk profile of the fund. TBX Floor applies specific Morningstar indices which apply tighter asset allocation parameters than ABI sectors.

Over the long-term, a good fund’s returns are expected to exceed the TBX Floor. Where this is not the case, and a fund falls through the floor, the fund’s performance will require greater scrutiny.

Figure 8: TBX Floor Principle

Good Fund

75th Percentile Returns (of

risk-adjusted index)

Positive Value value

Poor Fund

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Cash ISA Returns

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5 Appendix I: Testing – Benchmarking in Buoyant Markets

5.1 Testing Criteria




TBX Floor: 4th Quartile EAA GBP Returns + Average Cash ISA

Fund 6m (1) 1yr (1) 3yr 5yr

Adventurous Allocation 0.57 5.69 6.97 7.27

Av DAF III 2.83 14.07 12.17 n/a

SW PP2 1.45 10.74 10.68 11.17

ABI sector average n/a(2) n/a(2) n/a(2) n/a(2) Average Fund Return 2.14 12.41 11.43 11.17

Test A

Test

-1.57 -6.72 -4.46 -3.90

Test B n/a n/a n/a n/a

Test C FALSE FALSE TRUE TRUE Source: Morningstar Direct – Annualised Net Returns to 30.09.17. (1) Cumulative (2) Non-comparable sector

Key

Test

Pass Fail

TBX Floor: 75th Percentile EAA GBP Returns + Average Cash ISA


Adventurous Allocation 1.18 7.34 7.96 8.33

Av DAF III 2.83 14.07 12.17 n/a

SW PP2 1.45 10.74 10.68 11.17

ABI sector average n/a(2) n/a(2) n/a(2) n/a(2) Average Fund Return 2.14 12.41 11.43 11.17

Test A

Test

-0.96 -5.06 -3.46 -2.84


Test C TRUE TRUE TRUE TRUE Source: Morningstar Direct – Annualised Net Returns to 30.09.17. (1) Cumulative (2) Non-comparable sector

Key

Test

Pass Fail


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Moderately Adventurous Alloc. 0.98 5.40 6.31 6.67

Av 40-85 1.95 10.05 9.75 10.18

AP My Future 0.31 7.10 10.64 n/a

AEGON UBC 1.82 9.68 9.03 8.86

Consensus 0.84 8.61 9.86 10.05

SW PP3 1.05 8.12 10.01 10.36

ABI sector average 1.95 8.33 8.09 8.64

Average Fund Return 1.36 8.86 9.56 9.70

Test A

Test

-0.37 -3.46 -3.25 -3.03

Test B -0.97 -2.93 -1.78 -1.97

Test C TRUE TRUE TRUE TRUE Source: Morningstar Direct – Annualised Net Returns to 30.09.17. (1) Cumulative

Key

Test

Pass Fail



Moderately Adventurous Alloc. 1.47 7.27 7.05 7.55

Av 40-85 1.95 10.05 9.75 10.18 AP My Future 0.31 7.10 10.64 n/a

AEGON UBC 1.82 9.68 9.03 8.86

Consensus 0.84 8.61 9.86 10.05

SW PP3 1.05 8.12 10.01 10.36

ABI sector average 2.16 9.61 8.08 9.06 Average Fund Return 1.95 8.33 8.09 8.64

Test A

Test

0.12 -1.59 -2.52 -2.16 Test B -0.48 -1.06 -1.04 -1.09


Key

Test

Pass Fail


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Moderate Allocation 0.14 3.49 4.09 5.07

Av 20-60 1.59 6.37 8.10 8.21

Av DAF II 2.10 9.99 10.51 n/a.

Av DAF I 1.25 5.66 8.48 n/a

BR 50:50 B&E 0.09 2.78 9.66 9.11

L&G MAF 2.22 7.30 10.15 9.20

PP4 0.30 3.39 8.14 8.59

SL MAF 20-60 1.21 4.96 6.76 6.84



Test A

Test

-1.11 -2.29 -4.73 -3.32 Test B -1.12 -1.87 -1.83 -1.31

Test C FALSE TRUE FALSE TRUE Source: Morningstar Direct – Annualised Net Returns to 30.09.17. (1) Cumulative

Key

Test

Pass Fail



Moderate Allocation 0.81 4.71 4.87 5.66

Av 20-60 1.59 6.37 8.10 8.21

Av DAF II 2.10 9.99 10.51 n/a

Av DAF I 1.25 5.66 8.48 n/a

BR 50:50 B&E 0.09 2.78 9.66 9.11

L&G MAF 2.22 7.30 10.15 9.20

SW PP4 0.30 3.39 8.14 8.59

SL MAF 20-60 1.21 4.96 6.76 6.84



Test A

Test

-0.45 -1.07 -3.96 -2.73 Test B -0.45 -0.65 -1.05 -0.72



20



Cautious Allocation 0.17 1.84 3.66 4.13

AP My Future Consolidation 0.08 2.99 5.14 n/a

Av DAF I 1.25 5.66 8.48 n/a

ABI sector average 0.89 2.12 5.35 5.46 Average Fund Return 0.67 4.33 6.81 n/a

Test A

Test

-0.49 -2.49 -3.15 n/a

Test B -0.72 -0.28 -1.69 n/a

Test C FALSE FALSE TRUE n/a Source: Morningstar Direct – Annualised Net Returns to 30.09.17. (1) Cumulative

Key

Test

Pass Fail



Cautious Allocation 0.85 2.94 4.22 4.89

AP My Future Consolidation 0.08 2.99 5.14 n/a

Av DAF I 1.25 5.66 8.48 n/a

ABI sector average 0.89 2.12 5.35 5.46 Average Fund Return 0.67 4.33 6.81 n/a

Test A

Test

0.19 -1.38 -2.59 n/a

Test B -0.04 0.82 -1.13 n/a

Test C TRUE TRUE TRUE n/a Source: Morningstar Direct – Annualised Net Returns to 30.09.17. (1) Cumulative

Key

Test

Pass Fail


21

6 Appendix II: Testing – Benchmarking in Falling Markets

6.1 Testing Criteria






Adventurous Allocation -19.68 -24.24 n/a n/a

SW PP2 -13.81 -23.19 n/a n/a

ABI sector average n/a(2) n/a(2) n/a(2) n/a(2) Average Fund Return n/a n/a n/a n/a

Test A

Test

-5.87 -1.05 n/a n/a


Test C TRUE TRUE n/a n/a Source: Morningstar Direct – Annualised Net Returns to 31.12.08. (1) Cumulative (2) Non-comparable sector

Key

Test

Pass Fail



Adventurous Allocation -16.60 -20.30 n/a n/a

SW PP2 -13.81 -23.19 n/a n/a

ABI sector average n/a(2) n/a(2) n/a(2) n/a(2) Average Fund Return n/a n/a n/a n/a

Test A

Test

-2.79 2.89 n/a n/a


Test C TRUE TRUE n/a n/a Source: Morningstar Direct – Annualised Net Returns to 31.12.08. (1) Cumulative (2) Non-comparable sector

Key

Test

Pass Fail


22



Moderately Advent. Alloc. -16.94 -23.09 n/a n/a

Aviva Mxd 40-85%sh -13.55 -22.39 n/a n/a

AEGON UBC -11.02 -19.01 n/a n/a

BLK Consensus -9.47 n/a n/a n/a

SW PP3 -12.07 -19.93 n/a n/a

SL Managed -13.76 -21.16 n/a n/a

ABI sector average -12.22 -20.25 n/a n/a

Average Fund Return -11.98 -20.62 n/a n/a

Test A

Test

-4.96 -2.47 n/a n/a

Test B -4.72 -2.84 n/a n/a

Test C TRUE TRUE n/a n/a Source: Morningstar Direct – Annualised Net Returns to 31.12.08. (1) Cumulative

Key

Test

Pass Fail



Moderately Advent. Alloc. -13.50 -20.16 n/a n/a Aviva Mxd 40-85%sh -13.55 -22.39 n/a n/a

AEGON UBC -11.02 -19.01 n/a n/a

BLK Consensus -9.47 n/a n/a n/a

SW PP3 -12.07 -19.93 n/a n/a

SL Managed -13.76 -21.16 n/a n/a

ABI sector average -12.22 -20.25 n/a n/a Average Fund Return -11.58 -20.03 n/a n/a

Test A

Test

-1.91 -0.13 n/a n/a

Test B -1.33 -2.14 n/a n/a

Test C TRUE TRUE n/a n/a Source: Morningstar Direct – Annualised Net Returns to 31.12.08. (1) Cumulative

Key

Test

Pass Fail

Please note that the cautious funds on our panel were not launched before 31.12.08 and therefore no analysis has been made in this section.


23

7 Appendix III: Morningstar EAA Categories (Snapshot) Morningstar Category Name Equity Style

Box (Long) Fixed Inc Style Box (Long)

Fund Size Base Currency

EAA GBP Moderately Adventurous Aviva MultiManager 40-85% Sh Large Blend Large Growth 95733352

EAA GBP Moderately Adventurous Scot Wid Progressive Port.2 Pen Large Blend 132014525

EAA GBP Moderately Adventurous Zurich Managed Income G4 AL Life Large Value Low Moderate 42,628,071

EAA GBP Moderately Adventurous AP Baillie Gifford Managed Pen Large Growth 146,592,389

EAA GBP Moderately Adventurous AP Newton Balanced Pen Large Blend 155,280,209

EAA GBP Moderately Adventurous AP Baillie Gifford Managed AP9 Pen

Large Growth 36,341,226

EAA GBP Moderately Adventurous Zurich/BlackRock Balanced AP Pen Large Blend

Medium Extensive 789,627

EAA GBP Moderately Adventurous Zurich/Schroder Bal Mgd 2000 AP Pen Large Blend 1,650,518

EAA GBP Moderately Adventurous Sterling/Aberdeen Multi Asset Life Large Blend Low Extensive 1,738,046

EAA GBP Moderately Adventurous Sterling/Schroder Managed Bal Life Large Blend 7,719,132

EAA GBP Moderately Adventurous Sanlam/GLG Technology 7 Life Large Blend Low Limited 285,999

EAA GBP Moderately Adventurous Sanlam/GLG Technology 7 Pen Large Blend Low Limited 285,999

EAA GBP Moderately Adventurous RLP/Schroder Managed Bal Pen Large Blend 41,318,902

EAA GBP Moderately Adventurous Sterling/BlackRock Bal Gr Port Life Large Blend Medium Extensive 2,706,210

EAA GBP Moderately Adventurous Pru M&G Episode Growth A-Pen Large Blend 8,694,675

EAA GBP Moderately Adventurous SE/Baillie Gifford Bal Mgd Pen Large Growth 830,420,000

EAA GBP Moderately Adventurous SE/Man GLG Balanced Mgd Life Large Blend Low Limited 11,279,999

EAA GBP Moderately Adventurous SE/Baillie Gifford Balanced Mgd Life

Large Growth 18,749,999

EAA GBP Moderately Adventurous SE/Newton Balanced Mgd Life Large Blend 33,560,000

EAA GBP Moderately Adventurous SE/BLK Balanced Mgd Life Large Blend 9,970,000

EAA GBP Moderately Adventurous SE/Man GLG Balanced Mgd Pen Large Blend Low Limited 579,110,000

EAA GBP Moderately Adventurous SE/Newton Balanced Mgd Pen Large Blend 1,233,580,000

EAA GBP Moderately Adventurous SE/BLK Balanced Mgd Pen Large Blend 510,129,999

EAA GBP Moderately Adventurous Pru/M&G UK Income Cap Pen Large Value 10,223,744

EAA GBP Moderately Adventurous Pru Managed Income B (ex M&G) Life Large Blend 25,852,288

EAA GBP Moderately Adventurous Pru Managed Income A (ex M&G) Life Large Blend 22,030,247

EAA GBP Moderately Adventurous Pru Managed Income (ex M&G) Pen Large Blend 8,694,675


24

8 Appendix IV: References Invesco Perpetual White Paper on Targeted Returns

https://www.invescoperpetual.co.uk/ip/pdf/ip-targeted-returns-realistic-whitepaper.pdf.

FCA Asset Management Market Study

https://www.fca.org.uk/publication/market-studies/ms15-2-3.pdf

Morningstar EAA GBP Category Methodology Paper

http://media.morningstar.com/uk/media/classification_review/Category_Definitions_May2011.pdf

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