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The allocation illusion

The allocation illusion

By Pádraig Floyd
Wednesday 6th May 2015

Just how much do trustees know about where defined contribution default funds are invested? Pádraig Floyd finds out and looks at the real cost of diversification.

"This is really an issue of transparency. I was at a trustee meeting a year ago and when the advisers were asked about the allocation beyond the FTSE 100, they couldn't tell us."

Roger Mattingly

A recent report conducted by MSCI on behalf of the Society of Pension Professionals (SPP) and Old Mutual Asset Managers, looked at how default funds are typically allocated and compared the economic exposure of those regions to build a picture of where schemes are actually exposed.

It found default funds have a typical weight of around 41% to UK equities, yet due to the international nature of the businesses that dominate the FTSE 100, the economic exposure to the UK is only 13.6%.

For emerging and frontier markets, most funds typically have around 6.1% listed exposure, but the actual economic exposure is 22.9%.

Of course, this is not unusual – US funds would tend to have a US domestic bias and compared to the old days of 100% equity defaults or 60/40 balanced funds, 41% is a relatively low headline figure until you compare it to the UK’s proportion of global GDP, which is around 4%.


The UK market is also concentrated in a small number of sectors, all of them old school energy and commodity-based as opposed to high-tech.

However, the report highlights an element of exposure that may have been missed by the trustees, and almost certainly will not have been communicated to the membership.

Roger Mattingly of the SPP says the purpose of the research is not to change or distort behaviour of pension schemes, but make the reality clear.

“This is really an issue of communications and transparency,” says Mattingly. “I was at a trustee meeting a year ago and when the advisers were asked about the allocation beyond the FTSE 100, they couldn’t tell us.

“We simply wish to raise awareness. It changes second by second, but advisers should have flavours of where there are exposures.”

The research also found the average DC default fund has revenue exposure to 78 different countries, even though some allocations are as low as 0.01%.

“It may be good to have the exposure to pretty hefty increases in GDP with a reasonable corporate governance theme, but taken with the UK listing, that is probably not the perception within the scheme or the membership,” adds Mattingly.

Transparency of communication is all very well, but default funds are those in which the members have – implicitly – asked trustees to set the investment strategy.

“You can communicate, but people investing in defaults are separated from the decision-making process,” says Ashish Kapur, head of European institutional solutions at SEI. It all depends on how the trustees are using this information.

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