The scale of defined benefit (DB) transfer flows going into the PruFunds range has been revealed with data showing three PruFunds were recommended 13,560 times since pension freedoms.
Data from pension software firm Selectapension reported by New Model Adviser® yesterday showed the most selected funds by advisers when providing transfer value analysis (TVAS) reports for DB transfers since April 2015. Although the data does not show how many of the transfers went ahead, it gives a good indication of the funds benefiting most from DB transfer flows.
Other highlights from the data included:
- Standard Life Aberdeen's (SLA) Global Absolute Return Strategies, more commonly known as Gars, was the most selected fund in 2015 and second most in 2016 – following this the fund suffered a sustained period of poor performance and did not make the overall top 20;
- Although some passive funds made the list, the top 20 consists mainly of big active funds from fund houses such as Woodford, Jupiter and Merian;
- Vanguard was the most popular passive fund used and its use increased over the years with the Vanguard US Equity Index fund the second-most recommended in 2017.
It is widely accepted that the PruFund range, which has over £40 billion of assets, has been a dominant source of DB transfer money. M&G Prudential’s chief financial officer Clare Bousfield has previously said PruFunds has been ‘very strong in pension transfers’ and it ‘fits a massive sweet spot in terms of a post-pension freedoms environment’.
The Selectapension TVAS data showed from April 2015 to February 2019, the PruFund Growth A-Pen was selected 7,905 times, the most recommended of any product. Coming in second was the PruFund Cautious A-Pen (see performance below) which was selected 3,892 times and the PruFund Growth D 1,763 times.
Together the three PruFunds were recommended 13,560 times, making up a quarter of the top 20 most recommended funds.
Vince Smith-Hughes, director of specialist business support at Pru, said PruFunds is often chosen for DB transfers as it opens up asset classes that investors would struggle to access otherwise, potentially spreading the risk they are taking.
‘Its diverse nature as a multi-asset fund, both with underlying different asset types and geographical sectors, means clients are not exposed to dramatic falls in one investment sector. Some of these asset types are not easily accessed directly by retail investors,’ he said.
He added the smoothing mechanism protects investors from volatility and the expected growth rates provide ‘an element of predictability when considering future income requirements’.
Smith-Hughes also pointed out Prudential shares the regulator’s views of DB transfers. ‘The benefits of a DB pension should not be given up lightly because in transferring, the responsibility for providing an income shifts from the employer to the individual (scheme member) and this process is irreversible.’
Mark Watson, director of IFA Integris Wealth, said he uses PruFunds for older clients with lower risk profiles but can also see why some advisers are using for DB transfers.
‘You can look at it and see that people are not going to see huge distortions in their values,’ he said.
However he added that he does not expect the fund to be able to meet the level of return required to match DB benefits in the long-run.
‘It is dependent on the case but typically the returns you need for the client coming out of DB is typically 5% plus [to match the benefits of the scheme]. Yes Pru has done that in the last 10 years, but that is in very good market conditions, if we suddenly had a number of years of poor markets, I don’t think it would be able to maintain that market return.’
The infallibility of PruFunds was highlighted at the end of last year when 18 funds in the range saw unit price cuts with some funds dropping by 3.4%.
While PruFunds has delivered consistent returns in recent years, some funds which featured on the DB transfer list have not fared as well.
The most selected fund in 2015 was Aberdeen Standard Investments Gars fund which was recommended 619 times that year and 817 times in 2016 (the second most selected). At the time the performance and inflows of Gars were strong, but since then the fund has suffered from underperformance and huge outflows – the fund lost £5.3 billion in outflows in the first half of 2018.
A spokeswoman for Aberdeen Standard Investments acknowledged the performance of Gars has recently been ‘below expectations’ and that ‘may have contributed to lower demand’.
‘However, we believe strongly that Gars can perform well in the upcoming economic and market conditions. We have positioned the portfolio to capture returns in what may continue to be a difficult environment for many asset classes,’ the spokeswoman added.
She also said as Gars was originally intended as the ‘growth engine’ for Standard Life’s own DB scheme, the fund shares similar investment approaches to a ‘typical DB scheme’.
‘These [attributes] include taking a longer-term approach, building a robustly-diversified portfolio and targeting an attractive level of return. The Gars portfolio has these same attributes.'
Another underperforming fund popular for DB transfers was the LF Woodford Equity Income fund (see performance below) which was the ninth most selected fund over the four year period (2,640 times). This fund has returned -4% from April 2015 to January 2019.
Woodford declined to comment.
Jill Barber, global head of institutional at Jupiter, said: ‘We are pleased that three of our funds have been highlighted among IFAs as being popular for DB transfers. The three funds on the list aim to meet these identified needs and offer investors high-conviction, active investment options within their retirement portfolios.’
Eugen Neagu, head of financial planning at IFA Montfort International, said he uses the Jupiter European fund, managed by Citywire + rated Alexander Darwall because of its high barrier to entry for companies it invests in.
‘Jupiter European, like Fundsmith, is a fund that invests in very good quality companies, with high return on capital employed and with high barrier to entry. This is in my opinion the only way an investor could beat an index fund, when hiring an active manager,’ Neagu said.
However Neagu pointed out a danger with the Jupiter European fund is its high concentration portfolio, which was highlighted this month when its 9% holding in a company called Wirecard was hit by accountancy issues at the German payments firm – prompting a 1.8% fall in the Jupiter fund.
On the whole Neagu believes it is important for advisers to use equity funds following DB transfers because they are needed to try and achieve the returns required to match the benefits of staying in the DB scheme.
‘If you transfer from a DB scheme you need to have a higher risk tolerance and capacity, and that will result in investing a higher proportion of your funds in equities to have a chance to get similar benefits to the DB, otherwise you should have stayed in the scheme,’ he said.
You can see the full list of top 20 most popular fund picks for DB transfers here, or in the table below.
|Fund name||times selected since April 2015|
|Pru PruFund Growth A-Pen||7905|
|Pru PruFund Caut Fund A-Pen||3892|
|Vanguard US Equity Index Acc||3624|
|Fundsmith Equity I Acc||3219|
|Vanguard LifeStrategy 60% Equity||3031|
|Stewart Investors AsiaPac Ldrs A Acc GBP||2929|
|L&G UK Property Feeder I Acc||2795|
|LF Woodford Equity Income C Sterling Acc||2640|
|Merian North American Equity U2 GBP Acc||2559|
|Fidelity Em Mkts W-Acc-GBP||2550|
|LF Lindsell Train UK Equity Acc||2305|
|Schroder Tokyo £ Hdg A Inc||2251|
|Jupiter Strategic Bond I Acc||2071|
|Vanguard LifeStrategy 40% Equity A Acc||1960|
|Merian UK Mid Cap R GBP Acc||1873|
|Schroder US Mid Cap Z Acc||1823|
|Jupiter Absolute Return I Acc||1768|
|PruFund Growth D||1763|
|Royal London UK Equity Income M Acc||1760|