We have just published our second annual report on With-Profits Investment Performance and Strategy of UK mutual insurers. The report investigates the publicly reported 2014 investment performance and asset holdings of 44 funds from all 24 directive mutuals.
The results demonstrate that mutual insurers can generate greater with-profits returns than the larger proprietary funds. However, it also shows that not all funds are equal – the performance of the underlying investment managers is critical in maximising member benefit.
"The results demonstrate that mutual insurers can generate greater with-profits returns than the larger proprietary funds."
The most striking feature was the wide range of returns achieved by the funds, ranging from 3.2% to 16.57%. The average return was 8.79%, a remarkably high figure in what is considered a low yield environment.
As we highlighted in our first report, there is a wide range of investment aims for the funds so differences in performance, caused by differences in asset allocations, need to take into consideration the aims of the funds.
In 2014, the main source of the divergence in investment returns across the funds investigated was stock selection (the performance of the individual fund managers in the asset classes).
For example, UK equity returns for each fund varied significantly. This is demonstrated in the chart* below:
*Based on data from Prudential Regulation Authority (PRA) returns
Given that most equity managers would be working to similar benchmarks for UK equities, the level of differences in performance is surprising.
Whilst performance is better judged over a number of years, it is not surprising that an increasing number of companies are regularly monitoring the fundamental features of their managers, namely the team, their approach, size of funds and performance as well as considering those of alternative managers. We can only see the trend for frequent monitoring of the market participants and the drivers of their success increasing.
"It is not surprising that an increasing number of companies are regularly monitoring the fundamental features of their managers"
Due to this ability to enhance returns, and hence member’s benefits, we are also seeing a trend towards using a range of specialist managers for each asset class, rather than one manager to manage all assets. This places asset allocation responsibility back with the insurer and we recommend that independent advice is sought in both manager monitoring and tactical asset allocation.