Ahead of the pension pack (Sponsored)

Feb 10, 2020
Consistent out-performance based on an active management strategy has driven impressive pensions gains at Zurich, writes Barry McCall.

For pension investors, the most important metric is the growth in their investment over the long-term. Stellar performance over a year or two pales into insignificance when set against an investment term of 30 years or more.

This is among the reasons for the strong growth in Zurich’s pension business of late. “Our balanced managed fund has delivered 10% per annum average growth over the past 30 years,” says Zurich’s Head of Investment Development, Richard Temperley. “That is significantly better than the average fund manager in the market. Last year, we were the best performer in managed funds and the Rubicon Survey put us first over the past three and five years as well.”

That performance is, in turn, a result of the experience and expertise of the Zurich investment team. “We have been in Ireland for more than 40 years,” says Temperley. “We started as Shield Life before being taken over by Eagle Star, which was in turn acquired by Zurich. Our investment process has remained essentially the same throughout that period. It is more sophisticated and has been enhanced over the years, but it is still much the same.”

That process is based on an active management strategy. “We attempt to beat the benchmark set by our peer group of domestic and international fund managers operating in the Irish market. That group is mostly made up of international managers now, as there are not many fully Irish firms left in the market.”

Asset allocation is the cornerstone of the strategy, according to Temperley. “A significant proportion of our out-performance over the years can be attributed to our asset allocation,” he says. “That is the primary focus of the investment team. After that, we look at the regional selection, sectoral factors and, finally, at the individual stock selection. The active management process involves all four of these, but asset allocation is the most important determinant of performance.”

With more than €25 billion in Irish funds under management, Zurich is the largest active manager in the country. The company is also the second-largest pension provider in the country with a growing market share of 26%. “While our scale is significant, the main reason retail investors and corporates come to Zurich is due to the consistent out-performance of our funds.”

Those funds include Zurich’s multi-asset funds, which have been on the market for the past 30 years, and its Prisma funds, which are over six years old. “The main difference between the two is that the Prisma funds are risk-targeted,” Temperley explains. “We use a volatility scale of one to seven, and our Prisma funds are targeted at two to six on the scale. We couldn’t have a fund at one at the moment because it would be all-cash and at current interest rates, that would reduce in value. And we couldn’t have seven as that would be made up of 100% equities, mostly in emerging markets and would involve excessive risk.”

When it comes to asset allocation within the funds, several factors are taken into account including interest rates, inflation, GDP growth and other indicators such as purchasing managers’ indices.

“These are the key things we look at,” says Temperley. “But the valuation must be correct. You can have all the fundamentals such as low interest rates, low inflation and strong GDP growth, which are strong indicators for buying equities, but the valuation has to be reasonable.”

Looking to the future, he puts current conditions in context by noting that the current bull market has lasted 11 years since the crash of 2007 and 2008. “That was the second-largest crash of all time, second only to 1929. The property market bubble brought down the banks, which in turn brought down the real economy. This is now the second-longest bull run in history. The longest was 1987 to 2000, which lasted for 12.5 years from the recovery after Black Monday until the dotcom bust in 2000. There have been 26 bull markets in the history of the US and the length of the current bull market doesn’t mean it’s coming to an end. The equity market remains robust and still offers better value than other asset classes, such as bonds and cash.”

But there are negatives on the investment radar as well. “Economic growth has stalled in some parts of the world with Germany and Hong Kong close to recession. Manufacturing data around the world is weak, but that is a smaller part of the global growth story than it was 50 years ago when it was much bigger than services. There is also a debt mountain out there. While interest rates remain low, there is little incentive to deal with it – but if they do rise, it could be a problem.”

That said, the outlook for the near-term remains positive. “We still believe that equities will deliver positive returns in 2020. Government bonds offer little or no long-term value at present, and we don’t expect that to change in the near future. While we are certainly not expecting returns to equal those of 2019, equities remain the best asset class.”

But for pension investors, it’s all about the investment time horizon, and this requires changes in strategy over time. “We apply ‘lifestyling’ or de-risking strategies as people approach retirement. If people are going to buy an annuity, we will veer more towards cash and bonds. And if they are going to invest in an approved retirement fund (ARF), we will stay in a multi-asset fund, but one with lower risk exposure.”

For Zurich, a very significant growth area is corporate defined contribution (DC) pension schemes. “We see significant growth in this area. Clients come to us for the consistent out-performance of our funds and the strength of our investment team. Zurich is one of the largest insurance companies in the world, with an AA- credit rating. Many of our clients choose a bundled arrangement where we offer investment management, scheme management, administration, employee engagement and – in some cases – trustee services through Zurich Trustee Services Limited (ZTSL).”

This trend is likely to continue regardless of the introduction of a national auto-enrolment scheme. “Auto-enrolment is almost certain to happen at some point in the early part of the decade,” he says. “In theory, it will be good for private-sector employees who don’t have a supplementary private pension arrangement. It is a good idea for people in smaller companies who may not have schemes in place. But we believe that the best solution is to have your own industry-standard occupational pension scheme in place rather than rely on auto-enrolment.”