Speaker 0:
Joining me Now at the Winter conference. Chris Rule, head of Client Solutions at 10 Investment. Welcome, Chris. Thank you. So perhaps you can take us through the importance of asset allocation for default regulation and retirement portfolios. Sure,

Speaker 1:
so you know, today we spoke about unpacking the default investment portfolio rigs and, in a sense, trying to demystify some of the legal that are associated with that regulatory framework.

Speaker 1:
And when we unpack it, we look at the appropriateness for members, uh, in terms of the default investment portfolio that's been chosen by trustees and so forth. And ultimately, what drives a big part of the appropriateness is the asset allocation. And it's a shift of thinking around risk management from the concept of the risk of permanent loss of capital or volatility

Speaker 1:
to looking at the effect of uncertainty on an objective. And we essentially unpack how asset allocation is a major driver of an appropriate default investment portfolio. Given the fact that it is the closest link to the investor outcome, the investor objective, and given that

Speaker 1:
asset allocation drives the vast majority 90 plus percent of return variants in investment portfolios, so

Speaker 0:
then what ultimately is driving the rational curse between a a versus PS A for default pension portfolios?

Speaker 1:
Sure, so the the regulations speak quite specifically to

Speaker 1:
choosing between, and it specifically calls out both active and passive. And at the time of the drafting of the regulations pass. I had a very small market share in our market. Yet if you look at the statistics around active verse passive and we've spoken about this, you know, at at at pains, um, it's it's a It's an uninformed decision not to allocate towards an index based approach or a passive based approach. So the you know, the default R specifically calls out trustees and

Speaker 1:
to to to both consider active and passive. We've seen that market share move from about 3% to 7%

Speaker 1:
and ultimately, when you unpack those rigs and you consider the the reality that asset allocation is driving most of outcomes, while we think it's sensible, then to populate it with a well diversified, index based portfolio. But it's not an act of passive debate. It's actually looking at what the solution is for the clients, and that is in no way a passive investment construct. That's a that is a managed asset allocation framework, just then becomes populated with, uh efficient building blocks, which are often index based.

Speaker 0:
So you've mentioned that R 28 has evolved to be a little bit more liberal. Why are we going to expect to see increased divergence in returns in a more liberal red 28 environment?

Speaker 1:
Sure so the R 28 which ultimately determines the constraints of how managers can invest their portfolios, their retirement portfolios,

Speaker 1:
what has come from a place of relatively tight constraints in terms of asset class allocations and in terms of in particular, the big driver is the local versus global split between in your portfolio. Now, as that liberalises and the constraints loosen,

Speaker 1:
asset managers now have more ability to vary their portfolios. So what we saw under more constrained regulatory environments was portfolios clustering around the same asset allocation, which meant that returns were quite similar. It meant that outcomes for members were quite similar. Now we've got a scenario where you could have a manager who believes they should be at 45% offshore, or a manager who believes you should only be at 20% offshore, and you can have rather divergent returns. And if you look at the one year picture,

Speaker 1:
um, from the Alex Forbes large manager watch, you can see top to bottom is about a 13% divergence in return. So that's a massive discrepancy and massive differential in outcomes for for members of of these retirement

Speaker 0:
funds and important point that you mentioned in your break session was costs. And I think cost is quite an important consideration when deciding between

Speaker 0:
and passive. What have you found is the relationship between total investment costs and fund out

Speaker 1:
performance? Sure, so So we see a direct relationship between costs and outcome, and the outcome can be measured in various ways. But we basically took the entire peer group, and we categorise them in by cost. And what you saw was the highest cost. Managers

Speaker 1:
delivered the worst peer relative performance 38% and that in a very straight line steps up as you get to the lowest cost managers, who then deliver the best peer relative performance so you can see how important costs are in terms of driving outcomes of retirement funds and what's really interesting. And I always like to say this is, that's actually not a passive active debate. It's just cost.

Speaker 1:
I mean, give me an active manager who charges zero. It's probably going to give you a good outcome. But the reality is that most active managers, because of the resources and the structure of those businesses, have higher higher fees associated with their portfolio. So the costs are a critical critical piece. So what,

Speaker 0:
then, is supporting the increased focus of institutional investors, such as large pension funds and asset owners on passive investment solutions?

Speaker 1:
So I think the the statistics and the monotony of the statistics in terms of how consistent they've been over the last 15 years is becoming harder and harder to disagree with. Um, and so when one looks from a rational decision making perspective,

Speaker 1:
we see more investors allocating to low cost, efficient, index based solutions. These solutions are multi asset solutions in the main because we are talking to retirement funds and retirement default funds, so it it's not something that's passive. It's also not something that's active. It's kind of sits somewhere in between. It's a strategic as allocation framework that's populated with indexation, and I think that's a that's a trend that we think is gonna is gonna is gonna play out in terms of the future,

Speaker 1:
the future state of our market. OK,

Speaker 0:
so your outlook and just the close of the session for the relevance of passive solutions, then for for large institutions

Speaker 1:
Well, I think they I think they're relevant for many reasons, you know, efficiency, driving costs down. And actually, when you make an asset allocation decision to get that asset class exposure

Speaker 1:
and I think that has been a problem that's plagued our industry is you've got the asset allocation, right? But then you've delivered negative alpha or underperformance relative to that asset class. Um, and and we've spoken a lot about asset allocation, and everyone does, um, but But what indexation allows big institutions

Speaker 1:
to do is to actually get that asset class exposure with certainty. And and and we think that's a That's a key piece that's been missing in in the in the mix of of passive and active in our industry.

Speaker 0:
Chris, thank you very much for sharing your insights. We appreciate your time. Thank

Speaker 1:
you very much.