Defined contribution strategies with a greater allocation to equities saw a weaker performance during the first quarter of the year but some managed to buck the trend, new analysis shows. Performance in the retirement phase was largely flat but outperformed the growth phase and protected DC pot values in the derisking stage, the analysis suggests.  

More diverse strategies provided some downside protection, according to consulting firm Isio, which compared 13 DC providers. Despite this, a couple of the providers with all-equity defaults performed better, with Isio attributing this to their regional equity allocation and an underweight position in the US market. 

There was also a shift to more short-duration exposure to protect against volatility at retirement, Isio noted. 

 
A sell-off in US equities, a rally in gold and a shift away from US markets generally was sparked when the new US administration unveiled a series of heavy tariffs on foreign goods in early April, when markets had expected tax reductions and fewer regulations.
 
“Broadly, DC strategies with greater allocation to equities saw weaker performance over the quarter, and more diverse strategies provided some downside protection,” said investment director Sukhdeep Randhawa. 

However, he added: “Looking at the longer term, higher equity allocations strategies continued to deliver stronger returns."

Randhawa also noted that one of the early adopters of private markets – despite maintaining one of the lowest equity allocations and incorporating defensive assets – has outperformed the peer group average over all time periods.

Older DC members were affected by fixed income market developments during the quarter. Isio said in gilts, investors experienced modest negative total returns, with shorter-duration gilts outperforming longer-dated counterparts. UK corporate bonds and high-yield bonds delivered positive total returns, offering a degree of stability amidst market fluctuations. 

 
Performance in the retirement phase was largely flat but outperformed the growth phase and protected DC pot values in the derisking stage of strategies, the analysis suggests.  

Those with higher allocations to cash and a lower exposure to equities generally fared better, as risk averse strategies paid off during the recent market upheaval, Isio said.

“In recent years, there appears to have been a shift towards shorter-duration assets, initially driven by concerns about the potential for rising interest rates and the desire to reduce volatility as members approach retirement,” said Randhawa.  

However, he said tweaking duration levels “is not always straightforward, particularly for schemes heavily invested in passive strategies, which aim to track broader market indices and limit the provider’s ability to tailor underlying exposures to manage duration risk effectively”.   

This inflexibility can pose challenges in matching assets with evolving member profiles or market conditions, he argued. “To address this, some providers may explore using shorter-dated passive strategies, incorporating active management, hybrid approaches, or utilising overlays to achieve the desired risk profile.”