Mixed Equity performance hits DC schemes with concentrated equity allocations over Q1 2025

• Over Q1 2025, DC strategies with a greater allocation to equities saw a weaker performance compared to more diverse strategies, which provided some downside protection
• In contrast a couple of the all-equity provider defaults performed better, primarily benefitting from their regional equity allocation and an underweight position in the US market
• A shift to exposure of more short-duration exposure to protect against volatility at-retirement and safeguarding older members’ assets from adverse market impact

This year began on a high, buoyed by a strong finish to 2024, with optimism around continued AI breakthroughs and probusiness policies. However, momentum proved hard to sustain with the US market priced for perfection, with implications for defined contribution (DC) pension schemes.

Concentrated equity portfolios take short-term hit

Q1 saw rising tariff uncertainty, rather than expected probusiness policies. This dampened sentiment, fuelling fears of slower US growth and higher inflation, triggering a sell-off in US equities, a rally in gold, and a shift away from US markets.

“Broadly, DC strategies with greater allocation to equities saw weaker performance over the quarter, and more diverse strategies provided some downside protection,” said Sukhdeep Randhawa, Investment Director at Isio. “However, it is worth noting that a couple of the all-equity provider defaults performed better, primarily due to their regional equity allocation and an underweight position in the US market, which proved beneficial.

“Looking at the longer term, higher equity allocations strategies continued to deliver stronger returns. Interestingly, 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.”

De-risking provides protection for older members

Over the quarter, UK gilt yields saw little overall change, despite facing turbulence in March as government finances once again came under scrutiny. Investors experienced modest negative total returns, with shorter-duration gilts outperforming longer-dated counterparts. Similarly, UK corporate bonds and high-yield bonds delivered positive total returns, offering a degree of stability amidst market fluctuations.

These returns have played an important role in safeguarding older members’ wealth as they approach retirement. Over the quarter, retirement-phase performance was largely flat, but notably outperformed the growth phase and protected DC pot values in the de-risking stage of strategies. Those adopting a more defensive investment approach— characterised by higher allocations to cash and lower exposure to equities—generally fared better, demonstrating the value of risk-averse strategies in periods of market uncertainty.

“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 Sukhdeep Randhawa. “However, adjusting 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. 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.”