How to measure default fund performance


Auto-enrolment is not a one-off decision: advisers must revisit performance and use a range of measures to do so, the chief investment officer for NEST has stated.

Mark Fawcett said it was important not to just look at short-term performance figures and then compare these across all the providers, as this could be "misleading".

He explained: "We recently commissioned Defaqto to do a report on how to analyse default funds. It was very clear that first you need to look at long-term performance, and secondly, you need to consider the risk-adjusted performance."

In the 48-page report, How to Analyse Auto-Enrolment Default Funds, Defaqto analysed the risk-adjusted returns.

For example, it used the Sortino ratio, which looks at what Mr Fawcett called "the bad volatility, which is when the market goes down and takes the fund down with it".

This ratio helps to show how different funds have compared to each other, and can evidence which ones have delivered good returns but managed the risk better during any market cycle.

"We want to deliver great performance and great risk-adjusted returns", said Mr Fawcett, adding: "but this is not the only factor."