Consistent investment performance key to Zurich’s growth

“We have tended to outperform the average multi-asset manager by close to two percentage points on average over many years*. Our Balanced Fund, which is a multi-asset fund has grown by over 10 per cent per annum over the past 33 years, since launch**".

As a result, Zurich now has close to €30 billion of Irish clients’ funds under management and €320 billion globally. “The Irish operation is autonomous,” Temperley points out. “But we remain in close contact with our colleagues overseas, particularly in Switzerland.”

The key underlying reason for that strong performance is Zurich’s active management approach. “We are active fund managers as opposed to index or passive investment managers,” he explains. “Passive aims at middle of the road performance, but we try to do better than that. We are not saying that passive is bad. What we are saying is that good active management is better. The compounding effect of that performance is huge, and it has a positive impact on pension adequacy over time. We feel we have done a reasonably good job in that regard over the years.”

According to Temperley, the approach taken to active management is critically important. “We take a top-down approach and look at the macro environment first. We look at things like inflation, GDP (gross domestic product) growth, the interest rate environment, asset valuations and so on. Stock selection tends to come last. You have to understand all those other factors first.”

After that comes asset allocation, which is a challenging proposition in current market circumstances. Temperley explains that most people invest in multi-asset funds which are comprised mainly of equities but also include government and corporate bonds, some cash deposits, and other assets. The aim is to offer diversity of asset classes as well as diversity within equity markets to ensure that investors are not overexposed to individual companies, sectors, or geographies.

“Getting asset allocation decisions right is really important,” he adds”. We are coming off a 13 year bull market which ran from 2009 to 2021 when we saw fantastic returns. Last year we saw a significant correction and equity market performance was the fourth worst since the end of the second world war.”

Government bonds did even worse. “Normally their performance counterbalances equities. Unusually, this wasn’t the case last year and it was the worst year for centuries for government bonds.”

The sharp rise in inflation was the cause. “Central banks like to have inflation at around 2 per cent but consumer spending increases post the Covid lockdowns combined with supply chain bottlenecks and energy prices going through the roof resulted in a sharp increase over the past 18 months. The US rate went from 2 per cent to 9 per cent in a short period of time. It has now fallen to 6.5 per cent and is expected to drop to close to 3 per cent in 18 months’ time.”

This wasn’t the first time we’ve seen energy prices drive inflation. “When you look back to the Yom Kippur war in 1973, OPEC (Organization of the Petroleum Exporting Countries) put an oil embargo on the West in response to their support for Israel,” Temperley notes. “Inflation went to 12 per cent in the US at the time. Then there was the Iranian revolution in 1979. That triggered another oil shock and US inflation reached 14 per cent, much higher than the 9 per cent this time around.”

The knock-on impacts can be severe. “The markets do not like inflation,” he explains. “It’s bad for investments and the main way to tackle it is by increasing interest rates. Paul Volcker, chairman of the Federal Reserve back in 1980, put the rates up much higher than they are now.”

Increasing rates solves the problem, but not without some pain

It’s not all bad news, however. “Oil prices have been falling. They were exceptionally low two years ago - $20 dollars per barrel. Then they went to around $125. They’ve since dropped back to $85. The recent decline will have a deflationary impact. Inflation looks as it if is coming under control and interest rates look to be near their peak as a result. That is why we’ve been seeing a rally in equity markets. They hit their low in September or October of last year. Most equity markets are between 10 per cent and 20 per cent up since then. They have been responding to lower inflation numbers.”

Asia is in a bull market at the moment, he notes. “Europe and America are not there yet but they are definitely rallying. However, we are not out of the woods, we need to see inflation come down further.”

Temperley believes those trends will see equity markets begin to return to something resembling normal, but there is some way to go. “Equities are at fair value at the moment and are quite attractive in some markets. Earnings growth will likely be pretty muted for the next year; however, looking out to 2024, with lower inflation rates and interest rates coming down we can expect earnings to improve and equity markets could perform well again.

“There are reasons for cautious optimism,” he adds. “Interest rates may be close to their peak at the moment. The next move will be downwards after that. That will be positive for the financial markets. Our job as fund managers is to navigate the environment we are in, whatever that may be. We have a good track record in that.”

While the markets have been in turmoil over the past year, the Irish pensions landscape has also been undergoing a quite fundamental change. The transposition into Irish law of the EU Institutions for Occupational Retirement Provision (IORP II) directive has placed such an additional governance burden on small pension schemes that the great majority of them are in the process of transitioning into master trust arrangements.

Master trusts are, in effect, schemes of schemes which enable to costs of compliance to be shared among across any number of different schemes. Zurich has been experiencing a significant move into its master trust from existing and new corporate clients.

“It’s fair to say our competitors have had the same experience,” says Temperley. “IORP II has made being a trustee of a small pension scheme quite onerous. There are too many small pension schemes in Ireland and the regulator wants that to change. Large companies have the resources to continue with their own trusts and are happy with the changes; however, the new regulation is forcing the vast majority of schemes to go into master trust arrangements. By the end of the year most pension schemes are likely to be in these arrangements.”

He believes schemes are moving to the Zurich Master Trust because of the strength of the company, the service levels offered, and standards of governance, as well as performance over the long term. “Ultimately, investment performance will be the most important thing when making a choice and our track record in that regard is exceptionally good. The size of the pot of money people have when they come to retirement is what it’s all about.”

To find out more, please visit zurichcorporate.ie. This article was first published in Accountancy Ireland magazine.

Source: Zurich, 31/12/2022

Zurich Life is owned by Zurich Insurance Company Limited, which has an internationally recognised financial strength rating of AA/stable.

*Source: Aon Multi-Asset survey, 31/12/22

**Source : Moneymate, gross of AMC annualised performance since launch 10.05%

This article has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Zurich, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.