Aon Hewitt defends underperforming diversified growth funds

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The investment consultancy still supports the DGF concept, despite returns that have fallen markedly behind equity markets in the past six months.

Chris Inman, a principal consultant at Aon Hewitt, presented figures at the Pensions and Lifetime Savings Association’s annual conference in Liverpool last week, showing that since the end of 2015, the most common type of DGF has gained about 7% on average, while equity markets have soared by about 23%.

This is despite many fund managers marketing these as providing “equity-like returns with less volatility” and many pension trustees buying them on the understanding they would act as lower-risk replacements for their equity investments.

But Inman said: “DGFs have received a lot of criticism recently because of a failure of expectations, but were they the right expectations in the first place? Equities have outperformed growth DGFs recently, but this has essentially been because we have had a vertical rise in equity markets and we don’t get those very often.

“Look back over an extended period of time [Aon Hewitt has analysed performanc going back to 2008] and they have done a very good job of mimicking equity returns.”

Inman talked delegates through Aon Hewitt’s analysis of the DGF market, which splits the funds into three types; those focused on growth, those focused on preserving capital, and funds that aim for absolute returns in all market conditions.

He argued all three types had broadly met their investment targets over the past eight years, and in particular, had done a good job of losing less money than the stockmarket during sharp downturns, such as 2008.

He said: “During the global financial crisis, equities had a 34% loss peak-to-trough and it would have taken you two years to recover from that. You don’t want pension members nearing retirement to have to grapple with this.

“DGFs also suffered losses, but they did reduce these. The capital-preservation and absolute-return DGFs recovered from their 2008 losses within about six months. Having to defer your retirement by six months is far more palatable than two years.”

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