Diversified growth funds slump but money still rolls in

Diversified growth funds, which have been hoovering up assets largely on the premise that they provide equity-like returns but with reduced volatility, have seen performance slump compared with equities over the past year. But money continues to pour in.

The funds have been a significant growth story in the UK market over the past six years, but the three main types of DGFs have, on average, all underperformed the MSCI World index in the 12 months to March 31, 2016.

Diversified growth funds are a type of multi-asset portfolio popular in the UK that invest in equities, certain kinds of fixed income asset and a range of alternative investments. They typically aim for returns that beat cash by a similar amount to equities over the long term, but in a steadier, less volatile fashion than the stock market.

According to Financial News analysis of the DGF data tracked by analytics firm Camradata, part of investment consultancy Punter Southall, less than 10% of UK DGFs made positive returns over the 12 months to March 31, 2016.

On average, DGFs with a return target of cash plus less than 3% made losses of 3.7%. DGFs targeting returns of cash plus 3% to 5% returned -2.6%, while funds aiming for cash plus 5% to 7% on average made a loss of 4.4%. All the figures were gross of fees for the 12 months ended March 31.

In contrast, the MSCI World index, which tracks stocks across developed markets, produced a small loss of 0.28% over the same period.

Katherine Lynas, head of manager research at Punter Southall Investment Consulting, said: “It just goes to show how difficult a universe it is to crack. It needs a very wide set of skills to be good at running a DGF and [the performance figures] do bear out the fact there are not very many good managers out there.”

DGFs tend to be popular with smaller, less well-resourced defined contribution pension plans because they offer an affordable route to access directly a range of assets.

Despite the poor performance in general for the sector, money continued to pour into DGFs. Total assets invested swelled by a third from £117 billion at the end of March 2015 to £156.6 billion a year later. In 2010, total DGF assets stood at just £25 billion.

The number of DGFs available has also passed 100, with 102 now on offer. In the first quarter of 2016, seven DGFs were launched.

Lynas said: “[DGFs] still match very closely what a defined benefit or DC pension is trying to do. I think the love affair will continue. Just because performance has been bad over the last 12-month period, it won’t slow that [growth] down.

“There are still so many smaller pension schemes that have not thought of using a DGF.”

But she added that she expected the pace of growth for DGF assets to start slowing towards the end of 2017.

Quantitative investment house AQR Capital Management featured at both ends of the performance spectrum, possessing both the best and worst returning DGFs. Its Global Risk Premium Strategy made a loss of 8.2% over the 12-month period, while its AQR Style Premia Strategy recorded a positive return of 12.91%. AQR did not respond to a request for comment.

In terms of DGF flows, Nordea Asset Management topped the charts, recording inflows of £2.5 billion in the first quarter of 2016. During the same three months, Aviva Investors had the largest percentage growth in terms of its DGF assets under management with an increase of 51%.

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