Vicky Kydoniefs
Diversified growth funds (DGFs) have proved popular with investors because they offer a simple, low governance way of adding diversification to growth portfolios.
What are DGFs?
DGFs invest across a wide array of asset classes, changing their asset allocation in response to a change in markets and generally aiming to make (over a period of three to five years) equity-like returns with lower volatility.
Each DGF differs markedly in how its portfolio is constructed and so DGFs do not fit neatly into a generic box. The only common characteristics these funds have is that they typically aim to reduce absolute volatility compared to equities and have a return target in excess of either cash or inflation. The target return differs by product but there are typically three drivers of returns:
– Longer term strategic asset allocation (getting the mix of assets right to achieve their return target while lowering risk).
– Shorter term tactical asset allocation (being in the right areas of the market at the right times).
– Implementation of ideas (buying the right instruments at the right price).
What is their appeal?
Of significant appeal to investors is that DGFs are perceived to be a ‘one stop shop’ for diversification of the growth portfolio, since they usually allocate to a range of asset classes. If a single manager can do everything, why select, negotiate and monitor a collection of managers?
A DGF also enables switching to hold different percentages of asset classes at any one time, limiting asset allocation decisions to a smaller subset of the portfolio (for example, growth versus lower risk allocations). Another potential benefit is access to a range of investments, including some which investors may not ordinarily be able to gain access to due to high minimum investment sizes, with a low governance burden.
Types of DGF We think about the universe of DGFs as belonging to three broad sub types with each playing a different role within a scheme’s growth portfolio. It is important to consider which type of DGF is most appropriate, before selecting a DGF manager this will depend on the proportion of total assets that will be invested and the scheme’s wider investment strategy.
Fund manager selection is key
To be successful, DGF managers must demonstrate the following skills:
– Strategic and tactical asset allocation
– Financial instrument selection or implementation method
– Risk management
– Intelligent trading
Having expertise in all areas is difficult and this may, in part, be the cause of the underperformance of some these strategies. DGFs offer access to a range of asset classes but with a low governance burden. However, the choice of the underlying provider needs to take into account which type of DGF is most appropriate as each can play a different role within the portfolio.
Our offer
Aon’s Managed Growth Fund focuses on strategic asset allocation as a key driver of returns. It aims to provide exposure to a diversified portfolio of assets to deliver consistent returns of 4% p.a. (above threemonth sterling LIBOR net of fees). It provides access to a wide range of specialist solutions and selects best of breed managers from standard and niche strategies.
The fund has consistently delivered strong performance over the long term. It has outperformed its benchmark by 6.8% p.a. since inception (18 May 2012) by 29 March 2018. Diversification across asset classes, strategies and managers helps to reduce volatility.
Summary
DGFs are a suite of products, not an asset class, and so fund selection is extremely important. It is important to be aware of the different types of strategies pursued and how these are expected to perform in different market environments. Investors in DGFs should consider whether they have been performing as expected and whether they remain suitable for the investment strategy being pursued. There may sometimes be grounds to allocate to more than one DGF provided they are suitably complementary. A periodic review of how they fit together is recommended.
