 “All the evidence states that 90-100% of returns come from asset allocation rather than individual stock picking.”
The DGF phenomenon is taking centre stage as providers increase their multi-asset fund offerings to diversify the marketplace and improve access to higher yield assets
Economic downturn is persisting and in response European pension plans are reducing their exposure to domestic equities in a bid to hedge against market turbulence. In its place smarter, yet more cautious, asset allocation plans are implemented and DGFs are returning to the limelight as a vehicle for real-return growth.
This week the investment community has seen a series of fund providers strengthen and broaden their DGF provisions but amidst such choice and persistent market volatility key questions are to be asked:
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How can asset owners select the right fund provider- what questions should be asked and fees implemented?
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Are passive or active funds the best risk mitigation tool?
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What implications will the growth of defined contribution pension plans bring?
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As a strategy for portfolio diversification how sustainable are DGFs and multi-asset funds?
The Investing in Diversified Growth and Multi-Asset Funds report, published by Clear Path Analysis in collaboration with Legal and General Investment Management and Russell Investments, examines the DGF phenomenon, the search for portfolio diversification and access to higher yielding investable assets.
According to Marcus Mollan, Head of Strategy, Pension Solutions Group, Legal & General Investment Management, two questions must be asked before selecting a fund: “Where do expected returns come from and what risks does the fund bring? And how does this fund fit into the overall strategy?”
He goes onto state that “The returns and risks of diversified growth funds depend both on market returns and on the active management skills of the manager. Diversified growth managers differ by investment horizon, derivative usage, fee structures, the allocation to exotic or illiquid assets and the use of active underlying funds and multi-manager structures.”
The right manager and the right fund are equally important but should you take the passive or active approach? On the Legal and General Investment Manager approach Mollan reveals that “One of the things we have incorporated within our diversified funds is the use of more liquid passive type ways of getting exposure to a wider range of assets.”
But he also highlights that it is less about the passive v active debate but rather about to “making sure that you have a robust process {..} for getting the right strategic allocation.”
In dictating the popularity of DGFs and the passive v active debate, prolonged market volatility has been a crucial mechanism. James Ind, Managing Director, Portfolio Manager Multi Asset, Russell Investments, who have recently expanded their multi-asset offerings, comments “There is a problem in that a lot of investors are looking for DGF's and multi-asset funds to provide smoothing through the economic cycle, to reduce volatility, to protect on the downside and to do this through flexibility in asset allocation.”
In reality Ind argues the multi-asset marketplace is far more complex and investors have to, “take a view on a particular DGF and understand what its long term characteristics are against the long term objective.”
Informed decisions are imperative because as David Palmer, Head of Investments (Performance & Research), The Pensions Trust, states “What you are asking a DGF to do is one of the most difficult things for investors: to get asset allocation calls right” and spreading risk can only be effectively done if this is understood.
For a full copy of the report click here
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