Mark Cobley
23 Jan 2012
Article from Financial News
Diversified growth funds are currently among the hottest products for UK asset managers, and with billions flowing into these funds the men and women who run them could become some of the most powerful asset allocators in the industry.
Invented in the UK market about a decade ago, the leading DGFs have begun to pull in serious money in the last few years since the financial crisis.
There is now well over £30bn invested in these and similar multi-asset funds in the UK, largely by old-style defined-benefit pension schemes, but the concept is spreading to the retail market and to the newer, defined-contribution plans.
Cole
There are many different flavours of diversified growth, but what they all have in common is that they aim for equity-like returns with much lower volatility.
That is usually expressed as an ambition to make 3% or 4% a year over cash, thus hopefully keeping ahead of inflation, and over the past few years most are in line with, though not way ahead, of this target. Judging by the steady stream of inflows, clients find that appealing enough.
Some think of DG funds as “new balanced” – a reference to the combined equity-bond mandates that dominated the industry more than
10 years ago. But DGFs have a broader palette. They invest in a wide range of assets, including equities, bonds, commodities, hedge funds, private equity and take positions in rates and currencies.
Kyrklund
This approach lets fund management houses deploy many of their best profit ideas into a single product, and funnels client money to in-house equity and bond desks.
But if a firm has no in-house talent in a certain area, such as alternatives, DG teams will invest with outside managers.
Their choice can be restricted by the fact that most DG funds need daily liquidity in order to market themselves to retail and DC clients, which can mean certain hedge funds or private equity managers are off-limits.
Nevertheless, the potential exists for DG managers to muscle in on multi-managers, funds-of-funds and fiduciary managers as important intermediaries in the industry.
They are cheaper than most of the potential competition, which appeals to clients and consultants. Imtayaz Ahmed, a consultant with bfinance said the going rate for diversified growth funds is a management fee of about 0.75% of assets a year, with no performance fee.
That compares with 0.3%-0.5% for an active institutional global equities mandate, or as much as 3% plus a performance fee for a fund of hedge funds mandate, though these can be negotiated down.
Ahmed said: “We are seeing a lot of continuing demand for DG funds, as clients want to diversify their sources of return. The preference is for long-only type managers who don’t make much use of leverage – though they are open to allocations to hedge funds within the product itself.”
He said the appeal of DGFs might simply be a “sign of the times”, with clients prepared to pay for a more dynamic, diversified and sophisticated product in the absence of a long-term equity bull run.
He said: “If equities start to rise again, will investors’ allocations to cheap, indexed equity also begin to rise again? That is an interesting question and probably no one knows.”
DGFs’ allocations to equity, and thus their correlations with the stock market, vary quite a lot.
Allan Lindsay, head of DGF research at consultancy JLT, said: “Very loosely, you have absolute-return types, where the volatility control objective is almost as important as the return objective, and market-driven funds, where the return objective is important and they believe lower volatility will feed through from their asset allocation as a result.”
Within these styles managers can be split into those that are quite constrained in their allocations, with minimum percentages that have to be held in equities and those that are less constrained.
Lindsay said: “For the most part, managers with asset allocation constraints tend to be more market driven but with any rule of thumb there are exceptions.”
