It has been a difficult year so far for diversified growth funds. Investor sentiment has cooled for the product pushed by marketing teams as providing equity-like returns with lower volatility.
The result is that pension schemes are among those who have pulled billions of pounds from such funds in the first seven months of 2018. One of the biggest victims of this change in strategy is Standard Life Aberdeen’s Global Absolute Return Strategies fund (Gars). Its managers have handed around £6bn to exiting investors this year.
The problem is that for many DGFs, the returns have been nowhere near those generated in equity markets. Gars returned -3.9% in the first seven months of 2018, compared to a 3.5% gain by the MSCI World index over the same period. Some DGF managers warn investors to judge their performance over years not months, but over the past five years Gars returned only +1.35%. Not great for a product that is focused on outcomes instead of beating benchmarks.
It is important to point out that not all of these funds have recorded such a disappointing performance (see pages 26-29), but it is clear that many DGF managers have failed to add value during a prolonged period of low volatility and when the S&P 500 and the FTSE 100 reached new heights. Trustees who bought DGFs are well aware that they could have collected higher returns if they had taken more risk by investing in equity funds. Hindsight is a wonderful thing.
So the six-fold increase in capital flowing into DGFs in the 10 years to 2015 has become a distant memory, especially as tougher times are on the way. Volatility is forecast to be on the horizon and earlier this year we had a sample of what is to come when there was a sell-off in bonds and equities.
There are those who rightly see volatility as an opportunity, not a problem, so tactical investing by DGFs may have already begun.
Another benefit is the diversity that the product offers. The right spread of assets could protect portfolios from falling markets.
The fund managers, consultants and trustees we brought together to discuss this market (pages 6-21) believe that it can provide a desired outcome while protecting portfolios, if investors pick the right fund. How these funds should be used in portfolios was also at the centre of the debate.
Some pointed out that quantitative easing has helped push asset prices higher in recent years, so could DGFs prove their worth when markets normalise? Who knows, perhaps the time of the DGF is yet to come.