Too many Diversified Growth Funds (DGFs) have left UK investors disappointed with performance. In this paper, AllianceBernstein show how a DGF can be designed with clear objectives, constructed using guidelines that are genuinely outcome-oriented, and then managed to achieve its objectives.
DGFs (also known as multi-asset funds) have typically been promoted as a way to achieve equity-like returns with less risk, through diversification and risk management. A second selling point is that they can offer a straightforward way to access a spread of assets and to delegate tactical asset allocation to the asset manager. In the UK, this attractive story has led to the use of DGFs proliferating in both retail and institutional markets. Investors have bought into DGFs for a variety of purposes—for instance, as an equity replacement strategy, as a convenient way to access alternatives, and/or as a mid-life growth vehicle for defined contribution (DC) default solutions.
In fact, the journey for many of these funds has been far from straightforward, and they have been unlucky to face an unusual market environment. Equities have performed better and for longer than normal, and diversification has failed to pay off in the way expected.
Overall, DGF returns have been disappointing.
But things could have turned out so differently. With better attention to fundamental design principles by the asset managers, we believe that DGFs should have performed more in line with investors' expectations, and investors themselves could have had better information to guide their choices.
When properly resourced, designed and managed, we believe DGFs can provide attractive, differentiated returns that can't be easily replicated. In this paper, we highlight four ways to build a better DGF for the journey ahead.
Defining Our Terms
Practical terms and clear comparisons are important for this analysis. We think a good cost-effective DGF should outperform a simple composite of passive market components that investors can buy cheaply. So we use simplified benchmarks comprising an efficient combination of passive equity and bond components to evaluate whether a DGF is really providing value for money (VFM) (Display, below).
Historical analyses do not guarantee future results.
As of 30 June 2019. Performance is shown in GBP terms. Data shows the gross returns and standard deviation of the top 20 largest constituents of the eVestment Diversified Growth Fund and GTAA universe, excluding funds with no reported assets, performance for five years, or funds without GBP share classes. The AB simplified benchmark seeks to proxy the level of risk targeted (based on our long-term outlook) for each of our Target-Date Funds (as opposed to the asset allocation) using four widely used market indices. Source: Bloomberg and AB. Risk is volatility - not how we measure and manage risk, but a simple market definition. Return is annualized five years. Equities 8% p.a. with 9% volatility. Bonds 7% p.a. 8% volatility. Cash 0.5% p.a.
By this yardstick, the largest global DGFs available to UK investors have delivered poor value for money over the last five years (Display, below).
Historical analyses do not guarantee future results.
As of 30 June 2019. Performance is shown in GBP terms. DGF bubbles scaled to total asset under management size. Data shows the gross returns and standard deviation of the top 20 largest constituents of the eVestment Diversified Growth Fund and GTAA universe, excluding funds with no reported assets, performance for five years, or funds without GBP share classes. The AB simplified benchmark seeks to proxy the level of risk targeted (based on our long-term outlook) for each of our Target-Date Funds (as opposed to the asset allocation) using four widely used market indices. Source: eVestment, Bloomberg and AB.
So what were the reasons? We believe four factors explain much of the poor past returns— and point the way to better performance for the future.
Past performance does not guarantee future results. The value of an investment can go down as well as up and investors may not get back the full amount they invested. Before making an investment, investors should consult their financial advisor.
Note to All Readers: The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor's personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AB or its affiliates. Note to Readers in Europe: This information is issued by AllianceBernstein Limited, a company registered in England under company number 2551144. AllianceBernstein Limited is authorised and regulated in the UK by the Financial Conduct Authority (FCA-Reference Number 147956). The [A/B] logo is a registered service mark of AB and AllianceBernstein® is a registered service mark used by permission of the owner, AllianceBernstein