DGF: Picking up steam, not losing it

At a meeting last week The Lens was vociferous in saying the market in diversified growth funds had run out of steam. Face it, The Lens said, “DGF” – a multi-asset category of products aiming for equity-like returns with lower volatility – is being usurped by the wider phenomenon of multi-asset investing.

But friends at CAMRADATA find a different take on things among some in the UK consultant community. It could be that the decade-long run of DGF is changing gear rather than drifting into the fields.

Over the past 12 months there was a continued spate of relatively new entrants to the DGF market and newer funds offered credible alternatives to the more established vehicles. Accompanying the arrival of smaller players was some degree of staff turnover, which put pressure on resources at incumbent firms.

Further, although there was not a great shift in asset allocation in the past 12 months, there was a greater use of alternative asset classes in DGFs – such as property loans, insurance-linked securities and renewable energy.

The Lens might have been rash in exclaiming the demise of DGF. But advisers do acknowledge some sticking points.

For a start, despite the furore of asset manager fees, advisers have seen little change in DGF fee rates, at least for smaller mandates.

One contact tells us that if the expected DGF return is likely to be high, then a certain fee level is justifiable – but some funds that are accessed via platforms do have uncompetitive fees despite the increased scale built up in these products over recent years.

And what about the equity-like returns for lower risk that DGFs should deliver?

The capability of DGFs to deliver equity-like returns continues to be mixed, with some of the absolute return-style funds in this sector producing negative returns. But – with one or two notable exceptions – established DGF managers have done well at delivering lower risk returns, The Lens is told.

The Lens may be wrong in predicting the stalling of DGF. But one prediction we’ll stick to: returns will be all over the place due to significantly varied views on equity market levels.

“We would encourage DGF managers to continue searching for these new opportunities,” said one consultant referring to the newer DGF arrivals that pack a punch with alternative assets.  “Those DGFs that are essentially just a mix of traditional equities and bonds, may not deliver the target returns.”