How will Diversified Growth Funds protect previous gains during the Coronavirus crisis? New whitepaper from CAMRADATA

CAMRADATA has published a new whitepaper on Diversified Growth Funds (DGF), which looks at how this multi-asset class can protect its gains of last year, as the longest bull market ever teeters on the point of massive draw-down due to the Coronavirus pandemic.

The whitepaper includes expert insight from guests who attended CAMRADATA’s first virtual roundtable in March. Participants included Newton Investment Management, PineBridge Investments, Cartwright, PiRho, Punter Southall Aspire and PwC.

CAMRADATA revealed that net redemptions from DGFs were £4.46 billion in Q3 of 2019, but at the same time more than 90% of funds in the DGF universe had achieved breakeven or positive returns – for the second quarter in a row.

The roundtable discussion considers the experiences of DGF providers and investors since then – and the impact of the Coronavirus on the markets since China, followed by the rest of the world, implemented lockdown measures.

Sean Thompson, Managing Director, CAMRADATA said, “The Coronavirus’s impact on markets was largely delayed, as it appeared to take investors time to assess the risk. They eventually realised that if China the engine of the world’s economy was keeping 1bn plus of its consumers at home, it was certain to impact significantly.

“Where China sneezes, the world certainly does catch a cold. Outflows from DGF that occurred last year, despite the positive performance seen in the sector, came about because some investors had doubts about the ability of DGF to meet their return targets.

“But it wasn’t just about DGF returns; the outflows were to do also with sentiment about DGF risk management. Coronavirus and the increased volatility so far wrought on markets will be an acid-test for these funds. Our panellists discussed how DGF be protecting its gains for investors and can adapt to this new phase of uncertainty.”  

Key roundtable discussion points were the parameters for DGFs; how DGFs are not a like-for like equity replacement and why, plus should DGF managers be considering lowering their fees for these strategies. The panel ended by discussing how different DGF strategies might be suited for the current economic climate.

Key takeaway points were:

  • There are a variety of benchmarks applied to DGFs. The most obvious of these relates to equity market returns since the Financial Crisis and note how far beneath these returns DGFs appear.
  • Data suggests global equities have outstripped the average DGF by at least 50% since October 2009. But DGFs were never a like-for like equity replacement, not least because there was always greater emphasis on risk management.
  • The CAMRADATA panel was asked whether a risk-return ratio of half the volatility of equities for two-thirds of the return would be a better frame for expectations.
  • For the three years to February 2020, the average DGF has achieved only one-quarter of equity performance for one-third of the risk.
  • There are a host of extraordinary market pressures due to this crisis. Liquidity has all but dried up after the fastest sell-off in history, plus peculiar to the COVID-19 crisis, many investment management personnel are working from home, but technology was not up-to-speed to carry on business as normal.
  • DGFs could serve clients well but so far some have not. One solution going forward is to invest a proportion of the DGF allocation in passive rather than active management and use more than one active DGF manager.
  • This means diversifying organisational risk by having more than one DGF, which means less that can go wrong.

Sean Thompson, Managing Director, CAMRADATA adds, “These unprecedented times will be felt in the markets for the foreseeable future. Our whitepaper explores different DGF strategies and how effective these might be in these turbulent times. This is essential reading for investors in this multi-asset class.”

Along with highlights of the roundtable discussion, the whitepaper features two articles from the sponsors offering valuable additional insight. The article topics are:

  • Newton Investment Management: ‘DGFs: The value of flexibility in a fast-changing backdrop’
  • PineBridge Investments: ‘Multi-Asset Views: Building Bridges Takes Time’

To download the Diversified Growth Funds white paper click here