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Revisiting diversified growth funds

Revisiting diversified growth funds

This report evaluates the historic performance of diversified growth funds (DGFs) and their future role in pension schemes.

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Patrick Race

Partner, Investment Advisory

KPMG in the UK

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Revisiting diversified growth funds - Beach view with blue water

Diversified growth funds (DGFs) have grown in popularity over the past decade, with institutional investors fuelling demand for a one-stop shop, multi-asset solution. This surge in popularity was driven partly as a result of the 2008 financial crisis, which drove investors to look for downside protection. A significant proportion of investors were attracted by the ability of DGFs to move away from equities into bonds and alternative assets, and also by the low governance aspects of these funds.

However, the past five years have seen DGFs come under scrutiny over performance, and our evidence suggests much of this is justified. As markets continue to accelerate, many DGFs have failed to keep pace. Some may say this is understandable given their focus on downside protection, however in many cases managers have underperformed their own performance targets. Given the market environment over this time, with risk assets across the board performing strongly, the general trend of underperformance has led to us seriously question the role of this style of investing.

In the report “Revisiting Diversified Growth Funds”, we aim to assess the future role of DGFs. We find that:

  • Despite recent challenges, DGFs have, on average, been able to meet their cash or inflation plus targets (close to the long-term ‘equity risk premium’) since the financial crisis in 2008, but nowhere near to the ‘equity like’ returns that most of these managers promised.
  • Amid a changing investment landscape where a growing number of more esoteric asset classes are more accessible, we have seen investors constructing their own diversified growth allocations. For investors who are not constrained by size and governance issues, this is our preferred approach.
  • DGFs may still be appropriate in certain contexts, such as defined contribution (DC) schemes or investors with very limited time to spend on investments.

Download our report – Revisiting Diversified Growth Funds for the full analysis or contact Neil Otty, Head of Multi-Asset Research at KPMG UK.

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