UK pension schemes expected to increase use of multiple diversified growth funds (DGFs) as they seek new approaches to reduce volatility, found a survey commissioned by AXA Investment Managers (AXA IM), but there is widespread belief that the sector’s transparency could be improved.
The survey received responses from 150 consultants, defined benefit schemes and defined contribution schemes about their views on diversified growth funds or DGFs, which typically invest in a range of asset classes and aim to achieve capital growth whilst controlling risk. The findings include:
Schemes
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Almost half (49%) of DB schemes surveyed used two or more DGFs, with 36% saying that they opted for multiple funds in order to reduce risk, 23% to diversify manager exposure and 18% to introduce new asset classes.[1]
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67% of larger DC schemes (those with more than £250 million in assets) and 25% of smaller schemes (those with less than £250 million) held two or more DGFs. Of those DC schemes that opted to use more than one fund, reducing risk (45%) and diversifying manager exposure (36%) were the top two reasons given.[2]
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38% of respondents from DB schemes said they consider adding a new DGF to their existing rostra, whilst 60% of respondents from DC schemes said they would consider adding a new fund.
Consultants:
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68% of consultants recommended that DB schemes consider using more than one DGF, whilst 38% recommended that DC schemes use more than one type of fund.
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24% of consultants reported that a desire for new approaches to asset allocation is driving this trend, with a further 24% saying that increased demand is generated by the need to diversify between managers and 19% because of a concern about manager capacity.
When asked about issues in the DGF sector, all three types of respondent pointed to a need for greater transparency and clarity over the funds’ objectives, holdings and fees.
Maddi Forrester, Head of UK Institutional at AXA IM commented: “Demand for diversified growth products is by no means winding down, in fact arguably DGFs are even more relevant in the “growth” stage of retirement planning. De-risking is the primary objective for the majority of UK schemes and trustees and pension managers are always looking for new methods of diversifying between asset classes with a value for money product, which we believe the ‘next generation’ DGFs offer.
“It comes as no surprise to us that adding further DGFs to portfolios makes sense to consultants and schemes alike. While each DGF is diversified, blending more than one fund enhances the diversification, reduces the risk of betting on the skill of any single manager and allows access to a wider range of investment approaches. Essentially, not placing all your eggs in one basket is a prudent approach. The aim for trustees should perhaps be to identify DGFs that complement each other.”
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