Craig Nowrie, a client portfolio manager at Northern Trust Asset Management, reflects on the rise and fall of Diversified Growth Funds (DGFs) in the UK. In the late 2000s, DGFs promised pension trustees equity-like returns with materially lower volatility—typically around two-thirds that of equities. After the Global Financial Crisis, underfunded defined benefit schemes needed growth assets but were uncomfortable with equities, making DGFs an appealing compromise.
Trustees embraced them, consultants recommended them, and asset managers launched them. Based on Bloomberg data covering 15 leading DGF funds, assets under management grew from roughly £1bn in 2010 to around £80bn by August 2017. Standard Life Investments’ Global Absolute Return Strategies (GARS) franchise peaked at around £27bn, with the broader strategy managing more than £40bn globally. Cambridge Associates estimated the total market at greater than £150bn by 2015.
Then the tide turned. Critics cite complexity, cost, and failure to deliver on promises. But DGFs were also victims of a decade of central bank intervention that repeatedly rewarded equity risk, particularly in US tech stocks. In that environment, diversification became difficult to appreciate, and many alternative return streams struggled to justify their place in portfolios.
Source: Financial Times Companies · Summarized by HeadlinesBriefing