Data analysis: The use of multi-asset products has increased as schemes look to mitigate market volatility with the product, which promises equity-like returns with downside protection, investment data show.
There has been a steady increase in the number of multi-asset mandates – including diversified growth funds – since mid-2011 (see graph), according to Financial Times service MandateWire.
Investment experts have said schemes could benefit from a smoother investment ride and access to a wider range of return sources, but have warned them not to overestimate the performance of these strategies.
The second quarter of 2013 saw 18 mandates awarded or assets reweighted towards multi-asset funds.
This is the highest number since a peak of activity in Q1 2012, where two local authority schemes appointed multiple managers as part of a DGF framework.
Research by Baring Asset Management has found 66 per cent of pension fund managers were concerned about the current levels of volatility and nearly two in five schemes were mitigating market volatility by shifting their funds to multi-asset products.
The proportion of pension funds using multi-asset strategies – which include targeted return, diversified growth and dynamic asset allocation – stands at 70 per cent, an increase of 5 percentage points from the last survey in November 2012.
The survey also found exposure to DGFs has increased by 3 percentage points to 46 per cent.
They are useful for those investors that are looking to outsource a degree of asset allocations to experts
Atul Shinh, investment senior associate in Mercer’s alternatives boutique and a DGF specialist, said the consultancy's annual search trend report had reflected this growth.
DGFs searches have been number one in the UK over the past two years, Shinh said, "even more than global equity or fixed income”.
DGFs seek to offer a greater sense of certainty than you might get from investing in equities alone for those schemes wanting a smoother investment journey. But mitigating volatility is not the only reason for their popularity, according to Shinh.
“DGFs can provide investors with new and/or alternative return sources, [assets] that investors may not have used before like emerging market debt or something more esoteric like insurance-linked securities,” he said.
DGFs are also marketed on the ability to shift around assets more dynamically than schemes could do themselves. “They are useful for those investors that are looking to outsource a degree of asset allocation to experts,” Shinh added.
The asset class has also proved important for defined contribution schemes and are considered a "vital cog" in how the market works, Shinh said, especially in serving younger members who can stomach a degree of volatility growth potential but also want a degree of certainty.
Scheme investment
Last week, Pensions Week reported that Isle of Wight Pension Fund decreased its investment to domestic equities in favour of DGFs. The local authority scheme has allocated 15 per cent of assets to a DGF run by manager Baillie Gifford.
Nick Secrett, an investment director at consultancy PwC, stressed at the time the importance of being aware of the performance of these funds.
"There is a danger they have potentially been overhyped," said Secrett. "There have been a number of cases where you hear people say, ‘Oh it will be the same as equity returns, just with a lower volatility’ and I think the reality is that you are unlikely to get that."
