Which DGF strategies are likely to be successful over the next two years?

Nicola Ralston: I would like to see diversified growth funds at least contemplate being more active generally and taking advantage of tactical opportunities.

In terms of individual asset classes we have been pretty negative about emerging markets for a long time, but maybe we have now reached the tipping point. Direct lending is also interesting, but DGFs have to stick with liquid markets, so it can only be a very small part of a DGF strategy.

William Bourne: I would broadly echo that asset allocation is one thing most pension funds find difficult to do for governance reasons.

I see a greater range of premiums being deployed in these types of strategy and I just hope we are not headed for a giant banana skin in the form of complexity

Pete Drewienkiewicz, Redington

I also think that over the next four or five years it may be difficult to get returns out of the traditional asset classes, so you need to have a fund which is prepared to at least look at some of these more esoteric areas.

I would also like to see funds of funds using methodologies that do not rely purely on the historic correlation of data, because that is something which really worries me.

Percival Stanion: I find liquid assets can go pretty much anywhere, and we have demonstrated a pretty dynamic track record. I hope we can harvest what returns there are available.

Pensions Expert: Defined contribution funds in the UK have been using DGFs and have not necessarily gone wholesale for target date funds, whereas in the US there is a lot of money going into TDFs. Why?

Stanion: There is an ultimate illogicality in making decisions based purely on the length of time left to some arbitrary retirement point, rather than the level of premium that attaches to the different asset classes.

That is our objection to TDFs: that it is an automatic flight path, regardless of what the premium is you are paying.

And I am sure with the structure of bond yields where they are, there are going to be some pretty perverse outcomes from that.

Ralston: In some ways, we have probably had a lucky escape in the UK in respect of TDFs. As we now have much less definition about when any individual is likely to retire, I cannot see TDFs taking off here and I think that is a good thing.

John Nestor: I am not disagreeing with the points about TDFs because I have an issue about the glide path.

Notwithstanding that, what we want to know is where the member wants to get to, what shape of retirement [income] they are looking to have – drawdown, cash, [annuity] or a mixture of all three.

I want a product that is fit for purpose, which will create a sensible retirement pot that is managed professionally and has a target outcome, for which I go back to the consumer price index +3 per cent outcome. That has to be the bare minimum, and it is a product that is up to 35 years long.

Therefore it is upon us, as the product providers, to take the lead position, and whether that be an insurance company or an asset manager, that is the rightful place for those decisions to be made.

Pensions Expert: If you had one wish for the evolution of DGFs – in defined benefit or DC – what would that be?

Pete Drewienkiewicz: From a selfish perspective, that they deliver, but I see a greater range of premiums being deployed in these types of strategy, and that again is very sensitive to back-testing, sometimes correlation information, and I just hope we are not headed for a giant banana skin in the form of complexity.

Complexity is having to go up to keep up with the fact that the basic raw materials of investment have got more and more expensive, and I hope that does not lead to a massive problem down the line.

I would like to see diversified growth funds at least contemplate being more active generally and taking advantage of tactical opportunities

Nicola Ralston, PiRho

Nestor: We have to be very careful to be able to sidestep the impact of negative real rates and outstanding governance with very high quality investment guidance through consultants. DGFs are one way of doing that. It does bring a different view of the landscape when you are operating in negative real yields; that is uncharted waters.

Stanion: If I had one wish for the next year for DGFs, it is that our DGF delivers on the investment returns and does slightly better than our competitors.

Bourne: I have quite a lot of clients who use them as their kind of ballast for their funds, not having bonds. I will go for a good Japanese equity market because most of them seem to be invested there.

Ralston: My wish would be for managers to follow their convictions and not be too much under the thumb of their corporate people. We want managers who really benefit, take advantage of the unconstrained nature of DGFs and allow us to see enough of what they are doing to be able to make a proper decision as to whether to support them.

Drewienkiewicz: I will add one more thing that was mentioned earlier: there are too many ‘me too’ funds already – the market is saturated. Unless you have something that is really differentiated, or a team that has been doing this for a long time with great pedigree, then stay away.