Global materials technology company Luxfer Group has restructured the growth portfolio of its defined benefit scheme to invest in diversified growth funds, as research has predicted continued demand for these strategies.
DGFs have proved to be popular among pension schemes for their ability to provide exposure to different assets. By March 2015, they had attracted £150bn of assets and by 2018 are expected to break through £200bn according to consultancy Cambridge Associates, despite having come under fire in recent years for high fees and disappointing returns.
You have to be realistic about the return expectation for diversified growth
Kevin Frisby, LCP
DGFs now at 20 per cent
The £200m Luxfer Group Pension Plan has notified members that “the trustees agreed to restructure the growth portfolio by reducing the equity holdings and increasing the investment in diversified growth funds”.
According to the scheme, the change took place during April and May 2016 “with the target of reducing the equity holdings to 43 per cent of the fund and increasing the diversified growth funds to 20 per cent of the fund”.
Profiting from the equity exodus
John Walbaum, head of investment consultancy at Hymans Robertson, said that in recent years, quite a lot of schemes moved money out of equities into other types of assets, including DGFs, due to the volatility of equities. Walbaum said they are currently at an all-time high in a number of different markets, “so there’s a fear that the next move in equity markets might be downwards”.
“What a lot of schemes have been looking to do is to find other assets where they hope to generate similar levels of growth, but without so much downside risk,” he explained.
'Not a panacea'
Some schemes have been particularly attracted to DGFs because they tend to “offer returns that are similar to equities, but with less risk”.
However, Walbaum warned that “it’s by no means a panacea”, as although the majority of DGFs have provided less risk than equity markets in recent years, they have not provided the same kinds of return.
Murray Taylor, senior consultant at JLT Employee Benefits, agreed that DGF and multi-asset managers “have been, in general, a little more cautious than normal” as equity markets have done very well.
Which DGF manager?
Kevin Frisby, partner at consultancy LCP, said that when a pension scheme’s equity allocation has performed very well and contributed towards an improvement in the funding ratio, sometimes the trustees wish to then reduce risk “to take away some of the profits”.
There are many different types of DGF manager, and choosing the right one depends on what the trustees are looking for, because “some are better at risk control and capital preservation than others”, said Frisby.
NESPF adds DGFs and PE after global equities disappointment
The North East Scotland Pension Fund has taken further steps to diversify its growth portfolio, divesting from underperforming global equities and allocating to a range of private equity houses and diversified growth funds.
For example, if a pension fund is looking for a sustained level of return in most market conditions, “then they might want to look at something which is more multi-asset based”.
However, “that type of manager is probably less likely to really rotate aggressively and preserve capital”, he cautioned.
Trustees advised to have realistic expectations
Frisby’s advice for trustees is that, “generally speaking, you have to be realistic about the return expectation for diversified growth” due to the returns having not kept up with the equities or fixed income markets over the past few years.
DGF growth expected to continue despite challenges
Experts predicted the continued growth of the diversified growth fund market this week, even as the asset class comes under increased scrutiny over performance and competition from advisers.
However, one of the most attractive aspects of DGFs is that “they can be very flexible” and can “become very defensive and protect capital” in certain market conditions.
David Clare, partner at consultancy Barnett Waddingham, explained that DGFs work by “diversifying different sources of return”, and these different sources of return are not highly correlated with each other.
He said DGFs are a concept that involves trying to get a widespread balance of all different sources of return. “The beauty of DGFs is how different managers interpret that concept,” Clare added.
