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Willis Towers Watson urges more innovation from DGFs


Willis Towers Watson has urged investors to re-visit the traditional, liquid, actively-managed Diversified Growth Funds (DGF) proposition by comparing it to more modern cost-effective and better-structured solutions.

In a new research paper entitled: Diversified Growth Fund investing: is there a better way? it summarises some of the more important issues faced by DGF investors in the current market conditions and suggests a number of alternatives to the traditional DGF model, such as: focus on strategic asset allocation with index-tracking implementation; high-quality alternative smart betas which can provide extra diversity in the return drivers at a low cost; and genuinely differentiated and diverse manager skill across the spectrum of alternative asset classes.
Sara Rejal, senior investment consultant at Willis Towers Watson, says: “Diversified Growth Funds have grown from an improved one-stop-shop solution over traditional balanced portfolios to what is now a huge market where many asset managers are just capitalising on the popularity of this strategy by growing assets under management and launching more similar products. While these products have had good returns since 2008, benefitting from strong market performance across most asset classes, many asset managers have reaped the benefits and not innovated at a sufficient scale. Our analysis of the key drivers behind DGF performance shows that in general, the high returns are attributed mostly to beta rather than alpha. Further, and crucially, we question how effective traditional, liquid DGFs will be going forward if market returns are subdued.”
According to Willis Towers Watson, many traditional, liquid DGF managers have delivered breadth and diversification benefits, particularly improving Sharpe ratios, but opportunistic trading detracted from returns on average.
Rejal says: “We have witnessed that with increased product proliferation has come a deterioration in average quality and a deviation from the original DGF agenda. We have found that risk management is not an explicit focus for many DGF managers, assets under management have grown multiple times and the fees charged by the traditional, liquid DGFs are too high and not commensurate with their skill. However, there are some astute managers which have been able to improve on the earlier versions of the DGF, particularly those using smart beta* and alternatives to enhance future performance.”
As an alternative to investing in traditional DGFs, Willis Towers Watson suggests that those investors constrained to a single product approach should consider new options, including index-tracking implementation DGFs which focus on strategic asset allocation; DGFs that enhance their portfolios with high-quality alternative smart betas which can provide extra diversity in the return drivers at a low cost; or select a solution that includes genuinely differentiated and diverse manager skill and asset allocation. In addition, it says that if an investor can accept a less liquid strategy, they should choose a truly multi-asset, multi-manager approach that covers the full spectrum of alternative asset classes and makes extensive use of best-in-class managers in each space, including private markets.
Rejal says: “What is clear is that all DGFs are not created equal and there is now a wide dispersion, from those which have innovated and positioned themselves well for the more turbulent times ahead and those which have not.  Asset owners have a wide-ranging choice and it is in their interests to re-visit the original DGF proposition with a view to comparing what is now available and taking into account factors such as skill, governance, diversification, risk control, liquidity and value for money in their multi-asset investing journey.”

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