Assets in a volatile period: Diversified Growth Funds

by Brendan McLean   •  
Blog

Diversified Growth Funds (DGF) are an easy way for investors to access a broad range of asset classes through one fund - ranging from equities and real estate to emerging market bonds. This diversification provides investors with exposure to various return drivers which can improve risk adjusted returns over the long term.

DGFs also come in a range of different styles, from highly dynamic absolute return funds to passive multi-asset funds. Within defined benefit pension schemes, DGFs are often sold as providing equity-like returns with lower volatility over the long term.

In recent years, DGFs have not lived up to this aforementioned return promise. This is primarily due to the fact that equities have seen huge increases and many DGFs have not kept up the pace of positive returns. However, investors see DGFs as more than just a vehicle for high returns, as they like to believe that their DGF will be better able to control risks and protect capital when markets crash, as they did in Q1 2020 or Q4 2018.

This was proved true over Q1 2020, when the average DGF return was -11% with global equities in pound sterling posting -16%. Absolute return type DGFs were better able to preserve capital and on average were only down 2% over the quarter. This is a good result, but it is expected due to their low beta allocation. The lack of protection from some DGFs during Q1 is due to the broad market selloffs with almost every asset declining in value; even more defensive assets such as investment grade corporate bonds declined. However, in Q4 2018 global equities declined -11% while the average DGF return was -5%, demonstrating that DGFs can protect on the downside.

The range of returns for DGFs is broad. While the average performance has been below expectations, they can still offer investors access to a range of diversified assets which is important for long-term diversification and returns.

Further reading

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