The proliferation of diversified growth funds among UK institutional investors will continue for the next five years despite falling growth among defined benefit (DB) investors, research shows.

A report by research firm Spence Johnson showed that the UK market grew by £16.2bn (€22.4bn) over 2014, reaching a total of £124bn.

However, by 2019, it predicts the market will be worth £218bn as defined contribution (DC) schemes grow and allocate more.

While institutional investors dominate allocations, Spence Johnson suggests retail investors are becoming more of a significant minority.

Retail investors led the growth in the market in 2014, followed closely by UK DC funds, which added more than £3bn to the market.

Overall, DB funds still have around £55bn in DGF assets, while DC has around £15bn.

Spence Johnson, however, predicted that DC investors would be the greatest source of inflows over the next five years.

It also lowered its forecast on DB after a “disappointing” 2014.

It said DB inflows were past their peak, due to the growing fiduciary management market as a competitor for DB assets.

General de-risking is also affecting the outlook for DB allocations, it said.

“We have seen growth in DB assets fall to almost a standstill last year, following the huge success of the previous year,” it said.

“Because of these factors, we have more than halved our flow forecast from the previous year.”

The research also suggested multi-asset solutions in the DC market would grow their market share from 1% to 32% of the £787bn in assets, with DGF funds being the fastest growing element.

However, the growth of specific types of DGF products stand to vary, with Spence Johnson predicting absolute return funds accounting for almost half of the market’s growth over the next five years.

Of the £55bn of inflows, it expects £23bn into absolute return, £19bn into dynamic DGFs and £12bn into strategies DGFs.

For DB investors, absolute return and dynamic funds will be most attractive.

However, given the UK government’s 75 basis point charge cap on DC funds used as defaults for auto-enrolment, strategic DGFs will capitalise by being lower cost, while dynamic funds will reduce in quality due to fee competition, Spence Johnson said.

Standard Life Investment still dominates, with a majority market share of 33%, while Ruffer, BlackRock and Newton Investment Management all hold more than 10% market share.

While the Top 5 asset managers held a 71% market share in 2014, concentration will reduce by 2019, with this figure falling to 57%, according to Spence Johnson.

At the end of 2013, the Top 5 concentration was 75%.

Topics