Willis Towers Watson has strongly criticised the value of many Diversified Growth Funds (DGFs), a staple investment for many UK pension schemes and now “a huge market”, saying many managers displayed “low skill” and “destroyed alpha”.

The comments were made in a report urging investors to consider alternatives to DGFs.

Sara Rejal, senior investment consultant at Willis Towers Watson, said DGFs had grown from “an improved one-stop-shop solution over traditional balanced portfolios to what is now a huge market.”

Asset managers in this market “are just capitalising on the popularity of this strategy by growing assets under management and launching more similar products”, she added.

The consultancy set out to analyse whether DGFs delivered on what they promised, and made some strong conclusions.

It said many DGFs provided benefits and that investors had experienced “a good ride” with the funds since 2008, but it also made some strong criticisms.

“Not only have the managers of most (not all) funds exhibited low skill in tactical asset allocation, many have also destroyed value in their attempts to deliver alpha through idiosyncratic trading,” said WTW.

“In a world of more moderate returns, which we expect for the medium term, we fear many DGF managers will be shown to have limited skill.”

Other “limitations”, according to the consultancy, include that many DGFs have “high fees and significant expenses, making them poor value and even less likely to give investors good returns”.

WTW recommended investors consider alternatives to the traditional DGF model, such as a focus on strategic asset allocation with index-tracking implementation, “high-quality alternative smart betas” or “genuinely differentiated and diverse manager skill across the spectrum of alternative asset classes”.

It said these options were particularly suited for investors with investment or implementation constraints, as is the case for UK defined contribution schemes.

DGFs evolved from traditional so-called balanced equity/bond funds and met with strong demand, particularly in the wake of the 2008 financial crisis, according to WTW.

Assets under management in multi-asset funds grew sixfold in the 10 years up to 2015, according to figures cited from a Henderson 2015 global investors report.

“In the UK, at least,” the WTW report says, “we have observed a growing demand coming predominantly from DC pension schemes, which are relatively more constrained in terms of the level of illiquidity and charges they can accept.”

In September, a report from research firm Spence Johnson predicted the DGF market would grow by 75% by 2019, as UK defined contribution schemes grew and allocated more to the products. 

See IPE magazine’s December issue for a special report on DGFs

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