Plugging the DGF knowledge gap

Not putting all your eggs in one basket is a well-established investment cliché but it is one that has come to drive pension fund portfolio strategies in recent times.

The rise of the multi-asset or diversified growth fund (DGF) is testament to investor demand for a way of spreading risk across a range of asset classes while still investing in just one fund.

Yet while DGFs are widely available to the defined contribution investor, the ability to measure their performance and compare and contrast different strategies has been lacking.

In an attempt to plug the knowledge gap, DCisions, a specialist in DC data analysis and research, has created its own multi-asset benchmark series. The Fair Return Benchmarks group multi-asset funds into five risk types: low risk; medium low risk; medium risk, medium high risk; and high risk.

Mercer says it uses its own research for comparing multi-asset funds and questions whether the DCisions benchmarks allow for nuances in the way in which strategies are run

DCisions claims investors can analyse the return from each category and then decide if the risk is adequately rewarded. The analyst measured performance for the past three years and, as might be expected, the figures show the multi-asset funds exposed to the most risk were the best rewarded.

The highest risk funds, which have an average of 97% invested in growth assets, returned 10.9% for the three years to 30 June 2012. In contrast, the lowest-risk funds, which are dominated by cash, returned just 0.7% over the same period.

However, additional research will be required to give a complete picture of the options available and to ensure investors choose the right fund for their specific needs

However, the highest-risk investors were subject to the most volatility, with one-year returns delivering negative performance of 7.4%, while for the first six months of this year returns were -5%.

Middle-of-the-road investors were rewarded with 10% returns over the three years and enjoyed a relatively smooth ride. Returns were 3.4% for the year to 30 June and -2.4% for the first two quarters of 2012.

Advisers, asset managers and pension schemes can use the benchmarks to assess and demonstrate risk-adjusted performance

Graham Mannion, managing director at DCisions, believes the benchmarks will not only benefit investors but the wider industry as well.

He adds: “Advisers, asset managers and pension schemes can use the benchmarks to assess and demonstrate risk-adjusted performance.”

However, global investment consultant Mercer says it uses its own research for comparing multi-asset funds and questions whether the DCisions benchmarks allow for nuances in the way in which strategies are run.

Brian Henderson, head of DC investment consulting at Mercer, says: “If you look at something like the Standard Life Global Absolute Return Strategies fund it doesn’t look like any other multi-asset class fund, which means you might be comparing different things.”

The DCisions benchmarks provide a useful tool for investors considering multi-asset investment. However, additional research will be required to give a complete picture of the options available and to ensure investors choose the right fund for their specific needs.