One small potential fly in the ointment regarding the growth of multiasset and diversified growth funds is the U.K.'s recently announced charge cap on defined contribution investment offerings. Steve Webb, the U.K.'s pensions minister, announced last month that a cap would apply to DC default investment options starting in April 2015, set at 0.75% of assets.
“Not many (diversified growth funds) are already above the new charge cap, but unfortunately for bundled schemes, when you add in the cost of administration of member records, it squeezes the budget further,” said Nico Aspinall, London-based head of defined contribution investment at Towers Watson & Co. “Some funds have only 30 basis points (of total expense ratio) left for investment costs, which then rules out many of the multiasset funds.”
He said that while the threat of the charge cap is probably “not material” for money managers, a manager running a strategy that invests in lots of high-alpha or illiquid assets or more dynamic asset allocation will find it more difficult to comply with this lower cost.
“We haven't generally had 100% allocations to very dynamic DGFs in DC default (funds) — they have had small allocations blended with bulk equities and market index funds,” he said.
The managers do not appear too concerned. “We are seeing a common model in DC default funds of 50% global passive mandate, with a 50% DGF mandate,” said David Aird, London-based head of U.K. business at Investec Asset Management. “That blend allows us to sit below the new charge cap threshold.” The manager launched a diversified growth fund for the U.K. market that charges 80 basis points total expense ratio. A DC default fund “only has to blend that with a passive mandate and the result is below the 75-basis-points threshold,” said Mr. Aird.
One multiasset fund manager, who asked not to be named, said he had already seen money flowing into multiasset — but at the expense of cash rather than more risky allocations such as equities, as institutional investors look to put their cash to work.
Mr. Aspinall warned that DB funds becoming fully funded and derisking will result in withdrawals from return-seeking assets, “which would include multiasset funds.” However, a continued shift to DC will also support the asset class. “
As scale starts to build into DC, their purchasing power means more can be done within the charge cap. As DC moves into the multibillions (in terms of the size of the industry), then demand for multiasset should increase,” said Mr. Aspinall.
