While the return of volatility to the markets and increasing monetary policy divergence weigh on the minds of single-strategy investors, these factors might be just what diversified growth strategies need.
Consultants and money managers said the strategies — most commonly labeled diversified growth or multiasset strategies — have come under increased scrutiny from investors and consultants for their performance. Some say that the strategies, which aim to deliver a smooth ride by investing across asset classes, producing equity-like returns but avoiding the volatility and potential losses associated with bumpy markets, have failed to produce better returns than a simple, balanced portfolio. Strategies were put to the test at the start of this year thanks to shocks from China and the fear of a potential U.K. exit from the European Union; and last summer, as global markets suffered from short-term crashes.
Sources that run these types of strategies pointed out that they typically suffer around one-third to one-half of the losses equity markets suffer in negative periods, but also will not necessarily hit the highs that equities achieve in the good times. Hani Redha, multiasset portfolio manager at PineBridge Investments in London, said that over a three-year period to June, diversified growth strategies achieved monthly returns of between -3% and 4%, compared with FTSE All-Share monthly performance of between -7% and 7%.
Experts expect the protection against volatility that these strategies provide to lead to increased allocations by institutional investors globally. PineBridge expects 27% growth in diversified growth assets this year, to total £160 billion ($230.3 billion). Sources also attributed growth forecasts to increased allocations from defined contribution plans, and to the performance of some diversified growth strategies.
“Since inception, we have delivered an improvement in risk-adjusted returns relative to equities,” said Johanna Kyrklund, head of multiasset investments at Schroders PLC in London. “That is ultimately what the diversified growth universe is about — delivering a smoother path of returns” than equities. The firm runs £78.1 billion across multiasset investments.
Institutional assets have continued to flow into the strategies — albeit at a slowing pace. eVestment LLC, Marietta, Ga., data show net institutional inflows totaled $70.5 million for the three months ended Dec. 31, compared with $1.2 billion for the three months ended Sept. 30; and $3.3 billion in the three months ended Dec. 31, 2014. Institutional assets in diversified growth strategies totaled $87 billion at Dec. 31, up 4.4% year over year.
And the return of volatility to the global markets will give managers and certain substrategies within the diversified growth universe an opportunity to prove their worth, with dispersion in stocks and ever-diverging monetary policy set to benefit alpha-seeking and more dynamic strategies in particular.
“Heightened volatility will give a high dispersion of returns, certainly with the active managers, and the out- or underperformance will become maybe more magnified,” said Nick Ridgway, head of investment research at Xerox HR Services, based in London. “Going forward, the skill of DGFs vs. balanced funds potentially has more of an opportunity set in a world where volatility is much higher, and you do need to access a broader asset base.”