How a multi-asset fund is measured and marketed needs tougher scrutiny from investors, according to consulting firm PiRho.
In a paper questioning whether diversified growth funds (DGFs) meet expectations, the consulting firm advised investors to look not only at how they performed compared to the market average, but also to the benchmark they set themselves.
“Investors in DGFs would for the most part be disappointed with the performance of DGFs over the past four years.” —PiRhoThis is not a simple task, the consulting firm said, as each fund uses different methods—multiple benchmarks, adjusted targets, and more “aspirational” objectives—to gauge whether they have hit the mark or not.
Despite this range of measurements, many have failed to meet their own expectations over the last four years, PiRho found. From a group of 16 UK-based DGFs, just two funds reached their four-year implied return targets by the end of last year, after fees were paid.
One of the main reasons was the economic environment, which had not been predicted when setting out the funds’ objectives, the paper claimed.
“Overall, investors in DGFs expecting ‘equity-like returns with lower volatility over an economic cycle’ would for the most part be disappointed with the performance of DGFs over the past four years,” the paper said. “The determination of governments post the financial crisis to support economic growth has contributed to strong equity markets as well as strong bond markets.”
In these circumstances, diversification—which is “at the heart of the diversified growth fund”—has not paid off as compared with a simple equity and bond portfolio, PiRho said.
However, the consultants advised investors to not dismiss those funds that missed their targets out of hand, but instead use the exercise as a reminder of discipline in manager selection.
“We believe to really understand the likely performance characteristics of a fund it is necessary to ‘look under the bonnet’ and examine the manager’s approach to risk management rather than simply relying on the fund’s stated objective,” the paper concluded.
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