Diversified Growth Funds: Another British Invasion?

To illustrate, let’s say you hire a delivery service to transport a package from Los Angeles to New York. You don’t care how it gets there—trains, planes or automobiles. You don’t even care that it gets there fast. You just want it to arrive as scheduled and in good shape. That’s the intent of the DGF model. Investors let DGF managers decide how and when to invest—whether it’s in hedge funds, currencies, private equity, emerging markets equities, junk bonds or derivatives, for example, as well as in traditional stocks and AAA-rated bonds. It comes as no surprise that DGFs have been dubbed “hedge funds lite.” In terms of fees, Buck Global Investment Advisors found they currently charge more than mutual funds, but less than hedge funds. They also don’t have the long lock-up period often associated with hedge funds.

In the multi-strategy fund model, by contrast, the investor retains much more authority. To continue the analogy, the multi-strategy investor tells the delivery service which interstate highways to take across the country, with strict instructions not to deviate. In other words, the portfolio’s assets will be allocated to, and remain with, an array of sub-managers who are skilled in their area of expertise, be it long-short equity, convertible bonds, value plays, etc.

DGFs have been a hit with small- and medium-size pension funds in Britain, and it’s easy to see why. Generating enough return to meet their pension liabilities has become a huge challenge for pension funds. Bond yields are low, and the saw-toothed equity markets of recent years have rattled nerves. At the same time, the menu of asset classes available to chief investment officers has lengthened, and what was once exotic cuisine is now standard fare. Each new asset class represents an opportunity, but it also requires a new level of expertise. Even the largest institutional investors find the education process daunting. A DGF’s offer of instant diversification with one manager has obvious appeal.

It’s still early days for DGFs, and assessing this class isn’t easy. Each DGF has a different blend of assets, so no common benchmark exists. It remains to be seen if American small- and medium-size pension funds will find DGFs as appealing as their British counterparts do. Are DGFs the next hot import, or the investment community’s equivalent of Marmite (a vegetable extract that Brits like to spread on bread and crackers, to the puzzlement of their American cousins)?