From the BBC to the Beatles, Britain can lay claim to some of the world’s most popular exports. It remains to be seen if its newest financial innovation, diversified growth funds, will survive a trip across the pond.
Diversified growth funds, inevitably abbreviated to “DGFs,” have surged in popularity in Britain. In 2012, assets in DGFs in the U.K. grew from £20 billion to £50 billion (or roughly $33 billion to $82 billion), according to a white paper by Clear Path Analysis. Mercer, the consulting firm, estimates that DGFs now hold more than $250 billion in assets globally. Indeed, some of the best known DGFs have recently been closed to new money, according to Clear Path. Still-hungry DGFs, however, may decide to invade our shores, which is reason enough to find out what all the excitement is about.
DGFs have been marketed as “new generation” balanced funds. Instead of the static 60% equities/40% bonds asset allocation model of traditional balanced funds, a typical DGF might also include positions in the euro, a macro hedge fund, some private equity, junk bonds, loans, derivatives and real estate, according to FE Trustnet, which provides data on fund and equity prices. As the marketing literature puts it, they are designed to deliver equity-like returns over the medium term, say, three years, with lower risk. How? By letting the DGF manager zip in and out of asset classes, “dynamically rebalancing” the portfolio as he or she sees fit, often using derivatives that allow them to move quickly and cheaply.
Instead of trying to identify and vet managers of these specialty funds or paying a consultant to do it, pension administrators can turn the job over to the DGF manager. The idea is to make money by finding fresh sources of income, and above all, to not lose money.
This might sound like old wine in new bottles. After all, investors can already diversify using multi-strategy hedge funds. What’s novel about DGFs is that they take over the entire responsibility for performance from the investor.