A wake-up call for DGFs

There are many commonalities between the countless DGFs available for investors.

Thomasnehring
Thomas Nehring

The stated aim of most DGFs is to provide equity-like returns at less than half the volatility, while also targeting capital preservation over a three to five-year period. This is normally achieved by broad asset diversification. However, while goals can be quite similar, DGF philosophies and processes can vary widely. Ever since the crisis, there has largely been no opportunity for investors to test DGFs. Almost all asset classes performed positively in unison during recent years.

But it all changed in 2015, with heightened volatility compared to recent history. There were few safe havens. The summer of 2015 in particular was a wake-up call, with DGFs claiming to offer true diversification facing acute stress, leading some managers to post significant drawdowns. Many DGFs wilted in the summer heat. Between July and August, the Morningstar EAA OE Moderate Allocation sector (GBP) fell 2.3%, roughly half the 4.4% decline for the MSCI World. While able to dampen losses compared to equities, DGFs could not provide the much-needed and oftenpromised true diversification for capital protection.

This was not an anomalous occurrence. Similarly poor capital preservation was on display this January. The sector fell 2.5% in st, while the MSCI World lost 5.6%. This poor downside protection can be attributed to two main reasons. Firstly, many managers overestimated the potential of diversification. Also, many make macro calls, which are extremely tough to do in volatile conditions, and then allocate to assets to reflect these particular views. But the good news for investors is not all DGFs are created equal. Our £50bn Multi Assets team approaches multiasset investing from a different vantage point. Our team has a 10-year track record of preserving capital and generating consistent stable returns throughout a cycle. We do this by eliminating the need to make the right macro calls. We combine defensive return drivers able to perform well during recessionary periods with aggressive return drivers likely to deliver in expansionary periods. By utilising risk balancing principles and combining truly uncorrelated assets able to withstand negative economic surprise, we are prepared for uncertain market scenarios.

This allowed us to generate absolute returns during strong drawdown for the peer group last summer and in January this year. In the summer of 2015, we delivered a 0.5% return – while our process and investment objective was further vindicated in January, where we climbed 1.8%, a 4% relative return.

Clearly not all DGFs are created equal. If there is a positive to come out of the elevated market volatility we have experienced during the summer of last year and at the beginning of 2016, it is that investors will be forced to take a closer look at the universe to determine what solutions can truly deliver on their much-vaunted promises.