70% of DGFs not meeting return targets

More than two-thirds (70 per cent) of diversified growth funds (DGF) failed to meet their return target over the last 10 years, according to Willis Towers Watson (WTW).

Its report, Multi-asset investing – the next generation, highlighted that DGFs delivered an average 9.6 per cent lower return than a 60:40 equity:bond portfolio.

The firm stated that the key issues with DGFs included a constrained opportunity set, with just 17.5 per cent of DGF portfolios invested in alternative asset classes, on average.

WTW added that only 26 per cent of DGF managers allocated to externally managed investments and had “ineffective security selection with limited specialist skill”.

In its report, WTW called on investors to rethink the role of DGFs in their portfolios.

“Particularly where less constrained by any over-arching regulatory requirements around liquidity, we believe there is scope for improvement in the approach to multi-asset investing,” it stated.

“One possible solution is the adoption of an open architecture approach and mentality.

“Embracing open architecture provides access to greater breadth, unfettered access to specialist skill, greater diversity of active management styles and more effective security selection, although clearly this requires the successful appointment of skilled active managers.

“We believe a revised approach should help to increase the probability of better outcomes.”

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