Diversified Growth Funds: Uniform in variety

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1 INSTITUTIONAL INSIGHTS Institutional Insights 2016 Diversified Growth Funds: Uniform in variety Diversified Growth Funds: Uniform in variety Differentiating types of DGFs and examining their features Insight into growth in the market and DB/DC scheme usage Selection criteria and preferences in the market

2 Institutional Insights 2016 Diversified Growth Funds: Uniform in variety Company profile Russell Investments Russell Investments is a global asset manager that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals through advisors using the firm s core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures. Russell Investments has over 172 billion in assets under management (as of 31/03/16) with over 1,700 institutional clients, independent distribution partners and individual investors globally. Russell Investments has four decades of experience researching and selecting investment managers worldwide. Russell Investments managed 755 transition events representing over 483 billion during 2015 through its Implementation Services business. 2

3 Institutional Insights 2016 Diversified Growth Funds: Uniform in variety Interview with David Vickers Senior Portfolio Manager, Multi-Asset Solutions Russell Investments David joined Russell Investments in 2013 from Sarasin & Partners where he was the lead fund manager within the multi-asset team. During his tenure at Sarasin, David managed The Alpha Common Investment Fund, Sarasin s flagship charity endowment fund as well as GlobalSar Dynamic, the firm s core balanced fund, and a number of pension, insurance and fund of fund risk targeted mandates. Why should institutional investors include DGFs in their portfolios? Institutional investors are facing an unprecedented range of challenges. Equities and government bonds have become abnormally expensive and potentially more volatile, and pension fund trustees face the extra problems of shortening time horizons, widening deficits and negative cash flows. This tough environment demands a fresh approach and more flexible outcome-oriented strategies. Investors need to be more pro-active in managing and hedging risk exposures, and in dynamically managing their portfolios to take advantage of opportunities as they arise. We believe that an actively managed, globally diversified multiasset approach represents the best way for investors to manage their growth assets. DGFs provide convenient access to this approach. They offer diversification from traditional asset classes, and target capital growth with lower volatility than equities. Specifically, by carefully selecting from some of the leading DGFs, investors can benefit from four important characteristics: 1) Dynamic asset allocation, the ability to move quickly between asset classes to take advantage of opportunities when they arise. To do this successfully, you need a robust investment process and the ability to deal at any time across all asset classes. In a world of low market returns and a high probability of shocks, a dynamic approach is crucial to generate returns and mitigate risks. 2) Effective diversification. This means much more than simply holding a variety of asset classes. To diversify effectively, you need to have a real understanding of how different markets perform under various scenarios, and how to create asset mixes that can reduce risk without unduly constraining return. For instance, a significant allocation to commodities would have been a good diversifier in 2015, but extremely adverse for returns. Effective diversification means the ability to model and analyse multiple scenarios, to combine asset classes with attractive characteristics but relatively low correlations, and to be pro-active in the face of changing circumstances. 3) Downside protection, a portfolio construction approach that looks to lock in gains and avoid major setbacks that are hard to recover from. To do this successfully, you need expert knowledge of, and execution skills in, derivative markets, and the ability to adopt innovative strategies that provide new sources of return with low correlation to traditional markets for instance, multifactor volatility management strategies. 4) A commitment to best-of-breed is the ability to pick from the best managers and strategies in every asset class and every geographic region. When returns from markets are meagre or negative, achieving positive returns from manager skill becomes even more important. This requires significant research capability, and an open-architecture approach that adopts the best product irrespective of whether it is created in-house or provided by a third-party manager. To what extent do you see DGFs being offered either as part of or alternative to fiduciary management? To what extent are DGFs used to complement LDI? DGFs have become widely accepted in Fiduciary Management (FM) solutions, typically paired with a separate liability matching portfolio. This DGF + LDI approach is highly convenient, particularly for smaller and mid-sized DB pension plans, which typically have limited resources and welcome a governance arrangement where there are just two components to monitor and oversee. A key benefit is this type of fund s focus on growth with lower volatility, which makes for a more stable funding ratio. Managing volatility needs to be top of mind for trustees: 1) Excess funding level volatility undermines confidence in a scheme s ability to meet its liabilities and is a key watch-point for sponsors and regulators. 2) In a world of low capital market returns, short-term volatility can create opportunity to add value from tactical asset allocation. But this requires a robust investment process and the investment infrastructure to manage portfolio exposures and allocations dynamically. 3) Unnecessary volatility in a portfolio can adversely affect the value of scheme assets, particularly if the scheme s cash flow profile is negative and assets have to be redeemed after a big fall. So schemes of all sizes need the dynamic approach and skills that a good DGF manager can offer. In what ways, if any, do DGFs designs vary across asset managers and consultants? DGF designs are strongly influenced by the fund s investment objective and by the capabilities and characteristics of the providers. We see a DGF spectrum ranging from funds that use mostly skillbased and long/short strategies, to those more reliant on market beta supplemented by manager skill. At Russell Investments we have the capability to combine elements from across the whole spectrum. We also see that providers play to their strengths, designing their DGFs to suit their best in-house capabilities and their traditional biases. For instance, big retail brand name managers can have an equity growth bias, bond specialists may have a credit risk bias. These structural features can produce episodes of strong performance, followed by inevitable setback when a particular style or specialism goes out of favour. Firms with longstanding skills in strategic asset allocation also tend to more static approaches based around long-term expected asset class returns. The Russell Investments approach is fully dynamic and draws on the complete range of asset class and strategy opportunities. 3

4 Trouble sleeping? Multi-Asset Growth Fund Experience the performance with less volatility If volatile markets, low yields, or the next bear market keep you awake at night, then it s time to try our range of Multi-Asset Growth funds. Our approach taps into over four decades of multi-asset know-how, and our global team work around the clock to meet your investment goals. For a good night s sleep, visit FOR PROFESSIONAL CLIENTS ONLY Please remember your capital is at risk, any past performance figures are not necessarily a guide to future performance. Issued by Russell Investments Limited. Authorised and regulated by the Financial Conduct Authority APR 2016 UKI

5 Institutional Insights 2016 Diversified Growth Funds: Uniform in variety Spence Johnson Suite 501 Salisbury House London Wall London EC2M 5QQ UK T Compelling research. Objective advice. London office Suite 20 Salisbury House London Wall London EC2M 5QQ UK T Compelling research. Objective advice.