more of the same. True diversification shouldn t mean Aberdeen Diversified Growth Fund

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1 True diversification shouldn t mean more of the same. Aberdeen Diversified Growth Fund Lots of strategies call themselves diversified growth funds. But look closely and see how diversified they really are. At Aberdeen, we dynamically invest across traditional and alternative asset classes, seeking out the best s to achieve our target returns. The value of s and the income from them can go down as well as up and investors may get back less than the amount invested. For diversified growth investing that stands apart, please visit aberdeen-asset.co.uk/dgf For professional investors and financial advisers only not for use by retail investors. Subscriptions will only be received and shares issued on the basis of the current Prospectus, relevant Key Investor Information Document (KIID) and Supplementary Information Document (SID) for the Fund. These can be obtained free of charge from Aberdeen Fund Managers Limited, PO Box 9029, Chelmsford, CM99 2WJ. Issued by Aberdeen Asset Managers Limited. Authorised and regulated by the Financial Conduct Authority in the United Kingdom

2 d DGFs Sponsored by Diversified growth funds focus: The search for returns The role of DGFs - Mike Brooks examines the various roles DGFs can play within an portfolio p52 Diversify and grow - Natalie Tuck looks at why DGFs are proving so popular for both DB and DC schemes and how the pension reforms are acting as a catalyst for product innovation p54 Mike Brooks, senior manager, solutions, Aberdeen Asset Management DGFs I Summary Diversified growth funds are a type of multi-asset fund that are popular for both DB and DC schemes, particularly DC schemes which use them as their default option for savers. With the introduction of the DC charge cap this has led to less sophisticated products compared to the DB offering. However, this will drive innovation in the overall DGF market, which could even see the creation of a robo DGF. Diversify and grow Diversified growth funds are experiencing a surge in popularity, especially amongst pension schemes. Natalie Tuck looks at why they are proving so popular for both defined benefit and defined contribution schemes and how the pension reforms are acting as a catalyst for product innovation Johnson, which suggests the DGF market Therefore in order to give the same t is well known that diversifying is valued at 124 billion and is predicted type of ride to a DC investor that the your assets minimises your risk to to reach 218 billion by 2019, with DC old type of managed balanced funds volatility, which all being well brings pension investors forecast to be the were giving, you need to widen that positive returns. greatest source of new flows over the next opportunity set, you need to be more A diversified growth fund does five years (estimated to be 55 billion). dynamic in how you allocate around the exactly that. It is a multi-asset fund that assets that you ve got and therefore DGFs invests in a wide range of different asset The DC DGF sit very well in that pot, she explains. classes, with its main goal being smooth, One of the main advantages of a DGF, However, her one sticking point is consistent growth providing equity-like Brooks says, is that they can offer the widening gap between DGFs for DB returns with lower volatility, Aberdeen efficient access to different asset classes and DC investors since the introduction Investment Solutions senior and strategies under one of the DC charge cap. Lynas knows manager Mike Brooks explains. umbrella. that reducing fees is important but The assets within a DGF purely DGFs have no more so proved their consequently the DC market has been depend on the approach the manager popularity than as the default option provided with a less sophisticated DGF. takes, Punter Southall head of manager for DC schemes. Figures from Towers The flip side to this, Lynas says, is the research Katherine Lynas says. The Watson show the proportion of FTSE innovation it will bring. Developments one thing that you would hope to see 100 schemes offering DGFs as a default in DC, particularly concerning the is that the majority of them are liquid option increased from 10 to 70 per cent pricing cap and pension freedoms, will because DGFs have got to have daily from 2009 to push asset managers to develop more liquidity. You wouldn t necessarily see a Lynas believes this works very well: cost-effective processes, DGF investing directly in property, so The concept of having a multi-asset in order to deliver the important risk building. The default fund for DC has been around for controls that are currently only provided e. Markets have become more by the more expensive products, she explains. e a bigger role to October Sponsored by

3 DGFs The role of DGFs Mike Brooks examines the various roles DGFs can play within an portfolio Investors should also consider how easy it is to understand the approach. A transparent, understandable strategy enables investors to understand the portfolio and the opportunities and risks it will bring. This is particularly key for pension plans who wish to use a DGF as a governance solution for their growth portfolio. Although there are numerous strategies many market participants have split the DGF universe into two distinct groupings. The first is hedge fund-lite global macro style funds, which adopt complex tools and techniques. These funds largely rely on manager skill through significant use of relative value strategies, rather than on a diversified exposure to a range of asset class risk premiums. For core DGF solutions the simplicity in approach uses a breadth of asset classes and strategies to provide genuine diversification. The diversification is attained in many ways, but an emphasis on exotic credit (for examples the use of emerging market bonds and high yield) and alternatives exposure provides a healthy foundation. This lack of reliance on any one asset class, strategy or skillset High yield bonds Equity Infrastructure Given the array of diversified growth funds available in the market, picking a diversified growth fund for your portfolio has never been easy. However, it can be made significantly easier by asking yourself the right questions. The key question is: what role will the DGF play in your overall portfolio? Most DGFs have similar overall objectives but there are many different approaches available in the market. Do you require a diversified portfolio providing exposure to traditional and alternative asset classes or a single manager hedge fund-style strategy? Both have a place (and can sit neatly together) but you need to understand what the fund will bring to the portfolio. Property Emerging Markets 52 October

4 DGFs risk/return Fund aim To deliver a return of Cash +4.5% (net) A over rolling 5 year periods A volatility of returns well below that of equity (and less than 10%pa) A Approach Genuinely diversified across a range of attractive asset classes Flexible asset allocation Robust risk management A The The performance performance target target of cash+4.5% of cash+4.5% (net) and(net) the volatility and the target volatility to be less target thanto 10%pa be less are both than objectives 10%pa are which both the objectives Investment Manager which the aimsinvestment to achieve asmanager at the dateaims of this to document. achieve These as at targets the date are not of this based on document. These targets are not based on past performance, may be subject to change and cannot be guaranteed. Investors should always refer to the objective and past performance, may be subject to change and cannot be guaranteed. Investors should always refer to the objective and restrictions as stated in the latest prospectus. restrictions as stated in the latest prospectus. Substantial breadth and depth of resources Equity (111 people) Fixed Income (181 people) Property (291 people) Quantitative Strategies (25 people) Hedge Funds (19 people) Infrastructure (23 people) Private Equity (24 people) Research (25 people) Construction (7 people) Implementation (12 people) Portfolio Management (13 people) Diversified Growth Investment Team (8 people) makes this approach very appealing. There is a place for both types of DGF, and the aforementioned types of fund can sit well alongside each other but really understanding what you want is absolutely key. Aberdeen s DGF true diversification The Aberdeen Diversified Growth Fund is a high quality governance solution that provides access to a genuinely diversified portfolio of high quality traditional and alternative asset classes, many of which would not be accessible to many defined benefit schemes. The team that manages the fund is highly experienced and diverse, drawing on a wealth of internal expertise across a broad range of asset classes. The DGF seeks to generate growth predominantly from exposure to a blend of equity, exotic credit (high yield bonds, emerging market debt and structured finance), real assets (particularly listed infrastructure and property) and more market-neutral absolute return strategies. PLEASE CONSIDER THE RISKS The strategic asset allocation of the The following risk factors should be carefully considered before making an decision: Aberdeen s Diversified Growth Fund offers access to a compelling growth strategy, underpinned by the breadth and depth of our resources fund is driven by thoroughly researched views on the medium-term return and risk prospects of each asset class. This is complemented by more dynamic tactical views to add value, or reduce risk, in the short-term. Both of these processes are driven by Aberdeen s 15-strong strategy research team, in conjunction with the diversified growth team, ensuring that significant resource is dedicated to these key decisions. This desire to maximise the riskreturn trade-off for investors in the fund is also reflected within asset classes. For example, within equities the focus is on an actively managed portfolio that aims to outperform the MSCI World whilst delivering around three-quarters of its volatility. 1 From a risk perspective, the team consider a range of extreme scenarios that may play out and how the fund might perform in these scenarios. The diversified nature of the fund will typically serve to dampen market falls in these scenarios. The fund also incorporates cost-effective tail protection strategies and can increase the exposure when it is appropriate to do so. This approach helps to ensure that the fund is resilient to the wide range of scenarios that might play out in markets. Written by Mike Brooks, senior manager, Investment Solutions, Aberdeen Asset Management Written by Mike Brooks, In association with senior manager, Investment Solutions, Aberdeen Asset Management In association with The value of s, and the income from them, can go down as well as up and your client may get back less than the amount invested. 1 This Investing is an internal globally performance can bring additional target which returns the Investment and diversify Manager risks. However, aims to achieve currency as at exchange the date of rate this fluctuations document. may This have target a positive is not based or negative on past impact performance, on the may valuebe ofsubject your. to change and cannot be guaranteed. Investors Bondsshould are affected always by refer changes to the in interest rates, objective inflation and and restrictions any decline as stated in creditworthiness in the latest prospectus. of the bond issuer. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may not be able to pay the bond income as promised or could fail to repay the capital amount used to purchase the bond. For This Professional Fund can Investors use derivatives Only Not in order for use to meet by retail its investors or objectives. advisers This may result in gains or losses that are greater than the original amount invested. The value of s and the income from them can go down as well as up and investors may get back less than the amount invested. A full list of risks applicable to this Fund can be found in the Prospectus and Key Investor Important Information Document (KIID), which is available from aberdeen-asset.co.uk. For professionals investors only not for use by retail investors or advisers Subscriptions will only be received and shares issued on the basis of the current Prospectus, and relevant Key Investor Information Document (KIID) for the Fund. These can be obtained free of charge from Aberdeen Fund Managers Limited, PO Box 9029, Chelmsford, CM99 2WJ. Issued by Aberdeen Asset Managers Limited. Authorised and regulated by the Financial Conduct Authority inoctober the United 2015 Kingdom. 53

5 DGFs Summary Diversified growth funds are a type of multi-asset fund that are popular for both DB and DC schemes, particularly DC schemes which use them as their default option for savers. With the introduction of the DC charge cap this has led to less sophisticated products compared to the DB offering. However, this will drive innovation in the overall DGF market, which could even see the creation of a robo DGF. Diversify and grow Diversified growth funds are experiencing a surge in popularity, especially amongst pension schemes. Natalie Tuck looks at why they are proving so popular for both defined benefit and defined contribution schemes and how the pension reforms are acting as a catalyst for product innovation It is well known that diversifying your assets minimises your risk to volatility, which all being well brings positive returns. A diversified growth fund does exactly that. It is a multi-asset fund that invests in a wide range of different asset classes, with its main goal being smooth, consistent growth providing equity-like returns with lower volatility, Aberdeen Investment Solutions senior manager Mike Brooks explains. The assets within a DGF purely depend on the approach the manager takes, Punter Southall head of manager research Katherine Lynas says. The one thing that you would hope to see is that the majority of them are liquid because DGFs have got to have daily liquidity. You wouldn t necessarily see a DGF investing directly in property, so they wouldn t buy an office building. The proportion of illiquid holdings should be kept to a minimum. These traits are proving popular, particularly for pension funds. Brooks references recent research from Spence Johnson, which suggests the DGF market is valued at 124 billion and is predicted to reach 218 billion by 2019, with DC pension investors forecast to be the greatest source of new flows over the next five years (estimated to be 55 billion). The DC DGF One of the main advantages of a DGF, Brooks says, is that they can offer efficient access to different asset classes and strategies under one umbrella. DGFs have no more so proved their popularity than as the default option for DC schemes. Figures from Towers Watson show the proportion of FTSE 100 schemes offering DGFs as a default option increased from 10 to 70 per cent from 2009 to Lynas believes this works very well: The concept of having a multi-asset default fund for DC has been around for a long time. Markets have become more sophisticated since the credit crunch and faster moving correlation doesn t work the same way as it did prior to the credit crunch. Therefore in order to give the same type of ride to a DC investor that the old type of managed balanced funds were giving, you need to widen that opportunity set, you need to be more dynamic in how you allocate around the assets that you ve got and therefore DGFs sit very well in that pot, she explains. However, her one sticking point is the widening gap between DGFs for DB and DC investors since the introduction of the DC charge cap. Lynas knows that reducing fees is important but consequently the DC market has been provided with a less sophisticated DGF. The flip side to this, Lynas says, is the innovation it will bring. Developments in DC, particularly concerning the pricing cap and pension freedoms, will push asset managers to develop more cost-effective processes, in order to deliver the important risk controls that are currently only provided by the more expensive products, she explains. DGFs will also have a bigger role to play with the recent introduction of the pensions freedoms, meaning people no 54 October

6 DGFs longer need to buy an annuity. AXA IM Smart Diversified Growth Fund portfolio manager Yoram Lustig says savers will be looking for flexible drawdown growth solutions that fits DGFs. This is likely to lead to the development of new funds similar to DGFs, but targeting outcomes in line with the new needs of savers. The DB DGF For DB schemes the attraction of DGFs has increased in popularity since companies have had to recognise pension deficits in their accounts, under the mark-to-mark accounting methods used by UK corporates, notes JLT Employee Benefits senior consultant Murray Taylor. This has served to increase the alignment between trustees and the company; trustees have traditionally been more risk averse than the company, as they have sought to protect member benefits, whilst companies have often looked towards higher-return strategies as this can result in higher discount rates in the AVR and lower associated deficits. The advent of DGF, along with the accounting charges, has presented an attractive proposition to both sides, he says. As for innovation on the DB side of things, asset managers are going to become more sophisticated, Lynas says. After all, she explains, at the moment we are in a low growth scenario but asset managers need to find growth somewhere. They ve got to deliver that return because they re set against a cash benchmark and therefore irrelevant to what s happening in the markets they ve still got to give a cash-plus return. They re going to become more and more creative, they re going to be able to use different Most excitingly in the development of DGFs could be the introduction of the robo DGF. This new type of DGF would allow people to customise their DGFs to their specific needs types of tools to access that, so I just see it developing and becoming more sophisticated and the opportunity set widening even further, she adds. Fees and returns Fees vary for DGFs, Murray says, as it very much depends on the complexity of the product in question and the underlying instruments used. For small to medium size pension schemes, the average fee is around the 70-75bps mark for fundamentally managed funds. However, with the budget changes to DC, we are starting to see a rise in lower cost offerings specifically targeting the default DC market. The typical management fee for these products ranges from 40-50bps; although these are often less sophisticated DGFs to provide the lower cost offerings, he adds. As for the returns, Brooks notes, that over the long-term DGFs are typically looking to generate equity-like returns with much lower volatility. How DGFs seek to smooth out their returns does vary quite widely though - some simply rely more on manager skill to time the markets correctly, he notes. Lustig adds that DGFs typically generate returns of LIBOR +4.5 per cent but most aim to deliver this target return over three to five years. Figures from Punter Southall released earlier this year revealed assets in DGFs saw a fivefold growth in almost five years. Over a three-year period, DGFs achieved monthly returns of between -3 per cent and 4 per cent, providing a much smoother ride than the FTSE All Share, which achieved monthly returns of between -7 per cent and 7 per cent. The future DGF DGFs are here to stay, and have been a real gain for pension funds, Brooks says. As an asset manager he adds that they use the breadth of skills of a manager in a way that is more directly aligned to the investor s long-term needs. He believes they will have a key role as the transition between DB and DC continues. With the shrinking world of DB and the growing DC universe, Taylor believes that it will be the client demand from DC investors that will shape the future of DGFs. Up to now, the impact of the Budget changes has been limited because the majority of people retiring today have small DC pots, alongside a DB benefit. With time, the significance of DC will increase as it becomes a greater proportion of members retirement benefits. While time will be a true determinant of what is required, we believe that multi-asset products with an underlying income requirement will become a key feature of the universe as members look to a drawdown option, Taylor says. However, most excitingly in the development of DGFs could be the introduction of the robo DGF, a term that Lustig uses. This new type of DGF would allow people to customise their DGFs to their specific needs. For example, savers will be able to log in to an online website, answer questions about their financial goals and circumstances and a bespoke DGF will be automatically designed to match their needs. The era of the generic fund will end, giving way to a new era of bespoke funds, even for the smaller investors, he explains. Written by Natalie Tuck In association with October