Diversified Growth Funds

Robert Booth, Director of Investment and Product Development, NOW: Pensions 

The investment world seems to have its own confusing language, and the dictionary just gets heavier every year.  While Diversified Growth Funds have been around for a few decades now, there is still confusion over what they are and what they are trying to achieve.  Obviously, they are diversified and built for growth – D’oh!  But that could be said of dozens of other funds with different names

It’s difficult to put DGF’s into a specific category, mainly because they come in a variety of shapes and sizes.  But, they often share characteristics which can help to distinguish them.

Typically, they will be targeting long term investment returns of between 3% and 5% more than cash or inflation (by long term, we usually mean more than five years).  Again generalising, the goal can be summed up as trying to achieve long-term returns similar to traditional equity/bond portfolios, but with a lower level of volatility.  In other words, produce good returns without such extreme highs and lows along the way.  That means that projected risk-adjusted returns should be better than their predecessors, notably the good old balanced managed fund.

Balanced managed funds tend to hold broadly similar investments and often work hard to outperform each other by just a little bit.  DGF managers are afforded a lot more freedom as to how to invest and how to generate investment returns.  That freedom results in funds that can vary widely, meaning that a comparison of short term returns amongst DGF portfolios can be misleading.

The NOW: Pensions DGF is true to these principles and does not follow the herd.  Don’t expect performance to lead the pack during periods of very strong stock market growth such as we have seen in the recent past.  But during stormy weather, we think we have better protection against the elements.  The proof of the pudding will only become clear over time, when we expect to see strong returns without the levels of volatility experienced by equity heavy investment approaches.

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