The wide range in the underlying asset allocation of diversified growth funds (DGFs) is highlighted by a report from Spence Johnson that pinpoints three opportunities for US managers targeting the European institutional market, including the growing appetite for DGFs.
Opportunity one is described in Spence Johnson's November Deeper Perspectives report as "uncorrelated returns through DGFs."
The report notes that, "True diversification is on the wish list of pension funds and insurance companies across continental Europe." Demand for real assets and strategies that deliver absolute return is growing fast and the evidence for the demand "can be found in the growth of absolute return strategies in the UK, and the subsequent boom in DGF assets."
By 2018, the report predicts, dynamic DGFs will control 60% of the market, with absolute return funds commanding 37%.
Revenues in the DGF market will increase to over $2.9bn. "This is largely controlled by the dynamic DGFs, with over $1.6bn in revenue," the report comments.
Spence Johnson analyses the asset allocation of a sample of 27 funds, including a number run by insurers.
Legal and General's diversified fund has the highest equity allocation among the sample, the only one over 60%, and Aviva and Standard Life funds show over 50% in equities (see chart below).
In terms of estimated market share of AuM, the leading tier 1 provider of DGFs is Standard Life Investments with nearly 35%, compared with Ruffer in second place with just over 15%.
The report notes that DGFs have made "hedge-fund-type strategies more acceptable to a broader institutional audience, with lower costs, greater transparency and more liquidity."
Opportunity two is what Spence Johnson calls "solutions". These include buy-outs and buy-ins, longevity insurance, fiduciary management and LDI. The report says the assets of leading solutions have grown between five and 10 times since 2007.
Opportunity three is European smart-beta, which, according to Spence Johnson, investors increasingly see as an alternative to 'active'.
The report predicts that the smart-beta market will grow 31% a year from $93bn in 2013 to $356bn by 2018.
Link to report: http://www.spencejohnson.com/research#deeper-perspective
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