Deeper Perspectives. DGFs new tactical opportunities emerge

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1 Number 42 January 2017 A regular analysis of strategic issues in the institutional investment business Deeper Perspectives DGFs new tactical opportunities emerge Most new growth in assets for DGF providers will come from new sources, particularly through UK DC schemes as well as non-uk clients. While this creates new tactical opportunities, successful providers will need to be aware of the specific needs of each client group. Diversified growth funds have traditionally been focused on the UK institutional market, and DB pension schemes in particular. However, with lower forecast growth of DB for DGFs relative to DC, DGF providers are re-thinking their proposals. Dynamic DGFs are the segment of the market which is most competitive. With the DC charge cap in place, some providers are offering less expensive dynamic DGFs in order to compete for assets with the strategic DGFs that largely dominate in DC. Some existing DGFs are now looking to new markets for assets, and are increasingly finding success in marketing their strategies to non-uk clients. Outside of the UK, most new net flow has come from retail clients. With different clients having different requirements, providers are offering a range of products, rather than using a one-size-fits all approach. Spence Johnson 2017 Suite 501 Salisbury House London Wall London EC2M 5QQ UK T nigel@spencejohnson.com 1 Fullerton Road One Fullerton Singapore T yoon@spencejohnson.com

2 Most DGFs are dynamic, but assets are split 70% of DGFs sit within our dynamic classification. While assets are more evenly distributed across each segment, dynamic DGFs remain the largest segment of the market, with 101bn in assets under management. Of the DGFs studied as part of this report, 70% are dynamic, while 19% are absolute return, and 11% are strategic. Given the success of some absolute return DGFs in gathering assets, absolute return DGFs account for a disproportionately large share of AUM, with 39% of total assets. Dynamic DGFs and strategic DGFs account for 51% and 8% of total DGF assets, respectively. Number of DGFs, split by segment Number of funds Absolute return Dynamic Strategic 6 Total AUM, split by segment bn, 2016 Q Absolute return Dynamic Strategic 2

3 Several providers have built a suite of DGFs Some leading providers such as BlackRock, LGIM, SLI and Schroders have built a suite of DGFs. Thirteen providers in total have more than one DGF offering. The most common reason for doing so is in order to provide a range of different DGFs targeting different specific client segments although some are marketed as complimentary offerings. Four examples of providers with a suite of DGFs Split by DGF market segment BlackRock LGIM Schroders Standard Life Investments Absolute Return DGF 1) Dynamic Return Strategy 1) Global Absolute Return Strategy (GARS) 2) Global Focused Strategy (GFS) 2) Dynamic Diversified Growth Fund - DB Version 1) Dynamic Diversified Fund 1) Diversified Growth Fund 3) Enhanced Diversified Growth Fund (EDGF) Dynamic DGF 3) Dynamic Diversified Growth Fund - DC Version 2) Dynamic Multi-Asset Fund (DMAF) 4) Dynamic Allocation Fund Strategic DGF 5) Aquila Life Market Advantage Fund 2) Diversified Fund 3) Multi-Asset fund BlackRock has the largest number of DGFs, with one absolute return DGF, three dynamic DGFs and one strategic DGF. This range approach is the most common reason for offering multiple funds. The advantage of this approach is that the funds can be targeted at multiple client segments. Baillie Gifford are an example of a provider who offer a second DGF having reached capacity in the first DGF and therefore closing it. The basic structure of the new fund is similar to the old one, although an adjustment to the underlying asset allocation means that it will not face the same capacity constraints. Number of DGFs offered by those managers offering more than one DGF Split by segment Absolute return Dynamic Strategic Baillie Gifford 2 BlackRock Fidelity 2 Fulcrum 1 1 Jupiter 1 1 LGIM 1 2 M&G Prudential 1 1 Newton 2 Pictet 2 Schroders 2 SSGA 1 1 SLI 2 1 Towers Watson 1 1 3

4 SLI is the largest provider with 43bn in AUM Standard Life Investments remains the largest provider, with a total AUM of 430bn in Q BlackRock and GMO are the second and third largest providers respectively. Standard Life Investments are the largest provider by total AUM, managing 43bn combined within their DGFs. This is an increase from 30bn at the end of SLI s Global Absolute Return Strategies (GARS) continues to account for most of their assets, being the largest DGF within our analysis, although in 2016 their Global Focused Strategy also broke 1bn in total AUM. BlackRock and GMO are the second and third largest DGF providers, managing 20bn and 19bn respectively. BlackRock has gained success through offering a range of different DGFs, while GMO s assets are managed within the Benchmark-Free Allocation Strategy. Nordea, Invesco and Aviva are examples of providers whose total DGF AUM has grown substantially over the 18 months to Q While Invesco s Global Targeted Return Fund and Aviva s Multi-Strategy Target Return fund have been successful in traditional DGF markets, Nordea s Stable Return Multi-Asset Strategy has picked up a lot of assets from EMEA ex-uk retail clients. Top 15 providers by AUM Q Q Standard Life BlackRock GMO Ruffer Schroders Newton Nordea Invesco LGIM Baillie Gifford Aviva Investors Baring Insight Pyrford Russell 2016 Q Q Q4 4

5 Closures/Rebrands Launches Deeper Perspectives Number 42 January 2017 Dynamic DGFs focused on DC are emerging Although managers have launched DGFs for a variety of reasons, managers such as BlackRock and Fidelity have launched DC focused funds offering a dynamic, rather than simply strategic, asset allocation approach. A number of funds were launched during 2015 and 2016, for a variety of reasons. There is a evidence that providers are more actively tailoring funds to client groups with specific demands. For instance, the Pictet Multi-Asset Fund sits alongside the Dynamic Asset Allocation fund, but is targeted more towards retail clients. BlackRock s Dynamic Allocation Fund and the Fidelity Diversified Fund are examples of DGFs which are targeted at the DC market, being chargecap compliant, yet offering a dynamic asset allocation approach. Previously, DC focused funds have been strategic DGFs which take a static asset allocation approach. Fund launches and closures Fund Date Notes BlackRock Dynamic Allocation fund Fidelity Diversified Markets fund May 2015 June 2015 BlackRock launched a new fund aimed at DC default fund solutions needing to be compliant with the charge cap. The fund is low cost and targeted at the DC market, but uses a dynamic rather than strategic asset allocation. The fund uses a model-based risk allocation approach. Pictet Multi- Asset fund June 2015 Pictet launched a new multi-asset fund managed by a trio of managers previously at Barings, including Percival Stanion. The fund has a greater retail focus than Pictet s Dynamic Asset Allocation Fund. Baillie Gifford Multi-Asset Growth fund June 2015 This fund follows in the success of the Baillie Gifford Diversified Growth Fund, which closed after reaching capacity in Towers Watson IM Core Diversified Fund - The Core Diversified Fund was launched as a cheaper and more liquid option compared with the Partners Fund. Newton Multi- Asset Diversified Return Fund January 2015 The Newton Phoenix Multi-Asset Fund was rebranded to Newton Multi-Asset Diversified Return Fund. SSGA Strategic Diversified Fund October 2016 The name of SSGA s Diversified Beta Fund changed to the Strategic Diversified Fund and it is now benchmarked against LIBOR rather than a 60:40 balanced portfolio. AXA IM Smart Diversified Growth Fund 2016 AXA s Smart Diversified Growth Fund, which was targeted at both DB and DC clients, was closed in Source: DGF239, DGF240, DGF254, DGF255, DGF256 5

6 UK DC will account for 27bn in net flow UK DC and non-uk retail clients will account for the largest net flows over the next 5 years, at 27bn in total. We predict that between 2016 and 2020, net flows from UK DC clients into DGFs will amount to 27bn. With auto-enrolment having established a large membership base, albeit with low overall contribution rates, we expect that UK DC will be a reliable source of net flow through contributions over the next five years. This will only improve as the statutory minimum contribution rate increases from the current 2% to 8%, and a greater share of the total UK DC membership reaches the de-risking phase, where DGFs are most commonly used. We expect net flow from UK DB funds to be positive, but smaller than for any other client segment. This is largely due to the growing pressure faced by schemes as they go cashflow negative, and also due to the growth of other forms of solution such as fiduciary management, which competes for assets with DGFs and is expected to continue to grow rapidly over the next 5 years. Outside the UK, retail clients are expected to account for the largest net flows, at 27bn in total. Most of these assets are expected to be sourced from EMEA. A key driver of this trend will be the tendency of life-insurers to move policy-holders from guaranteed products held on the general account to unit-linked products where the policyholder bears the risk. This helps the insurer cope with the pressures placed upon them by the low-yield environment and Solvency II capital charges. Net flow by client location and type bn, UK DB 3 UK DC 27 UK other institutions 4 UK retail 14 Net flow by client location and type bn, Non-UK pension 14 Non-UK other institutions 7 Non-UK retail 27 6

7 Deeper Perspectives Number January 2017 We use imim and our Market Intelligence Spence Johnson s mission is to put data and intelligence at the heart of successful asset management businesses. This Deeper Perspectives is drawn from both our Money in Motion data, and latest Product Intelligence report focused on Diversified Growth funds. Data Analytics Money in Motion empowers asset managers to make better decisions by generating essential Asset, Flow, Revenue and Fee data at a unique level of detail Market Intelligence Our MI service is based on annual reports but delivered via a service in close partnership with our clients. It s designed to embed the detailed distribution, product and competitive intelligence required to be effective now and in the future Strategic Consulting Driven by our data analytics, market intelligence and advice from our team of industry experts. Our work here requires a deep understanding of our clients and is focused on generating a specific strategic outcome Money in Motion Market Intelligence Reports $4 trillion Tracked Institutional Flows 40k Segregated Accounts 140 Investment Consultants tracked 16 Client Type Segments >100 Asset Manager Members 7

8 Deeper Perspectives Number January 2017 Previous editions Previous editions Available from December 2016 Number In this special edition of Deeper Perspectives we look at three of the major themes prominent in the global institutional asset management business in 2016 September 2016 Number 40 UK DB: LGPS Reforms Local authority pension schemes are merging into at least 6 pools. This means that asset managers will have to adjust to a vastly different competitive environment September 2016 Number 39 UK DB: A market looking for solutions As a result of the difficult situation faced by schemes, providers of solutions have been the main beneficiaries of the continued growth in private DB assets. September 2016 Number 38 APAC Institutional opportunity doubles by 2025 Strong growth from existing investors and emergence of new investors mean the region could see a close to doubling of addressable assets in the next 10 years. August 2016 Number 37 Smart Beta: multi factor vs alternative index Smart beta growth reflects a face-off between more active multi-factor strategies and more passive alternative index approaches June 2016 Number 36 Asia Pacific institutions strength in numbers Partnerships, co-investments and asset pooling on the rise as Asian institutions take a more collaborative approach towards investments March 2016 Number 35 Trends in client relationship management: In depth research into the trends in institutional client relationship management over the period. February 2016 Number 34 Insurance Asset Management Outsourcing growth 6% pa to 1.1trn by 2024 December 2015 Number 33 Unconstrained Fixed Income The future of fixed income investing in a low yield environment? November 2015 Number 32 The changing UK retirement income market The retirement income market moves from an era of compulsion to an era of choice November 2015 Number 31 UK DB Pensions -Winter is coming Only 13% of schemes are still open, net contributions are falling and the investment needs of DB schemes are fundamentally changing. October 2015 Number 30 DGF, New Players win Market Share The DGF market grew 15% last year and sits at the heart of the growth portfolios of many UK pension funds. July 2015 Number 29 Smart Beta - Our fastest growing MI segment The rapid expansion of the Smart Beta market in 2014 makes it the fastest growing market segment covered by Spence Johnson s Market Intelligence Service. June 2015 Number 28 Targeting growth markets in European Institutional We project future annual growth rates in institutional assets varying from -0.5% to 31%. June 2015 Number 27 Opportunities in insurance asset management The search for yield in a low interest rate environment and regulatory pressure are driving outsourcing opportunities. 8 8