Mercer: New generation balanced funds adding growth to diversification

Research by Mercer shows that the ‘new generation’ of balanced funds are coming of age.


The term diversified growth funds covers diversification across traditional and alternative asset classes but, according to Brian Henderson, a consultant at Mercer, often at the expense of any growth.

“The old balanced managed funds added in non-equity, lower risk asset classes and gave up potential returns in doing so,” he explained. “The new products focus on a return profile that also delivers growth.”

They have been around for three or four years now, describing them as the “next generation” of balanced funds that are trying to avoid an age-old problem of the traditional approach which was having too much exposure to a particular asset class at the wrong time – i.e. at their peak- and from a lack of diversification away from traditional assets.

The Baillie Gifford Diversified Growth Fund, a largely fettered fund of funds, is one Henderson uses as an example that currently includes emerging market, corporate and high yield bonds, a gold ETF and a growth fund.

Another is the Newton Real Return Fund that is able to invest in money market instruments as well as derivatives, forward transactions and collective investment schemes; or the Schroders Global Diversified Growth Fund that invests in emerging market debt, commodities, infrastructure, private equity and property above the more usual asset classes.

“It is difficult to diversify beta funds that asset allocate to get diversification through passives rather than, for example, Schroders investing across a range of asset classes that are actively managed. They may be more expensive but you expect to get well compensated for it,” Henderson adds.

According to date from Mercer, the number of diversified growth fund strategies has grown from just one in 2001, to 16 in 2005, to almost 40 by the end of last year with $45bn in assets under management.

Henderson’s conclusion is: “We expect them to be used increasingly by the investment industry and would expect that, over time, the number and variety of offerings will increase. Potential investors should consider what role they want diversified growth fund to play, as this will help to determine the type of fund that is most appropriate.”

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