Spence warns schemes against DGFs

Simon Cohen

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Spence & Partners, the UK actuaries and consultants, today urged schemes to review any strategy that contains allocation to Diversified Growth Funds (DGFs).

Simon Cohen, Head of Investment at Spence & Partners, commented: “DGFs are a pretty common part of an allocation strategy for smaller schemes, as they allow them exposure to lots of different asset classes they wouldn’t ordinarily get access to due to issues of scale. However, schemes should be careful when investing in them – yes, they are less volatile and have somewhat protected schemes against the fall in equity markets at various points in time, but schemes need equity. DGFs aren’t a direct equity replacement and shouldn’t be treated as such – and, of late, their performance has been particularly disappointing too.

“Schemes that bought into DGF strategies a few years ago are missing out on some of the good returns we’ve seen in the markets in recent years. Since June 2011, overseas equities have grown by nearly 50%, almost managing to track the 65% increase in UK gilt prices that is used as a benchmark for pension liabilities. The 25% return on the average DGF falls massively short of what schemes needed to protect their funding position and, to add insult to injury, schemes using DGFs are also paying higher investment charges than those using passive management, for the privilege.”

Simon Cohen

Post by Simon Cohen

Simon Cohen is an experienced pensions investment actuary who heads up the Investment Consultancy Services at Spence.

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