Adding cautious DGFs as market complacency rises

DGFs are a large part of our business at JLT, with these solutions appropriate for wide range of our clients. We tend to use DGF strategies to provide a more stable path to investment growth, with a degree of insurance against whatever investment environment we may be faced with. We definitely do not use DGFs in anticipation of extraordinary investment growth.

Unfortunately there is a lot of complacency in the market after nearly a decade of consistent returns across most assets. However, markets have a way of surprising people; this is why we have to adapt our thinking. We fully accept there will be periods when manager styles underperform, but we just need to be sure processes are being followed and these strategies are broadly doing what they say on the tin.

It is clear the absolute return area of the DGF spectrum has faced some pressure in recent months, particularly since the turn of the year. Many strategies have witnessed fairly consistent drawdowns over this period. In addition to this, a considerable number of absolute return multi asset strategies are also failing to capture upside when risk assets move higher. While this may be a temporary phenomenon at this point in markets, it is really the worst of both worlds. It does, of course, make us revisit our research and assumptions on many of the processes currently powering many of these DGF strategies and ensure we are confident in our views.

As for our allocation to DGFs, we place these strategies in about five or six buckets. We currently have no allocation to the more quantitative or quantitative-plus portfolios. We are currently more cautious on the prospects for returns going forward, considering we have seen largely one-way positive returns for a number of years. There are also concerns over a potential Brexit in the UK, while there are still worries about growth on China and the US. We think it is therefore prudent to increase our allocation to the more cautious end of the spectrum, adding to portfolios with a proven ability to protect downside and generate stable returns through a cycle.

This is why we added the first new cautiously-managed DGF to our buy list in three years, the Nordea 1 – GBP Diversified Return Fund.

This strategy is run by a very experienced team, but more than this, the numbers show they really do deliver on their promises through all market conditions.  We first allocated at the end of November last year and then again in January. Our investment is currently about €60m, but we would expect this to increase considerably over time. Since we made our investment, the Nordea strategy has exceeded our expectations through what has been a very choppy market and is delivering outsized returns against most of its more-volatile peer group.

We do use DGFs heavily and believe in the ability of the strategies to help our clients over a long-term time horizon. However, we do urge investors to really do due diligence on these funds and make sure they allocate to those strategies that can truly deliver through what could be a more volatile environment.


Hilary Winn is an investment manager at JLT Investment Management

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