Aberdeen Asset Management GR-TAG-007 311014 Aberdeen Asset Management It is time to diversify. Genuinely. 60/40 is no longer enough. July 2017

‘Diversified Growth Funds’ have become the go-to strategy Growth in AuM of DGF market 2008 2009 2010 2011 2012 2013 2014 2018 200 180 160 140 120 100 80 60 40 20 Institutional investors – and in particular defined benefit and defined contribution pension schemes – have increasingly been allocating to multi-asset strategies They have also been popular with the LGPS Source: Spence Johnson, 2015

But they have faced their doubters Does this new breed of multi-asset strategy really deliver relative to an old fashioned balanced fund? Hasn’t a simple blend of equities and bonds performed just as well for much lower fees? Source: Aberdeen Asset Managers, 2017

DGFs are attractive because they can offer more than equities and bonds “Equities over the next 20 years could average … more than 250 basis points below the 1985 - 2014 average” 250 bps 400 bps “Fixed-income real returns could be … 400 basis points lower or more” McKinsey Global Institute (MGI), Diminishing returns: why investors may need to lower their expectations, May 2016

Start by considering the type of value add the manager is offering Manager D Manager E Manager H Manager A Market timing Manager F Manager B Manager I Manager G Manager C Manager J Manager K Diversification Alpha strategies Manager P Manager L Manager M Aberdeen Manager N Source: Aberdeen Asset Managers, 2017

Growing investment universe Frontier debt Emerging market sovereign Frontier equities Asset backed securities Global property Structured finance Developed equities Insurance linked High yield bonds Aircraft leasing Alt. risk premia Developed equities Loans CLOs Emerging market corporate Investment grade credit Emerging market equities Global bonds Litigation finance Absolute returns Tail risk hedges Managed Futures Government bonds Private equity Infra-structure Renewables Domestic property

Comparison of strategies – key questions that follow Is what the manager is trying to achieve, relevant to me and my scheme? Complementary return drivers Dependence on manager skill Transparency Governance

Comparison of strategies – key questions that follow Is the manager good at what they are trying to deliver? Return versus risk management Cyclicality of alpha Delivering diversification

Loosening the liquidity constraint And DGFs are evolving… Loosening the liquidity constraint A source of income % Monthly income distribution Source: Aberdeen Asset Managers, 2017

Conclusion It is all about understanding the “more.” DGFs have gained attraction because they offer something “more” than a simple equity bond allocation More alpha strategies More market timing More asset classes What that “more” is, will impact the possible role in a portfolio It is also important to understand when assessing managers

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