Here at First State, we have applied our core strengths of active and responsible management by investing with purpose through a truly flexible and dynamic approach – a smart evolution from traditional balanced funds.

·         Investing over £12bn on behalf of our clients globally in multi-asset

·         20+ years’ experience managing multi-asset funds

·         Global team with local presence: London, Singapore, Sydney

·         Responsible Investment Excellence

·         Long-term investors

We launched the First State Diversified Growth Fund (DGF) in June 2015 for the UK market with a focus on preserving capital and growing it over the long term. The Fund seeks to generate real capital growth of 4% gross of fees over a rolling five year period (UK RPI + 4%).  

As we mark its third anniversary, we reflect on the major market events we have navigated and analyse the different return drivers. 

How has the fund performed?

Since inception, DGF delivered 12.0% (net of fees and taxes and 5.8% volatility), which is 4.2% over UK RPI. In comparison, the FTSE 100 Index returned 7.9% over the same period but with a volatility of 13.6%.  We generated returns from a number of equities, sovereign and corporate bonds, foreign currencies as well as shorter term opportunities informed by our investment signals.

*B GBP Acc net of fees

These figures refer to the past. Past performance is not a reliable indicator of future results. For investors based in countries with currencies other than the share class currency, the return may increase or decrease as a result of currency fluctuations.

Performance figures have been calculated since the launch date. Performance data is calculated on a net basis by deducting fees incurred at fund level (e.g. the management and administration fee) and other costs charged to the fund (e.g. transaction and custody costs), save that it does not take account of initial charges or switching fees (if any). Income reinvested is included on a net of tax basis. Source: Lipper IM / First State Investments (UK) Limited.

Figure 1 depicts the performance contribution by return driver since inception. 

Figure 1: Return contribution since inception 

Source: First State Investments


Figure 2:  Return contribution since inception

Source: First State Investments as at 30 June 2018, inception day 23 June 2015. Contribution might differ from official performance, due to data source, pricing, and timing.

2015: Grexit fears and Renminbi devaluation:

DGF was launched in the face of numerous volatile financial market events: Grexit1, fears of a Chinese hard landing, and rising Fed rates were to be the maiden voyage. Financial markets considered the potential for Fed interest rate rises could stall growth, especially in emerging markets, as occurred in the late 90’s. Tensions flared and died, and belief in any of the Soothsayer’s predictions could have left the investor holed up in cash and painfully watching as financial markets continued to rally.

Grexit fears – Summer 2015

For a brief period, Greece considered the benefits of being independent from the Euro, providing the first fears of contagion that could end the European project.

The troika of lenders – the EC, the ECB and the IMF – had set bailout conditions which the socialist government of Alexis Tsipras decided to take to the people through a referendum. It had the potential to redefine Greece’s relationship with the EU, impacting the perceived risk premiums across Europe and on the euro itself. Seeing the contagion risk, the Fund had removed its interest rate sensitivities and had the majority of its small equity allocation focused in the US (less than 20%). 

Renminbi devaluation – Autumn 2015

September brought with it concern that China was headed for an economic ‘hard’ landing, signalled to the market through the devaluing of the Renminbi. Equities and corporate credit weakened, exacerbated by concerns of the knock-on effect of interest rate rises in the US.

The risk-off moves by the market presented some attractive opportunities and as such we added to positions in equities, high yield and emerging market debt. High yield spreads were 800bps over US treasury bonds. This was a period in which we had our highest foreign currency exposure at 43%.

As a result the Fund held a low allocation to equities and bonds. At the end of 2015, the Fund added, for the first time, exposure to high yield and EM local debt based on prevailing valuations.

¹Refers to Greece's possible withdrawal from the Eurozone

2016: Brexit and Trump

In 2016, financial markets endured an escalation of negative interest rates, the collapse and subsequent rebound in commodity prices and fluctuating stock market valuations. The test for investors began in week one, as fears of a China slowdown agitated stock indices weeks after the Federal Reserve began to normalise policy. Over the ensuing months, the Brexit vote and US election would prove significant mile markers and prompt repositioning.

DGF returned 14.2%, net of fees and taxes and all four quarters of 2016 recorded positive returns, with volatility being significantly lower than equities.

Performance contribution was relatively evenly distributed between equities, sovereign and corporate bonds, and foreign currency. Allocations to high yield and EM local debt were particularly strong contributors as prices recovered in 2016.

The UK Referendum – Summer 2016

When the UK announced its referendum on EU membership in February 2016 we assessed the impact of both outcomes. We expected that a ‘Remain’ vote would result in a move higher for sterling and equities to be supported and, in Brexit, sterling and bond yields to fall, inflation expectations to rise and equities to come under pressure.

We reallocated some of our fixed income and currency exposures, and switched holdings of nominal UK gilts into inflation-linked bonds. At the time the market’s implied inflation expectations over five years was less than 2%, making it a very attractive entry point based on our view of a reasonable outlook for inflation given a decent labour market, economic conditions and tail-risk of a ‘leave’ vote in the referendum. We reduced our foreign currency exposure into the referendum as sterling started to fall, both via direct reduction and the purchase of foreign currency options as demonstrated in Figure 3. The fund availed of protection strategies through the referendum and although we were a little ‘over-insured’, it allowed us reduce risk, capitalise on return opportunities elsewhere and stay on course to meet our objective.

This was a significant event for financial markets which was particularly felt through currency markets. Sterling fell 11% in the two trading days post the referendum. This was the biggest fall since the pound floated in 1971.

The US Election – Autumn 2016

As we neared the presidential election in November 2016, our view was that a Trump presidency could have wide ranging implications for trade and globalisation. This could be felt in equity and currency markets. As such we applied capital protection strategies on US equities in the run-up to the election, providing a cushion in the event of a volatile reception to the new US president.

Trump's proposed economic policies, including a massive infrastructure plan, lower corporate taxes and less regulation, had the potential to lead to higher growth and inflation, making bonds less attractive but leading to a rout in equities. While our capital protection strategies reduced gains, it didn’t completely mitigate them.

As expected, developed market bonds experienced a large sell-off amid a pick-up in inflation expectations, which fuelled strength for the US dollar. Gilts and emerging market bonds had a rough quarter and sold off sharply in November, while equities were up significantly due to strong performance in December.

2017: Some respite

In 2017, financial market volatility remained low as the Federal Reserve embarked on rate hikes and reduced its balance sheet. Investors were relatively sanguine with longer term bond yields largely unchanged in much of the developed world. We entered the year with high political risk; five major elections across Europe, the swearing in of Trump and a congress in China. Across Europe (Germany, Netherlands, France) the right-wing threat to mainstream parties was mitigated and US equity and bond markets performed well in the face of Trump, Brexit and geopolitical upheaval.

'As investors, having the experience to look beyond the news flow to find attractive opportunities, requires a flexible and dynamic approach.'

DGF returned 6.5%, net of fees and taxes, during 2017 with approximately half the volatility of equities.  

Having started the year with minimal foreign currency exposure, the fund increased this in June. This was due to the deterioration of the UK economy which was seen in GDP, consumer spending, business investment and net trade as well as a weak minority government to negotiate Brexit. Similar to 2016, protectionist strategies were put in place to reduce portfolio risk, in order to allow us to ensure we meet our objective of protecting capital on the downside and therefore keep us on track to return RPI + 4 on a 5 year outlook.  

Equities were the main performance driver accounting for almost half of returns, Sovereign and corporate bonds contributed positively while commodities and foreign currency exposures were small detractors.

2018 to date:

In the first half of 2018, so far, we have seen volatility return to markets, a breach of the much anticipated 3% handle for 10 year US Treasuries and an agreed summit between North and South Korea.

The Fund has been defensively positioned with overall portfolio risk at low levels, compared to the history of the Fund. The main detractor has been our preference for equities and bonds within emerging markets as they have been impacted by trade tariffs, strong USD and political events in May and June.

DGF has returned -3.16% in the year to 30 June 2018, net of fees and taxes. Figure 3 shows our asset allocation on a quarterly basis. To see a detailed monthly asset allocation breakdown and commentary to explain any shifts, please visit the DGF Navigator.

Figure 3: Asset allocation on a quarterly basis since inception  

Source: First State Investments


Figure 4: Risk allocation

Source: First State Investments

Figure 5: Return Contribution 

Source: First State Investments


The risk allocation conundrum remains, particularly as there is an increasing acceptance that we are at a multi-decade inflection point in long term yields. Changes in regimes, such as this, will add to volatility (and opportunities) and likely play a greater role in influencing investors’ asset allocation decisions.

In the current low return environment it is critical to have the flexibility to blend beta and alpha to deliver a real return of 4% for the Fund over five years. Our investment process and philosophy provides our clients the highest possibility of obtaining a real return, with the current outlook making our DAA paramount. For a more in depth view on our current market outlook and asset allocation, please see our latest NAA Review.

In order to find out more about the First State Diversified Growth Fund, please visit 

Investment Process

Within our investment process we have two building blocks. The first, which we call Neutral Asset Allocation (NAA), sets longer-term asset allocations. The second part, which we call Dynamic Asset Allocation (DAA), allows us to exploit shorter-term opportunities in markets.

  • The first step of our NAA process is to set the economic climate for each country. We use the economic climate assumptions within our set of proprietary stochastic simulation models to determine forward looking risk premia and expected returns. The process of determining the NAA uses these expected returns for the building blocks of the portfolio allocations incorporating the return objectives, constraints, and investment horizon of the portfolio.
  • Our DAA process, on the other hand, takes into account the shorter-term market dynamics to deliver additional returns and abate portfolio risks, such as tail events. This part of our investment process, which includes our investment signals   and qualitative overlay, is formally reviewed each week and looks at (among other things) markets and fundamental data to take advantage of possible dislocations.

Important Information

This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered and does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy, or completeness of the information. We do not accept any liability whatsoever for any loss arising directly or indirectly from any use of this information.

References to “we” or “us” are references to First State Investments.

In the UK, issued by First State Investments (UK) Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB number 2294743. Outside the UK within the EEA, this document is issued by First State Investments International Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registered number 122512). Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB number SCO79063.

Certain funds referred to in this document are identified as sub-funds of First State Investments ICVC, an open ended investment company registered in England and Wales (“OEIC”). Further information is contained in the Prospectus and Key Investor Information Documents of the OEIC which are available free of charge by writing to: Client Services, First State Investments (UK) Limited, Finsbury Circus House, Finsbury Circus, London, EC2M 7EB or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday or by visiting Telephone calls may be recorded. The distribution or purchase of shares in the funds, or entering into an investment agreement with First State Investments may be restricted in certain jurisdictions.

Representative and Paying Agent in Switzerland: The representative and paying agent in Switzerland is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. Place where the relevant documentation may be obtained: The prospectus, key investor information documents (KIIDs), the instrument of incorporation as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland.

First State Investments (UK) Limited and First State Investments International Limited are part of Colonial First State Asset Management (“CFSGAM”) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments elsewhere. The Commonwealth Bank of Australia (“Bank”) and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of the Bank or its subsidiaries, and are subject to investment risk including loss of income and capital invested.