Breaking industry conventions: Outcome-based funds

Pictured above are an investment team from Principal Portfolio Strategies. They are, left to right, Julia Lawler, Jessica Bush, Kelly Grossman and Jake Anonson.

“What’s next” isn’t a new question for Principal. In fact, we’re seeing industry-leading growth and differentiating capabilities result from asking almost a decade ago “what’s next” for portfolio design.

In 2008, in response to investor concerns reported in 401(k) surveys, Principal introduced a new fund design for retail investors—the Principal Global Diversified Income Fund—that broke the mold by throwing traditional “style box” portfolio design out the window and focusing on something much more impactful: outcomes.

The Global Diversified Income Fund was constructed differently, with multiple asset classes that offered multiple sources of returns, as well as lower overall volatility.

It was managed differently as well, with multiple, specialist managers overseeing the investment strategy—including managers outside Principal whose specialty expertise filled an internal gap.

The fund was designed to target a specific risk profile for more consistent returns, with dynamic, opportunistic asset allocation and both passive and active management styles. There was nothing else like it on the market at the time.

“By being more thoughtful about outcomes versus a style-box approach, we were able to create an investment strategy with far more reliable risk management,” said Jake Anonson, portfolio manager. “Our clients’ risk isn’t about standard deviation. It’s about failing to meet their investment goals.”

As it turned out, this outcome-based fund design rose above the pack in addressing investors’ needs after the economic crisis of 2008. Principal was ahead of the game.

Two years later, a similar fund was introduced to meet institutional investors’ needs: the Diversified Real Asset Fund.

By offering growth-oriented assets with less variability, the fund was able to provide a portfolio with remarkable inflation sensitivity—plus a strong return profile.

To date, the Global Diversified Income Fund has grown to more than $10.5 billion in assets under management, and the Diversified Real Asset Fund has grown to $5 billion. A third fund has been added to the family, as well: the Global Multi-Strategy Portfolio, launched in 2012 to add a hedge fund strategy to the mix.

“Despite an overwhelming business model that emphasizes style-box portfolio construction, these multi-asset, multi-manager strategies found real across both the retail and the institutional channels,” Anonson says. “This is an innovative approach that came at a very opportune time.”

With this outcome-focused approach showing strong results for both clients and shareholders, the team plans to begin compartmentalizing client needs, designing strategies around more specifically targeted outcomes, as well as explore new strategies that compete more directly within the traditional modeling space—a return to the world where most of the team got their start.

“Say you’ve been in a business for 20 years, and you’re given the opportunity to build your practice all over again today,” says Anonson. “Would you do it the same way? Or would you build it in a more thoughtful and consistent way? That’s exactly what this team has done.”