To deliver an investment return of 5.0% p.a. above Australian inflation over rolling 3 year periods. Inflation is defined as the RBA's trimmed mean, as published by the Australian Bureau of Statistics.
Many investors define their objective as a return above inflation, but few investors specifically manage to this objective. Our approach to inflation plus (or real return) investing is to choose the portfolio that has the highest probability of achieving the required return objective over the investment horizon, and the least expected variability around this objective. The Fund employs a dynamic asset allocation framework in which both asset market risk premium, and consequently, the asset allocation of the portfolio are constantly reviewed. As risk premium (and thereby expected returns) change, so too will the asset allocation of the Fund (and sometimes significantly). The portfolio will reflect those assets that in combination are most closely aligned with the delivery of a real return of 5% p.a. In effect it is not the asset classes that are important but the likely characteristics of the return. The approach utilises a combination of our 'longer term' return estimates together with our 'shorter term' value, cycle and liquidity ('V,C,L') framework. Important in the decision process, is the level of risk taken to achieve the real return objective because the Fund aims to achieve a real return of 5% p.a. while minimising the dispersion of returns around the real return objective (and in particular downside variability).
The investment process has 3 key steps:
Identifying the right assets to own and when to own them is the most important step in the process as it will have the greatest impact on the overall return and risk characteristics of the portfolio. This stage of the process involves the development of dynamic return expectations (a blend of our strategic and tactical returns) as well as a forward looking assessment of risk (in both a volatility and distribution sense).
Once the appropriate asset allocation has been determined, the next step is how best to implement this. This step involves an assessment of where and how to allocate stock selection risk in the portfolio. In this regard we consider a range of options including active and passive strategies, direct investments, funds or derivative exposures.
At all times the portfolio will reflect the combination of exposures that we expect will deliver the real return objective subject to acceptable risk limits. A key aspect of this Fund is the explicit targeting of a consistent real return. In this regard, a key measure of risk is not absolute volatility but volatility around the real return target. The portfolio construction process involves the continued assessment of a broad array of risk metrics to aid in the effective allocation of risk (both total and active).