Real Returns... An investor’s perspective


Simon Doyle

Simon Doyle

Head of Fixed Income & Multi-Asset

Investors all agree they don’t want to lose money. While capital preservation is paramount, investors ideally desire a minimum level of return that compensates them for the level of risk taken. At the end of the day it’s all about how much risk you are willing to bear. Realistically, taking on a lot of risk means being prepared to lose some or all of the money you invest. Unless you are lucky, to earn returns in excess of the market means you have to take some big risks and for most people that also means losing sleep! However, without taking on at least a little risk, investors who put all their money in the bank, can really only expect to keep pace with inflation.

Market can be volatile from year to year

The Global Financial Crisis and the erratic performance of various investment markets over the last few years might seem like an exception to the norm but the reality is markets can be volatile from year to year. For Australian investors, Australian and international shares and property trusts (collectively known as ‘Growth’ assets) have been the most volatile asset classes experiencing best as well as worst performance outcome more often than cash or bonds (refer Figure.1).

Looking at performance of markets over time there are many occasions when one year’s ‘winning’ investment becomes next year’s ‘loser’. In fact, some growth investment categories such as international equities have had occasions of sustained poor performance for several years after a run of good performance. For example, 1997, 1998, 1999 and 2000 were good years for international equities with annual returns of 36.4%%, 23.2%, 18.0% and 30.9% respectively and over the following 2 years international equities lost nearly half its value. However, the reverse situation also occurs with the old adage ‘out of adversity comes opportunity’. For example, 2001 and 2002 were poor years for Australian equities with annual returns of -4.4% and 1.0% respectively, and the following year the market had rebounded and returns were positive for the next consecutive five years.

Figure 1. Annual performance of asset classes %pa

1994 7.0 -6.0 -2.7 -4.2 5.0
1995 9.8 12.8 11.5 16.5 7.7
1996 11.8 9.0 12.4 12.2 7.8
1997 25.8 36.4 25.1 14.6 6.2
1998 -2.8 23.2 14.9 9.3 5.1
1999 15.4 18.0 -0.1 1.4 5.0
2000 18.5 30.9 12.0 5.9 5.9
2001 -4.4 -21.0 16.2 10.7 5.8
2002 1.0 -26.7 11.7 5.8 4.7
2003 11.4 1.0 6.2 4.9 4.9
2004 20.7 9.7 29.0 5.2 5.5
2005 32.2 12.9 16.5 5.8 5.7
2006 16.0 17.5 25.6 4.8 5.9
2007 32.4 1.8 20.1 3.5 6.5
2008 -26.8 -16.2 -40.4 8.4 7.7
2009 8.3 -12.8 -23.7 7.1 4.3
2010 0.6 -2.3 -4.2 7.3 4.3
2011 -8.6 -4.0 -6.2 9.0 5.0
2012 14.8 14.3 29.1 9.6 4.4
2013 24.3 34.8 16.2 1.8 3.1

1.S&P ASX 200 Accumulation Index; 2. MSCI World ex Australia Accumulation Index $A; 3. S&P ASX 200 A-REIT Total Returns; 4. UBS A$ Composite All Maturities;5. UBS Bank 0+ Yr Total Returns. Source: Morningstar

The key is more dynamic diversification

Diversification, or not putting all your eggs in one basket, by spreading money across a range of investments including equities, bonds, property and cash is an excellent strategy to ride out the peaks and troughs in the market. The challenge is deciding what proportions to allocate, when to buy in, hold or sell and what to switch into.

Problems with static asset allocation

For the last 30 years or so, the majority of multi-asset funds (also known as ‘diversified’ funds) have been built using a fairly prescriptive asset allocation dominated by equities and to a lesser extent property (so called ‘Growth assets’) with smaller components of bonds and cash (so called ‘Defensive assets’). Several variations of these ‘formula driven’ funds exist (eg. Growth, Balanced and Conservative) with the size of the allocations to international equities, Australian equities, bonds, property and cash largely determined by return objectives and risk tolerances of the investors targeted by the managers. Examples of various types of multi-asset funds and their typical asset allocation ranges are shown in Figure 2.

Figure 2. Asset allocation of typical multi-sector funds


Source: Morningstar. Morningstar category benchmarks median asset allocation.

Different asset allocation models as shown above have been developed on the assumption that equities will outperform bonds over the medium term. The reality has been somewhat different, particularly if you look at market performance over the last 5, 10 and 20 years. While Australian equities and global equities have outperformed bonds over the past 2 years, the previous 2 years were a different story with bonds outperforming. Static asset allocation has meant that these type of portfolios have not been able to shift in and out of equities to take advantage of the opportunities offered. The end result for investors in such funds has been somewhat disappointing. For example, the median Multi-asset Growth fund has returned 5.9%pa over the 5 years to 30 September 2013 which is 3.3% more than the average inflation rate for the same period. Similarly the median Multi-asset Balanced Fund has returned 6.2%pa over the 5 years to September 2013 which is 3.7%pa above the inflation for the same period.

Objective based asset allocation – the Schroder Real Return Fund

Objective based investing is a strategy that focuses purely on achieving an investment objective irrespective of what happens in various markets and what others are doing with their investment portfolios. It’s not about outperforming compared with a particular market index such as the S&P ASX All Ordinaries but rather generating a consistent real return above inflation.

The Schroder Real Return Fund Wholesale Class adopts an objective based approach with the objective of returning 5% per annum above Australian inflation over rolling 3 year periods. Investments are managed with the intention of minimising the chance of losing money while also achieving a real return relative to inflation.

The target return for the Schroder Real Return Fund Wholesale Class is 5%pa above the current inflation rate without taking undue risk. The Fund adjusts to changing valuations taking into consideration the different cycles which can provide a much more consistent return experience than the typical diversified funds described earlier. Broadly, the Schroder Real Return Fund Wholesale Class invests across 3 types of investments according to the likely returns and the risk. The 3 types of investments are:

- Defensive assets – those which are relatively safe such as high quality debt and cash;
- Diversifying assets – those offering better potential returns but with slightly more risk for example higher yielding corporate bonds; and
- Growth assets – offer potentially the highest returns but can be quite risky for example Australian and international equities and property trusts.

The Schroder Real Return Fund Wholesale Class uses a dynamic approach when allocating to the different types of assets so that it is able to take full advantage of the fluctuations in the markets. As the markets’ risks and returns change, so too will the strategy's composition. The diverse nature of this Fund ensures that it will manage downturns in the share market while minimising losses. Refer to the most recent Monthly or Quarterly report available on the Schroders website ( for portfolio composition and performance details.

Schroders has run the Real Return strategy since October 2008. While past performance is not indicative of future performance the strategy has returned 8.1% per annum net of fees since October 2008 (as at 30 September 2013). This compares favourably with an investment in Australian equities which has returned just 7.3% per annum over the same time frame and with considerably higher risk.

As at 30 September 2013, over $2.3 billion was invested in the Schroder Real Return Fund and the Schroder Real Return Fund Wholesale Class.

The Schroder Real Return Fund Wholesale Class is designed for investors looking for a smoother ride through potentially bumpy investment markets while seeking to earn a return around 5% higher than inflation. Its in-built diversification means it suitable for use as a complete portfolio solution or simply a component.

This Fund will appeal to investors who:
- Are comfortable with taking on some risk but are uncomfortable with the volatility typical of a portfolio comprised of just shares
- Want a fund which uses a combination of shares, bonds and cash, in order to increase the value of their investment, while at the same time minimising the risk of any loss
- Want an inflation-adjusted outcome or a ‘real’ return (as opposed to a return which aims to beat some arbitrary target or benchmark)
- Are looking for a single standalone solution which is transparent and represents real value for money.
- Need, when required, to be able to easily redeem their investment and convert into cash with minimum delay.

The Schroders Group is one of the largest and most internationally diverse independent managers providing investment management, research and market services from offices located in 27 countries.

The Schroder Real Return Fund Wholesale Class is managed by the Australian Fixed Income and Multi-Asset team at Schroder Investment Management Australia Limited. The professional team of fund managers and analysts manage over $13bn on behalf of clients.

Important Information:
Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article. They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 ("Schroders") or any member of the Schroders Group and are subject to change without notice. In preparing this document, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this article. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this article or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this article or any other person. This document does not contain, and should not be relied on as containing any investment, accounting, legal or tax advice. Schroders may record and monitor telephone calls for security, training and compliance purposes.