Real Return Funds: Right Time Right Place
Australia is on the cusp of a post-retirement boom. With retirees facing an ever-longer wait for pension eligibility and greater life expectancy, demand is growing for risk-aware and stable wealth building strategies to support clients’ post-retirement needs. In this article, we explore diversified real return funds, and whether they offer an effective wealth building safeguard for late-in-working-life and risk-averse investors.
For those approaching the end of their paid working careers, the balance between protecting one’s life savings and making it last for as long as possible presents a complex challenge. With a sufficient financial buffer in place, a comprehensive shares portfolio may well be the most sensible investment option.
Yet, for those with no such financial buffer, what are the alternatives?
Prior to the GFC, the options were simple. Interest rates were higher, meaning investors could park money in term deposits and government bonds that provided shelter from the corrosive effects of inflation and volatile equity markets.
Today, the situation is more complex. With the interest rates catapulted to historically low levels – the central bank’s most effective lever to boost stagnating economic growth – risk-adverse investors have been left with few options to secure their wealth.
The GFC also highlighted one of the fundamental flaws within the wealth management industry: professional fund managers and financial planners had few options to respond to changing economic conditions.
Yet, with persistent market volatility and challenging valuations across many asset classes whilst retirement-age investors seeking greater asset protection and safer avenues to wealth accumulation, it is more important than ever to adopt a common sense approach to managing risk.
Responding to the existing market sentiment and the burgeoning needs of investors, diversified real return funds have thus emerged as one of the most robust, dynamic and high-performing vehicles for risk-sensitive investors.
A Better Balance: The Real Return Advantage
Diversified real return funds are dynamic investment vehicles specifically designed to minimise, effectively delivering consistent and stable returns for investors.
Real return funds build the portfolio from the bottom up, with investments that have a high probability of achieving the return objective. Risk is managed by spreading capital across multiple asset classes (e.g. cash, bonds, equities, commodities, currencies etc.), and by avoiding asset classes which are overbought and susceptible to poor returns.
Unlike many other investment approaches, diversified real return funds create conditions for stable and predictable capital growth, by only investing when expected returns offer adequate compensation for the risk. In many ways this is a return to an ‘old school’, common sense approach to investing.
The downside is that in the really good years for equity markets, real return funds could potentially lag; but there is no magic pudding for investors.
The upside, however, is obvious: by spreading investment risk, and by taking risk only when conditions are favourable, investors can weather financial market storms, while participating – perhaps not fully – in market rallies.
According to Michael O’Dea, Head of Multi-Asset at Perpetual, empowering expert fund managers with the ability to continuously review risk and shift capital between asset classes is one of the key reasons why real return funds will continue to deliver highly competitive returns over a long-term investment cycle.
“It is very difficult for financial planners to vary the asset allocation for clients,” said O’Dea. “Making informed asset allocation decisions is a full time job and it is important to have the right structure to be able to act quickly when opportunities present or risks change.”
Embedding dynamic asset allocation in a client portfolio can be achieved “in a transparent, liquid and cost effective way via real return funds,” according to O’Dea.
Real Return for Every Investor
Diversified real return funds offer a stable core of investments for all investors, particularly those requiring a stable asset core that can be built upon with investment satellites that add higher risk and potentially higher returns. They are particularly well suited for those:
- approaching retirement and requiring greater security over their capital base, providing greater financial certainty in retirement;
- currently retired, and requiring a stable return in their spending each year;
- young professionals with a short to medium-term time horizon saving for a particular event or wealth goal, for example: first home buyers saving for a deposit;
- in the prime wealth accumulation phase (from early 20s to late 40s), looking for a liquid and transparent alternative to equities;
- not-for-profit organisations requiring a stable and predictable capital accumulation that can be invested back into projects.
The Real Return Advantage
Diversified real return funds operate on a simple – albeit salient – principle: the very best way to make money is to not lose it in the first place.
In an era of sustained market volatility, maintaining a low-risk investment portfolio – one that can weather market downturns and participate in rising markets – is not just a prudent growth strategy, but also the most efficient means to realise wealth goals, particularly for short- to medium-term investors.
Responsiveness, flexibility and stable returns: these principles are at the heart of Perpetual’s Diversified Real Return Fund.
A unique feature of the Diversified Real Return Fund is the ‘no minimum exposure’ rule for asset classes. According to O’Dea, “if it doesn’t meet our return criteria, we can [reduce the asset class exposure] to zero,” targeting returns across the entire market cycle, while adjusting the portfolio for risk.
Investment security is a core principle of the Perpetual Diversified Real Return Fund. To safeguard investments against market shocks (in addition to building in diversification) Perpetual also utilises put protection at various points in the market cycle.
The Diversified Real Return Fund sets a competitive benchmark return for their investments, leveraging Perpetual’s proven value-based investment style. The fund’s objective is ‘CPI plus five, over a rolling five-year periods – a target that, despite persistent economic uncertainty, has been exceeded since the fund was established five years ago.
To learn more about Perpetual’s Diversified Real Return Fund or other investment offerings, visit perpetualrealreturn.com.au, or make an appointment with one of our investment specialists.
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