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GFC heralds a new reality

Australians' unrealistically high expectations of sharemarket returns have been dashed but it's not all bad, writes John Collett.

Australians' unrealistically high expectations of sharemarket returns have been dashed but it's not all bad, writes John Collett.

Fresh thinking is needed if investors are to earn decent returns from their investments.

The days of investors simply placing their money into investment markets or with fund managers and doing well ended with the global financial crisis.

"Investors and investment managers need to stop regarding the investment environment as the 'tail end' of the GFC 'anomaly'," the chief executive of diversified fund manager Centuria Capital, John McBain, says.

He says the experience since the GFC may be the new reality.

The double-digit returns enjoyed on the Australian sharemarket for the best part of 20 years before the GFC lifted investors' expectations to unrealistic levels. Now that investors have experienced heavy losses, they are beginning to ask questions about the wisdom of paying handsome fees to fund managers who do little more than mirror the sharemarket index.


The new reality is not just about lowering earnings expectations from the sharemarket. It could just as well apply to other traditional assets - shares, property and fixed interest.

Some fund managers have launched multi-sector funds that invest in a wide range of assets, in addition to traditional ones. To name just a few, they are investing in emerging market debt, specialist credit, commodities, inflation-linked bonds, infrastructure, private equity and "alternative" strategies such as hedge funds.

"Investors must rethink the conventions of asset allocation in the light of financial markets that will remain highly volatile, at least in the medium term and very possibly beyond it," McBain says.

He says the conventional "time in the market" mantra, which holds that taking a long-term position will smooth short-term losses and lead to net investor gains over time, should be viewed with scepticism.

As the chief economist at AMP Capital Investors, Shane Oliver, points out, through the 1980s, '90s and up until 2007 and the start of the GFC, the conventional funds management model provided great returns for investors. But the conventional model, if not broken, is in need of a revamp.

To be fair, managers have for some time been making changes to help achieve better returns from traditional assets. In Australian shares, for example, they have been reducing the number of stocks they hold in portfolios and more prepared to back their judgment on which stocks will prove winners. They have made investment staff responsible for individual stock calls. Some fund managers have their senior portfolio managers responsible for a discrete portion of the fund rather than being jointly responsible with the other senior portfolio managers for the performance of the whole portfolio.

However, most of the funds management industry still manages investors' money with reference to sharemarket indexes. And some have been slower than others to recognise the new investment landscape.


For most small investors, their benchmark is the interest rate that they can earn at no risk with an online savings account, or a term deposit, not some artificial market benchmark created for the benefit of the financial services industry.

When markets were booming, few questioned the benefits of benchmark-relative investing. But with markets doing poorly and returns likely to be lower and more volatile, investors are likely to want managers to state a return outcome rather than one that is relative to a market index. Why should fund managers receive accolades and bonuses for producing a return of minus 10 per cent, when the market returned minus 12 per cent?

Some fund managers expecting lower returns and higher volatility are doing more than just talking the talk. They have responded to the investment environment of expected lower returns by launching a new style of multi-asset funds that seek to harvest returns from several asset classes.

Instead of managing the fund with reference to market indexes, they aim to meet return targets, such as 5 per cent above inflation, on average, over three or five years by accessing a wider source of returns than just shares.

These "real" return funds invest in a wide range of asset classes normally not held by traditional multi-sector funds, such as emerging market debt, commodities and specialist credit.


Oliver says the new multi-asset funds that spread the money to many more asset classes than the traditional "balanced" or "multi-sector" funds can be better suited to investors who have a shorter time frame and want a smoother ride in their investment portfolio or have specific income needs.

However, he says a high allocation to shares can still be appropriate for long-term investors. He says there is no evidence that shares have lost their long-term ability to deliver for investors. "Over the long term, shares have provided higher returns than cash or bonds," he says.

"However, benchmark-focused products are probably in for a more volatile ride than Australians have been used to. They serve their purpose for long-term investors but for investors who have a shorter investment horizon, or who do not like the volatility, then funds that are more focused on providing absolute returns, and are far less constrained by benchmarks, can be appropriate."

Traditional multi-asset or "balanced" funds have fixed allocations to shares, bonds, listed property and cash, with particularly big tilts to shares. These funds are periodically rebalanced to the fixed allocations.

While traditional multi-sector funds have between 50 per cent and 60 per cent exposure to shares, new multi-sector funds have less than half that.

While having shares in a fund increases the returns of the fund over the long term, it increases the volatility of those returns substantially.

The new-style multi-asset funds spread their money among many more asset classes on the assumption that the returns for the traditional classes are not going to be very high.

They also aim for a certain return above the inflation or the cash rate rather than the usual aim of outperforming market returns.


The Schroder Real Return Fund, launched in the middle of last year, aims to deliver a return of 5 per cent above the inflation rate before fees, over a three-year period.

The fund has an exposure to Australian shares of only 14 per cent and to global shares of only 16 per cent. It has exposure to high-yielding credit, bonds and inflation-linked bonds and about 20 per cent of the fund is invested in cash.

AMP Capital's Multi-Asset Fund, launched at the end of last year, aims for a return of 5.5 per cent above inflation, on average, over five years.

As well as the usual asset classes, including a weighting of about 20 per cent to shares, the fund has 10 per cent exposure to "absolute" return investment strategies such as hedge funds.

Perpetual also launched its Diversified Real Return Fund last year but it is not yet available to individuals.

A senior analyst at investment researcher Zenith Investment Partners, Steven Tang, expects to see more managers launch funds that have return objectives rather than a goal of beating the market. "At the end of the day, investors care more about their returns, after inflation, than beating some sort of benchmark," he says.

As for the return aims of 5 per cent or 5.5 per cent after inflation (or 8 per cent to 8.5 per cent nominal return), it would be a "very good outcome if they could achieve that".

"Most people would settle for 8 per cent in a low-growth environment," Tang says.

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