Real Return Strategies, what the clients really want

The main issue with the financial industry that the normal strategies recommended to the client are mainly index following strategies. If you are a Growth Client the 70% to 80% of your assets will be invested in shares and if you are a Conservative Client 70%-80% of your asset will be invested in bonds. The assets of the client will broadly follow what the two indexes will do - for the better or worse

The issue is that the mind of the client does not work like this. In a perfect scenario the client would like to achieve, in the current inflation environment, between 5% and 10% - with the minimum shock possible.

Although this is not really possible, real return strategies are at least meant to provide this kind of solution.

Real Return strategies are particularly important for pre-retiree and retiree that cannot afford the so called sequencing risk (the market having a deep correction just before retirement) as unfortunately the Global Financial Crisis showed to everyone.

A normal growth strategy is designed to obtain, over 7 years, a performance of 11-12% per year with the occasional correction year of -13%

A Real Return strategy instead aims, over the same period, to achieve a performance of 9% per year with the occasional correction year of -4% (Font: averaged data from Lonsec, Morningstar, Perpetual and Zenith).

Contrary to beliefs a market correction (defined as market loss of 20%) statistically occours every 2 - 5 years and Since 1987 there have been seven Market Corrections (average loss  -13.2%) and seven Bear Markets (average loss -30.6%), . The time to make new highs has been 3.1 years  (excluding currently Australia which has not reached new highs after 2008)

 

How does Real Return Strategy achieve it?

Essentially a real return strategy includes more asset classes (better diversification) and it has a more nimble asset allocation (it can invest/disinvest in different asset classes rapidly) and, if all else fail, it can go to cash in any currency (the USD appreciated 20% versus the Australian Dollar during the Great Fnancial Crisis!).

To make it simple:

 

A stable core of Senior Corporate Bond, infrastructure (listed and unlisted), Major Corporation with pricing power (CBA, Google), rule driven Exchange Traded Funds

 

A shock absorbing satellite made of different currencies, precious metals and alternative investments including agriculture, water rights, absolute return credit and hedge funds in general

A diversifier made of specialist managers in niche sectors such as Micro caps, emerging markets and ETF for tactical asset allocation