Markets aren’t static. Why is your asset allocation standing still?
Over the past 40 years strategic asset allocation has been the predominant driver of investment outcomes. This has been supported by a negative correlation between equities and bonds but that is unwinding – and expected returns falling across major asset classes – strategic asset allocation alone, may not be enough to deliver on return targets when looking forward.
Our Multi-Asset Solutions team believe that holding a large number of asset categories doesn’t necessarily provide real diversification in today’s markets. To solve this challenge we have developed the Colonial First State Real Return Fund, an objective-based approach to investing that combines the benefits of long-term asset allocation with dynamic short-term tilts to enhance returns and also to abate risks.
Unlike traditional multi-asset portfolios, there is no requirement to allocate to any particular investment type. We only invest in opportunities that offer the best risk-reward for investors, blending a combination of assets together that have the highest likelihood of delivering on the performance target while also considering sequencing risks.
The Colonial First State Real Return fund aims to protect against inflation and provide growth by achieving a positive return of 4.5% in excess of Australian CPI (trimmed mean) over a rolling five year periods. We believe multi-asset strategies should have flexible product designs which do not hold asset classes that don’t offer value, are not constrained by benchmarks or restricted to long-only investment. Asset allocation must be dynamic to take advantage of market opportunities when they arise across the full spectrum of equities, bonds, currencies and commodities.
Objective-based investing seeks to overcome the limitations inherent in a traditional balanced approach. A particular outcome is targeted through a bespoke investment strategy that aims to realise an investor’s objectives as opposed to arbitrary benchmarks. Objective-based investing is designed to reflect a client’s interests in terms of ambition and risk, and adopts a total return mind-set.
Sophisticated risk management
Even with the most diligent monitoring and management, returns are never certain when investing in financial markets. It isn’t possible to meet return objectives without exposing investors to some risk. Statistical risk measures are used as aids to guide asset allocation decisions and risk controls. While we believe these measures are helpful, they are imperfect and so need to be supplemented with market experience.
By dynamically shifting exposures, we aim to take advantage of short-term investment opportunities as and when they arise. History has shown that being dynamic, making well-timed changes to the investment mix, can have significant positive influence on long-term performance.
Reviewing positioning on a weekly basis, the composition of the portfolio is continually reviewed by the investment team. The unconstrained approach enables us to respond quickly and decisively to evolving market conditions.
Our corporate RI strategy is based upon three strategic pillars of quality, stewardship and engagement.
As global multi-asset investors, we partner with our clients to provide solutions that maximise the probability that they will achieve their investment objectives. We assess our client needs based on three key criteria: risk tolerance, investment horizon and return ambition level. We utilise third party monitoring services for our direct holdings.
Performance and Documents
Source: First Sentier Investors 2020
Performance returns are calculated net of management fees and transaction costs. Performance returns for periods greater than one year are annualised. Past performance is not a reliable indicator of future performance.
Where does an objective-based fund fit?
Investing in an objective-based multi-asset strategy with flexible investment ranges free your manager to deliver more consistent returns with less risk, but how can a fund that moves in - and out - of asset classes fit within your broader asset allocation?
Here are five ways the Colonial First State Multi-Asset Real Return Fund can be used in your portfolio.
Core or whole portfolio solution
Use your objective-based strategy as a one-stop-shop for delivering on an overall portfolio objective - including outsourcing of asset allocation and governance.
Fixed income or cash enhancement
With low real returns on offer in fixed income and cash markets, an objective-based strategy has the flexibility to help protect capital against rising interest rates.
An objective-based strategy can be added to the equities segment of your portfolio with the aim of delivering 'equity-like' returns with lower volatility.
An objective-based strategy could fall into the 'growth alternatives', 'defensive alternatives', or 'absolute return' categories, depending on the fund.
If you're using a traditional 60/40 balanced portfolio, then you can introduce your objective-based strategy as an additional - yet distinct - allocation, for example carving out 5% of your allocation to growth and defensive assets each and reallocating the capital to an objective-based fund.
Wand to find out more?
Led by Epco van der Lende and Kej Somaia, we consist of eight multi asset specialists, based in London, Singapore and Sydney, averaging 6 years of experience.
We are responsible for research, portfolio construction and implementation, working collaboratively with clients to seek to deliver robust and consistent investment solutions.