January 2016
Monthly Report
Schroder Real Return CPI Plus 5% Fund Professional Class
mthly
Total return %
Schroder Real Return CPI Plus 5% Fund (pre-fee)
Schroder Real Return CPI Plus 5% Fund (post-fee)
qtr
1 year
3 year
5 year
Incpt
1 mth
3 mths
6 mths
1 yr
3 yrs p.a.
Inception p.a.
-1.18
-1.23
-1.78
-1.92
-2.37
-2.66
-0.26
-0.85
5.88
5.25
7.09
6.44
Past performance is not a reliable indicator of future performance
Returns over 12 months are annualised
Please refer to www.schroders.com.au for post-tax returns
Portfolio inception 01/10/2008, 7 years and 4 months
Asset allocation
Portfolio and market review
Australian
Equities, 15.8%
Global Equities,
12.3%
Cash, 27.9%
Higher Yielding
Credit, 11.4%
Absolute Return
Strategies, -0.3%
Mortgages and
Floating Rate
Credit, 5.7%
Inflation Linked
Bonds, 3.6%
Australian Fixed
Income, 15.3%
Global Fixed
Income, 8.3%
Fund objective
To deliver an investment return of 5.0% p.a. before fees
above Australian inflation over rolling 3 year periods.
Inflation is defined as the RBA's Trimmed Mean, as
published by the Australian Bureau of Statistics.
RBA CPI Trimmed Mean* as at 31 December 2015
3 months
6 months
1 year
3 years. p.a.
0.57%
0.90%
2.13%
2.32%
*The RBA CPI Trimmed mean returns are published quarterly by the ABS.
Historical returns may be subject to revisions.
It was a challenging start to 2016. Against this backdrop the Schroder Real Return (CPI+5%)
Strategy produced a return of -1.2% in January, which dragged the 12 month ended return into
slightly negative territory (-0.3%). To put these numbers into some context though, in January,
Australian equities returned -5.5% at an index level and around -6% for the year ended. Over our
targeted 3 year horizon, returns remain reasonable at 5.9%, albeit a bit below the 5% real return
objective. Against a backdrop of increasing market volatility, portfolio volatility remains low.
The January return was predominantly the result of substantial declines in risk assets across the
board. While exposure to risk assets is relatively low, the extent and breadth of the declines made
some drag hard to avoid. Stock selection at the sector also broadly detracted as we continue to
favour value over momentum – and for the time being at least value is generally being ignored. We
had a number of positions in the portfolio that mitigated the drag from risk asset declines, but they
were only able to mitigate, not offset these forces. Specifically, the high cash weighting, duration and
the portfolio’s long FX position all contributed positively. Likewise the S&P put options delivered a
significant profit (which we have taken).
Outlook and strategy
The New Year is typically celebrated with fireworks – the major cities all trying to outdo each other
with both colour and impact. It was a seemingly similar start to 2016 for the major markets. Equities
slumped across the globe, credit spreads widened, the oil price collapsed and bonds rallied - a tough
start to the year by most metrics.
To a significant extent the catalysts were not new. Oil prices continued to fall as both demand
concerns (anaemic global growth) and supply concerns (the failure of OPEC to curtail production)
aligned, raising fears of deflation and hurting energy producers – including the liquidation of reserves
of the major oil producing countries. Likewise in China, moderating trend growth and the structural
rebalancing of the Chinese economy away from investment to consumption has been overlayed with
a cyclical slowdown driven by the fallout from excessive credit growth and seemingly erratic policy
responses as policy makers grapple with the idea and consequences of free floating capital markets.
At the same time a moderation in US data (“soft patch”), and concerns about profit growth (especially
in the US) have raised concerns about the wisdom of Fed tightening and where it goes from here (will
it lower its dots or abandon altogether). Adding to volatility (and downward pressure on bond yields)
was the BoJ’s adoption of negative interest rates on selected deposits which added to the list of
central banks reaching deeper into their drawer for additional stimulation to lift inflation and promote
growth. Desperate times, desperate measures.
While we were not too surprised by the weakness in China (to a large extent this was inevitable, it
was only the timing that was hard to predict), the dynamics of the oil markets and the severity of the
collapse in oil prices has surprised us. Likewise where oil goes from here is also problematic and we
admit to having little confidence in any particular outcome. While there’s plenty of sound analysis that
say the lows have been seen, the conflux of both demand and supply side factors add to uncertainty.
We expect / hope the oil price will stabilise and recover somewhat from here – but confidence is low.
These factors make the current economic environment difficult to read and not surprisingly the
economic consensus is polarised. As I noted above our own “crystal ball” is distinctly cloudy. What is
clearer though, is the distortions that these policy measures impose on investor behaviour and asset
prices (both financial and real). One of the underlying objectives of aggressive monetary policy
responses (from QE to negative interest rates) is to encourage banks to lend, consumers to spend
and provide ample capital for investment.
While we don’t know the counterfactual (ie. what would have happened had these policies not been
pursued) we also know that a key missing ingredient has been a substantive recovery in business
investment. Instead monetary policy has steered investors and corporates away from pursuing
productive capital investments, channelling cash flow into financial assets to effectively play the carry
trade in its many forms. Asset prices have risen (be it bonds or equity) so there has been a wealth
effect, but this wealth effect has not been sufficient to create a virtuous cycle of demand, leaving
economies vulnerable to minor shifts in sentiment and outsized concerns over relatively small market
developments. While there has been some volatility in recent months, the cracks have been
emerging for some time. Equity markets have been on the slide since Q3 2015, credit markets have
been rebuilding spreads, while sovereign yields have been trading in a wide range with one eye on
the Fed and the other nervously watching the worry list (the worry list is currently dominating).
Portfolio refers to the Schroder Real Return CPI Plus 5% Fund Professional
Class
Unless otherwise stated figures are as at the end of January 2016
Numbers may not total to 100 due to rounding
While I’ve admitted above the increasing difficulty in interpreting the broad range of economic data
and developments, we have a clearer view of how to invest.
Schroder Real Return CPI Plus 5% Fund
Professional Class
Performance
Monthly Report
January 2016
Outlook and strategy continued
Contributions to Returns
7%
6%
Firstly, we firmly believe that capital preservation is our foremost near term priority. This means we are
particularly judicious in how and where we take risk until such time as asset markets re-instate
appropriate and commensurate risk premia. We need to continue to focus on how we can manage
downside risk in an environment where the traditional risk hedges (like sovereign bonds) are as / more
vulnerable (at least directionally) than the growth assets they have typically been useful in hedging.
Secondly, we are reluctant to chase markets in the pursuit of incremental returns. While the momentum
trade has rewarded investors it will turn. We prefer adequate valuations anchor our investments rather
than the fact that the investment went up yesterday.
5%
How does this look in practice?
4%
Our exposure to defensive assets is high both in absolute terms and relative to equities. Within the
defensive allocation cash is preferred, and while it does not offer any more than the cash rate, we at
least know this with relative certainty in the short term at least.
3%
Within the equity space our preference remains to be exposed to the cheaper markets – those that have
suffered the biggest de-rating and arguably are ahead of the game in terms of pricing the downside.
Australian equities are our biggest absolute exposure but still at a relatively modest 15%. Active
management of our Australian equity exposure has been a drag on performance as our Australian
equity pool which reflects the bulk of this 15% has been overweight resource stocks as value has
emerged there and underweight the financially leveraged sectors of the economy. However, we are
comfortable this is the right stance and more defensive than the alternative, which would in effect be
long momentum – a high risk strategy in our view and anathema to our thoughts on capital preservation.
Likewise we have relatively little effective exposure to US equities given our concerns that structural
valuations in US equities remain stretched and therefore offering modest return potential over the
medium term as a result.
2%
1%
0%
-1%
-2%
-3%
3 months
1 year
3 years p.a.
Australian Equities
Global Equities
Higher Yielding Credit
Absolute Return Strategies
Market Neutral Strategies
Australian Fixed Income
Global Fixed Income
Inflation Linked Bonds
Mortgages and Floating Rate Credit
Domestic Property Trusts
Cash
Fund details
APIR code
Fund size (AUD)
Redemption unit price
Fund inception date
Buy / sell spread
Management costs
Minimum initial investment
Distribution frequency
We are starting to see value in credit markets (high yield spreads have widened substantially) and this
is something we are selectively adding. We prefer high yield in the context of our medium term
objectives over global equities.
Managing downside risk is in part a function of the comments above (ie. avoiding / limiting exposure to
the assets we don’t like) and in part dealing with specific uncertainty. To this end our list of downside
mitigants includes duration and yield curve flattening positions, and currency (we still like FX over the
AUD). We have taken profits on the S&P put options we had in place broadly since the rebound in
markets through Q4 last year, but may look to reinstate should we see a bounce in the market from
here.
Finally – and to reiterate the comments we have been making for some time – we expect another tough
year.
Investment style
SCH0039AU
$2,135,792,697
$1.1480
October-2008
0.20%/0.20%
0.60%
$500,000
Normally twice yearly June and December
Our approach to inflation plus (or real return) investing is to choose the portfolio that has the highest
probability of achieving the required return objective over the investment horizon with the least expected
variability around this objective. The Fund employs an objective based asset allocation framework in
which both asset market risk premium, and consequently, the asset allocation of the portfolio are
constantly reviewed. The portfolio will reflect those assets that in combination are most closely aligned
to the delivery of the objective.
Unless otherwise stated figures are as at the end of January 2016
Contact
www.schroders.com.au
E-mail: [email protected]
Schroder Investment Management Australia Limited
ABN 22 000 443 274 Australian Financial Services Licence 226473
Level 20 Angel Place, 123 Pitt Street, Sydney NSW 2000
Phone: 1300 136 471 Fax: (02) 9231 1119
Investment
in the Schroder Real Return CPI Plus 5% Fund Professional Class (“the Portfolio”) application form accompanying the current Product Disclosure Statement, available from the Manager,
0
Schroder
1.148 Investment Management Australia Limited (ABN 22 000 443 274 AFSL 226473) (“Schroders”).This Report is intended solely for the information of the person to whom it is provided by
Schroders. It should not be relied on by any person for the purposes of making investment decisions. Total returns are calculated using exit price to exit price, after fees and expenses, and assuming
reinvestment of income. Gross returns are calculated using exit price to exit price and are gross of fees and expenses . The repayment of capital and performance of the Funds is not guaranteed by
Schroders or any company in the Schroders Group. Past performance is not a reliable indicator of future performance. Unless otherwise stated the source for all graphs and tables contained in this report
is Schroders. Opinions constitute our judgment at the time of issue and are subject to change. This report does not contain and is not to be taken as containing any financial product advice or financial
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