Are return expectations moving ahead of reality?

Schroder’s Investment Management this week released a note to the ASX in which they announced the objective returns of their popular listed and unlisted CPI Plus series of funds would be amended.

For those who aren’t aware of the strategies, they are what’s known as multi-asset class strategies, able to invest across all available asset classes, within set parameters, in the pursuit of a specific return target. That return target, is of course, determined by the level of risk each strategy is mandated to take.

According to the announcement, the targeted return of the CPI + 3.5% Fund would be amended to the RBA Cash Rate plus 3 to 4%. Similarly, the CPI Plus 5% Fund, along with the ASX-listed version of it, would have their objectives broadened to CPI + 4 to 5%. On the face of the announcement, it appears of little materiality, but looking closer it may be a precursor for the rest of the investment and superannuation industry.

Schroder’s flagged the impact of COVID-19 as a key reason behind the need to ‘recalibrate’ the return expectations of their clients. They further noted that due to the never-ending fall in cash rates and bond yields, the after inflation return that can be achieved from ‘low risk’ investments which form as much as 40 per cent of a traditional balanced fund, have fallen to historically low levels. 

Despite the required disclaimer of ‘past performance is no guarantee of future performance’ anyone looking closely at investment flows into stocks, managed funds or industry super funds, knows that money follows performance for better or worse. The consistently strong returns delivered by most investment markets over the last decade means that many investors now come to expect the 9-10% per annum they have seen every year. These are clearly overly optimistic expectations when the standard balanced fund carries an investment objective of CPI + 3 to 4% per annum.

According to Schroder’s “market conditions have progressively made it more difficult to consistently achieve both the return and risk objectives of our Real Return Funds. Until recently we believed these were reasonable targets to pursue, however the COVID-19 pandemic has now tipped the balance.”

The discussion of expected returns remains a difficult one, particularly at a time when investors and advisers are being forced, through central bank policy, to accept low returns or expose portfolios to additional risk in their pursuit. Education and communication is key in this environment, rather than simply moving with the herd.