Ensuring investors are clear what your fund does is essential for any product, but for Schroders’ Robin McDonald that has become increasingly challenging as the investment environment has evolved.
Earlier this year, his Schroder MM Diversity fund was renamed the Schroder Diversity Real Return fund, as part of efforts to improve clarity for investors on the fund’s stated commitments.
Since the fund launched in 2005, it has aimed to deliver inflation-beating returns, but investors were not always clear that this was its primary goal, Schroders’ head of multi-manager conceded to Portfolio Adviser.
“Although the fund had worn its diversity name since 2005, it didn’t really give advisers much, if any, insight into what the fund actually tried to achieve.
“What we’re trying to highlight to advisers is that everything about the fund: its objective, its benchmark and so on is skewed towards generating real returns above inflation,” he said. Making this clear has become much more important in a post-Covid period, McDonald added.
When the fund first launched before the global financial crisis and pandemic, beating inflation was not a concern because it tended to annualise at a fairly low level, he said.
“The world has kind of evolved,” McDonald noted. “It’s gone from a world where inflation wasn’t really an issue to a post-2020 world of higher inflation, where it’s more common knowledge that inflation is a covert tax.
“If the period post-GFC, pre-Covid was about low or no nominal growth, the period post-Covid has really been about higher nominal growth,” he explained.
See also: Investment industry should wake up to looming experience gap
In the past six years, we’ve seen bond yields normalising, richly priced high-quality stocks derating, while others such as banks re-rated upwards, creating a much more distinct investment environment, he said.
In this modern regime of higher nominal growth and inflation annualising at 3-4%, a rebrand of the real return fund felt more appropriate, he said.
However, this changing investment environment has implications for portfolio construction, he explained. While the core goal of outperforming UK inflation has remained consistent, what assets seem appealing has changed.
“If you flip an investment environment basically entirely on its head, you shouldn’t be surprised if you need to fully turn over the portfolio to succeed in this new environment,” he explained.
See also: Clearwater: 90% of fund managers to expand into alternatives
As an example, he pointed to the change in their alternatives bucket. Five or six years ago, many multi-asset investors had increased exposure to alternatives such as real assets or infrastructure, which the Schroders team largely regarded as bond proxies when bonds were mostly unattractive, according to McDonald.
“So, the point we would have made five or six years ago was that you need to be careful with your alternative allocation, to make sure you weren’t just porting in ‘bonds in drag’ and calling it diversified.”
Today, he argued, it is a little different because bonds are producing “on a forward-looking basis, adequate yields, so some exposure is not necessarily a bad thing”.
Within their own alternative bucket, he explained the team expresses this through a long-short strategy, where they might go long more interest rate-sensitive stocks that may rise with bonds.
Similarly, the team has increased its position in government bonds, as noted last week, a sharp reversal from 2020 and 2022 when the fund was short fixed income owing to the low yields available.
This had mostly paid off, according to data from FE fundinfo. In 2022, the portfolio was up 5.1%, while many multi-asset funds underperformed owing to their bond allocations. Meanwhile, it successfully outpaced UK CPI in 2020 and 2021 in line with its stated objective, as seen in the chart below.
Now that bonds are a much more compelling proposition, he explained, it is important to recognise the changing investment regime and pivot the portfolio accordingly.
Over the past five years, the fund has delivered a 45.5% total return according to data from FE fundinfo. For comparison, UK CPI has delivered a total return of 27.8% over the same period, while the average fund in the IA Mixed Investment 20-60% shares sector is up 21.7% according to data from FE fundinfo.
“We’ve done well over the course of the past five or six years, and that comes down to identifying the investment regime and being willing to position for it,” he concluded.
