Greater than the sum of its parts

Michael O’Dea

Head of Multi Asset

The Greek philosopher Aristotle observed that the whole is greater than the sum of its parts. This goes to the heart of the Perpetual Diversified Real Return Fund’s four quadrant approach to portfolio construction. The philosophy behind each quadrant combines to achieve a precise balance between minimising risk and achieving a targeted level of return.

The Perpetual Diversified Real Return Fund targets a return of 5% p.a. above inflation, over rolling five year periods, before tax and fees. The portfolio is designed daily with the right mix of assets to deliver the return objective at lower levels of risk. 

Four quadrant portfolio construction

The four quadrants that underpin the Fund’s construction are designed to identify investments for the portfolio that contribute to the Fund’s objective of CPI + 5% p.a.* at low levels of volatility.

*Over rolling 5 year periods, before tax and fees 

Here’s how the process works:

1.  Inflation protection - What will protect from inflation over five years?

A sustained period of high inflation is one of the most serious risks facing investors. It can have a two-fold impact on wealth:

  • When the cost of living increases the future value of an investor’s money diminishes; and
  • Many assets, such as equities and bonds, fall in both real and nominal value when inflation is high.

Given these risks, the investments we consider in this quadrant are those that will help protect the Fund from inflation over a period of five years. These investments may include inflation linked bonds, commodities, and property where rental increases are explicitly linked to inflation.

2.  Return seeking What has a high probability of meeting a return of inflation + 5% p.a.*?
*over rolling 5 year period, before tax and fees

This is the ‘engine room’ of the portfolio. We look for the most attractively priced investment opportunities across asset classes, markets and geographies.  We are not constrained by fixed allocation ranges which means we have the flexibility to actively shift the investment exposures to capture the best opportunities – wherever they are found. 

From an extensive range of investment opportunities, we build a highly selective portfolio of diversifying opportunities that satisfy an expected return greater than inflation + 5% p.a. over rolling 5 year period, before tax and fees. The types of assets we may invest in within this quadrant include Australian or global equities, infrastructure debt, emerging market debt or equities and bank loans.

3. Diversifying opportunitiesDoes the investment add the potential for uncorrelated returns?

Uncorrelated returns diversify a portfolio because they are not linked to the general movement of the overall stock market. In the past, investors could diversify by investing in cash and bonds at positive real rates. But this is no longer viable because of historically low interest rates.

What we look for are investment opportunities typically overlooked by traditional balanced fund investors. Sometimes they don’t fall neatly into asset classes – they may include relative value investments, currency holdings or skill-based sources of return such as market neutral equities.

4. Downside protectionWhat will protect the portfolio in times of market stress?

Our approach seeks to lower risk and protect capital because the Fund is focused on managing overall volatility. Having an inherent bias towards loss prevention means our portfolios are designed to act as shock absorbers when markets fall.

 

“The Perpetual Diversified Real Return Fund is based on a simple principle – that the best way to make money is not to lose it.” Michael O’Dea, Head of Multi Asset

 

One way we protect on the downside is to explicitly manage valuation risk – that is, avoiding investing in expensive asset classes in the first place. But we are aware this approach can lead to investing large amounts in cash when valuations are unattractive. To counter this we not only tactically increase our allocation to fixed income and hold cash when appropriate, we may also implement explicit portfolio protection.

We rotate our protection strategies according to what is likely to be most effective at any point in time. These strategies include put options, gold, bonds or cash.  

To find out more about the Perpetual Diversified Real Return Fund, visit www.perpetualrealreturn.com.au, contact our Adviser Services team on 1800 062 725 or speak to your Perpetual Business Development Manager today. 

 

ABOUT PERPETUAL

Perpetual’s disciplined approach to identifying high-quality, attractively valued investment opportunities for our investors – irrespective of the security or asset class – is what has set us apart for generations. As one of Australia’s most highly regarded and awarded investment managers, Perpetual manages money across a range of asset classes, including Australian and Global Equities, Multi Asset strategies as well as Credit and Fixed Income.

 

MORE INFORMATION

Adviser Services 1800 062 725

Investor Services 1800 022 033

Email investments@perpetual.com.au

www.perpetual.com.au

 

This brochure has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The product disclosure statement (PDS) for the Perpetual Diversified Real Return Fund, issued by PIML, should be considered before deciding whether to acquire or hold units in the fund. The PDS can be obtained by calling 1800 022 033 or visiting our website www.perpetual.com.au. No company in the Perpetual Group (Perpetual Group means Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past performance is not indicative of future performance.

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