We have heard it before, but this time it’s serious: the reward for risk will probably be lower going forward and super funds should be satisfied with a real return of about 5 per cent a year, the Russell Investments conference was told.


The conference, in Melbourne last Thursday and Friday, was generally upbeat about investor prospects over the next 12-18 months, notwithstanding the sharp market falls of the past year. Andrew Pease, Russell investment strategist, said: “The prospects for global growth haven’t changed. I think we’ll see the worst of the bad news through this year and in 2009 we’ll see some positive news.” He said that the most exciting thing that has happened in the past 12 months is the de-coupling of the emerging world with the developed countries. “That’s the positive story coming through. The G3 economies are either in recession or close to it while the emerging markets are now internally driven.” He said that, over time, profits could be expected to grow in line with the economy, which was about 3 per cent, plus inflation, which was about 2.5 per cent. A standard 70:30 growth:defensive portfolio would have a 7.6 per cent return or 5.1 per cent real return (after inflation) – “that’s a realistic assumption”, Pease said. Cliff Asness, CIO and managing partner of AQR Capital Management, said that investors needed to take risks, unless they could time the market to the day, even though the rewards were likely to be lower than in the past. What was a reasonable return to expect from stocks and bonds above inflation for a 50:50 portfolio – “the passive return you get for just showing up” – had fallen by about one-quarter, down from 4 per cent to 3 per cent, in the past 10 years, he said. Asness said that global diversification was the only free lunch in finance. He said that investors needed to ask themselves whether they were in a sufficient number of asset classes; whether they were global enough and whether they were in the “risk space, not just the capital space";. He said that 60:40 portfolios were still too common even though equity risk dominated these portfolios. He also advised: . large-cap alpha was more important than small-cap alpha, but difficult to find . relax constraints and use portable alpha . beware of the paradox of “factor-less alpha” . fees matter – know what’s worth paying for. “Long-term average alpha came out between zero and a healthy negative,” Asness said. He suggested investors should be contrarian: “It’s a form of alpha that’s freely available over three-five-year periods.” And a final tip: “Buying insurance against disaster is almost always a mug’s game.” Pease said that the biggest opportunities lay in the emerging economies. “Emerging markets are where the profits are, where the income and spending is going to happen,” he said. “So, you want a tilt to that.”

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