It might only have $100 million under management, but Perpetual’s Diversified Real Return Fund has a major role to play in the future of the fund manager as it rebounds from recent turmoil. Perpetual’s roller coaster ride is well known in the industry. The $1.2 billion that walked out the door when John Sevior left was followed by a bruising $1.75-billion takeover bid from US buy-out group, KKR. When that was rejected, the Perpetual share price went into free fall and it was only in the latter stages of 2012 that any signs of recovery were evident.
While all this was going on at a corporate level, Perpetual continued to do what it has always done – manage money – and part of that was a change in philosophy as the fund manager decided on a new strategy around outcome-based investing, joining a wave of thinking which eschews benchmarks and uses multi-asset investing to achieve returns.
It is a philosophy that Perpetual thinks is well suited to the risk profile of people approaching retirement and for those already retired. Perpetual says that 80 per cent of its clients’ investment income is earned after the age of 55.
The result has been Perpetual’s Diversified Real Return Fund, founded in 2010, has in its short life delivered an 8.8-per-cent two-year return and 14.1 per cent over calendar year 2012. This is against a target of CPI plus 5 per cent over five years. The idea, though, is not to “shoot the lights out” in a bull equity market; it is to deliver sustainable performance against the target in all market conditions.
While there is some institutional money in the fund, the bulk of it comes from retail investors and self-managed funds. The fund sits as part of a diversified strategies family of four funds, which combined have $2.5 billion under management.
“The Real Return Fund takes a different approach in that it used different levers to get outcomes and won’t rely on equities quite as much,” explains Sandi Orleow, senior portfolio manager at Perpetual.
“Managing across asset classes makes the manager accountable for the outcomes and because the fund doesn’t have the governance constraints of benchmark investing, it is more adaptive generally.”
The asset allocation of the fund is very different to the traditional balanced fund. Around 10 per cent of the fund is in Australian equities, 20 per cent is in global equities, around 40 per cent is in emerging market and private sector debt, with a further 15 per cent or so in inflation-linked bonds. There is also a mix of real assets and derivatives.
Portfolio manager Michael Blayney, pictured right, puts it this way: “When we started this fund, we started with a clean piece of paper. With a multi-asset fund we can tweak the asset allocation to match what we are trying to achieve from a diversification perspective.
“You can be more flexible, so you can say I want developed market global equities, but I can get that exposure more efficiently synthetically.”
Where, in a more traditional portfolio, a re-allocation of assets means “you have to go and sell something else.”
“Let’s say you have to go and sell your equities, but then you dilute your returns,” says Blayney. “A more efficient way to do it can be to pour more of your capital into credit and get some equity exposure synthetically, particularly in the area of global equities.”