Russell Investments Dynamic Real Return Series

Funds Management

by Jessica Amir

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Russell Investments, Director Client Investment Strategies, Scott Fletcher, talks about how the Russell Investments Dynamic Real Return Series aims to deliver returns with substantially less volatility than traditional investments.

Jessica Amir:
Hello I’m Jessica Amir for the Finance News Network. With me today from Russell Investments is director of client investment strategies, Scott Fletcher. Scott thanks for coming in and welcome to the Network.

Scott Fletcher: Thanks Jessica.

Jessica Amir: First up, we’ve seen a lot of volatility in the markets of late. What is it really saying about where we’re at and where do you think we’ll be headed?

Scott Fletcher: There’s no doubt that the markets have taken investors for quite a wild ride in 2018. But I think we really need to look at this wild ride in a context of the broader picture, which is we’ve had seven years since the Eurozone crisis of 2011. Seven years of very strong solid returns, so investors have actually done pretty well. What we’re seeing at the end of all that is we’ve seen asset markets, particularly in the United States stock market, pushed to valuation levels that are very expensive.

And so the volatility that we’re currently experiencing is very much in the context, of a late cycle momentum driven transition phase in the market. So we’re late cycle, we’re looking out towards the risk of a US recession, 2020 for example. And so there’s a lot more volatility creeping into the market, which we will think will usher in a lower return higher volatility phase, probably over the next few years medium term. That creates a significant investment challenge in fact looking out, for those investors requiring a growth like return, say CPI plus four and so on.

Jessica Amir: What can investors do to really navigate through this investment challenge?

Scott Fletcher: The nature of the investment challenge is probably helped by thinking some numbers. So if we look out five years and we put in capital market assumptions of markets that have been pretty successful, over the last seven years for example, high valuations means that you’ve got less upside. So when we put those capital market assumptions into building a portfolio for the next five years, we end up not at CPI plus four, which is your typical 70 per cent growth 30 per cent defensive type portfolio that a lot of investors have. We end up about two per cent short over the next five years.

So really the critical success factors for bridging that gap, come down to a combination of additional sources of return. Extra asset classes, even in traditional asset classes, the processes or styles that you can invest into generate that return. Also dynamic management, dynamic management really means what are you going to do to adjust your market risk, through the cycle? That’s a big one, downside limitation strategies, use of options and so on. And of course, every time you move money and particularly in a lower return environment, it costs money to move money. So you need to be really efficient in your implementation.

Now most investors in a retail sense can only do really one of those four things, in any way, shape or form and that is in terms of diversification. But it is not enough we believe. So effectively, that’s why we’ve been seeing increased interest in our dynamic real return solutions.

Jessica Amir: You mentioned an increasing number of investors are looking for those real return solutions. Maybe you can tell us about the Russell Investments Real Return Series and how it’s being used?

Scott Fletcher: The Russell Investments Real Return Series is effectively three funds. There’s a Flagship Fund, our multi asset growth strategy, which targets a CPI or inflation plus four per cent. But unlike a traditional balance fund or a conventional balance fund, it is very targeted to the return outcome. And not just the return outcome, but it also has objectives in the sense of volatility, how much drawdown is it? There is a much higher drawdown focus in these type of funds. And also in terms of income focus, there’s a part of the series, which is our multi asset income strategy which also has a more conservative asset allocation and a bit more of an income focus, at the more conservative end of the spectrum.

So these funds are effectively a different animal to your conventional 70/30 fund. And they’re very much designed for people with a higher sensitivity to downside. For example, people close to retirement, pre-retirees, early retirees, they can’t afford the capital hit. But they are still maybe underfunded and they need that growth style return, but with less volatility.So it’s the same destination, but just a different journey and that’s the big difference in these funds.

Jessica Amir: Thanks Scott. For investors thinking about going into a Real Return Fund, how does your fund differ from others on the market?

Scott Fletcher: It’s an interesting question. So when you move around the market and you talk to different investors, and advisers and so on and even in the institutional side, people try to put a blanket over real return funds, as though they’re all the same thing. And they’re not; it’s a very broad church, a very wide range of different ways of doing it. So one of the main differences in terms of the way we do it at Russell is, we look at those critical success factors to bridge that return gap that I mentioned earlier. And we build those sort of critical success factors into the design and the structure, and the management of the fund.

So effectively, dynamic management, all about how do you adjust risk through the cycle is critically important and actually makes the biggest difference.So when things are going well and the market’s going up, it’s obviously keep pace with inflation plus four. When the market starts to enter this volatile transition phase and they move to bear market, it moves to capital protection, capital preservation if I can put it that way. So dynamic management, the way you systematically adjust the growth exposure, or the equity market exposure through the cycle is critically important. A lot of other funds out there were pretty much designed in a very large bond bull market and have quite conservative allocations.

So the main thing to look for in Real Return Funds is how, or do they, actually significantly adjust the equity market exposure through time. And you have to be systematic in the way that you do that. Loading up on growth exposure when things are cheap early in the cycle, and de-risking as the cycle matures to make sure that you’re prepositioned for the downturn.

Jessica Amir: Scott Fletcher, thank you so much for your insights.

Scott Fletcher: My pleasure.


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