Benchmark beating irrelevant to outcomes based investors
Fund managers investing to outperform benchmarks are irrelevant to end investors as managers often stray from their own investment objectives and do not meet the returns investors require after inflation.
Rather there has been a shift to institutions investing for a specific return after inflation according to boutique fixed income manager Ardea Investment Management.
However while this appears to be a new trend local investors have had access to outcome driven investing for 30 years via inflation linked bonds (ILBs) according to Ardea.
Ardea said the role of ILBs has come to the fore again as institutions and investors seek an ‘inflation plus return' with Ardea principal and portfolio manager Tamar Hamlyn stating that interest in ILBs had spiked among industry, corporate and government superannuation funds seeking investments to cope with ongoing market volatility.
"What has always seemed obvious to us, and is perhaps just coming to the attention of the industry, is the natural fit of ILBs in a portfolio being constructed to meet a specific outcome, especially where the objective is an after-inflation return," Hamlyn said.
This focus on inflation is still important to maintain even in the current low inflation environment, Hamlyn said, because there was a higher likelihood of inflation spiking unexpectedly, rather than dropping suddenly.
"Currently, inflation is at historically low levels, a factor which makes it easy for short term investors to overlook the potential risk of inflation to a portfolio.
"However, not including inflation protection in a portfolio is effectively making the bet that inflation will continue to drop - an outcome which would be difficult to achieve given how low inflation is already," Hamlyn said.
"With governments around the world engaging in multiple rounds of quantitative easing, the inflationary backlash is a question of when, not if.
"At such low levels, investors should be locking in inflation protection while it can be accessed relatively cheaply, and ensuring they have it in place for the full term of their investment horizon."
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