The Rushton All Seasons Fund (“Fund”) is liquid and highly diversified across a range of different investments (asset classes and strategies) and over a thousand individual positions globally.
Combining a wide range of investments in an optimal way can generate consistent returns with only moderate levels of risk throughout the various phases of the economic cycle. The Fund can be used as a complete portfolio solution, or as an important portfolio diversifier, adding considerable value to most investment portfolios, due to its lower correlation with global equities.
Why All Seasons?
Whilst it is possible to ascertain which types of investments (asset classes) work well under specific economic conditions (e.g. generally speaking, shares and property perform well when economic growth rises above expectations and gold and bonds perform well when economic growth falls below expectations), what no one knows is when economic conditions will change and how long any set of economic conditions will last. This is what makes investment timing very challenging. Investors need to be mindful of what they do know and what they don’t know and what they don’t know is when economic conditions will suddenly change, due to a specific event, such as major economic announcements or the emergence of geopolitical risks.
If it is not possible to reliably predict when economic conditions will change, the logical solution is to construct a portfolio that works very well across the full range of economic conditions – a truly balanced approach, come what may.
What are the primary drivers of the economy?
The primary drivers of the economy are growth and inflation. As the share market is forward looking, all other things being equal, if economic growth is expected to be 3%, share prices will reflect this expectation. If growth then comes in at 3.5%, the share market will generally react positively, as growth has exceeded expectations. Likewise, if growth is expected to be 4% and comes in at 3.5%, the share market will generally react negatively, as growth has come in lower than expectations. Based on this information, we can broadly divide these economic conditions into economic seasons, as follows:
Spring –when economic growth rises relative to expectations (i.e. the economy is warming)
Summer –when inflation rises relative to expectations (i.e. the economy is overheating)
Autumn –when inflation falls relative to expectations (i.e. the economy is cooling)
Winter –when economic growth falls relative to expectations (i.e. the economy is freezing)
Understanding the Economic Climate
The only problem we face when analysing the economic climate, is that, unlike the weather, the economic seasons don’t always follow in the same order or last the same amount of time. Further, an economic environment can also be characterised by two seasons at once, just as natural seasons have transition periods. Rest assured that no one can consistently predict the order or duration of the economic seasons, so whilst we know which investments perform well in each season, we don’t know what season tomorrow will bring, and by the time the change in season is obvious, the damage may have already been done – for example, Black Monday, when in October 1987, the Australian share market fell 25% in one day.
By balancing overall portfolio risk evenly across the four economic seasons, we can generate much more stable returns, whilst minimising the portfolio’s susceptibility to negative events that are characteristic of any one season. Severe investment portfolio losses result from having an investment portfolio which is out of sync with the prevailing economic season and we prevent this by being evenly balanced across all seasons. For example, if a portfolio is dominated by growth assets, such as shares and property, it will do well in Spring – but it can be expected to suffer severe losses in Winter, as happened during the GFC.
The underlying logic of the All Seasons approach is to understand that all investments are simply sources of risk and return and each investment will perform better or worse dependent on the current economic conditions. When building a diversified portfolio, a common mistake made by many investors is a desire to see all of their investments perform well at the same time. This can lead to the construction of very unbalanced portfolios and the problem is that if all of the investments in a portfolio are doing well at the one time, i.e. under a specific set of economic conditions, it means that when the conditions change, they may all be doing badly at the same time, resulting in severe losses. The whole idea of building a properly balanced and diversified portfolio is to avoid this outcome, by holding an intelligent mix of investments that complement one another, allowing the whole portfolio to provide a much better overall risk-adjusted return than each of its underlying components.
The All Seasons solution
Rather than attempt to have each investment in the portfolio performing very well at the same time, the All Seasons approach is to select a wide range of investments, with each investment performing very well over the long term but performing better or worse under different economic conditions. The benefit of evenly spreading risk and return across each of the economic seasons, is that the long-term return can be improved whilst the risk (volatility) is substantially reduced. This doesn’t mean that we make a zero return in every environment – in fact, our strategy is designed to produce a positive return in each economic season by harvesting the unique “source of return” that we derive from each different type of investment.
Let’s consider a simplified, hypothetical example with only two assets in a portfolio.
After 30 years:
- $1 invested in asset 1 is worth $38.12 (compound return 12.90%)
- $1 invested in asset 2 is worth $52.55 (compound return 14.12%)
- $1 invested in the combined portfolio is worth $88.29 (compound return 16.11%)
By combining two uncorrelated investments we reduce our risk by one third and increase our compound return by approximately 2-3% per annum. Obviously, this example only combines two uncorrelated investments – combining more uncorrelated investments increases the diversification benefit.
In the above chart, we show Asset 1 and Asset 2 over 30 years. In this hypothetical example, both Asset 1 and Asset 2 have identical average returns (i.e. 18%) and identical risk (i.e. a standard deviation of just over 30%), but importantly, they have a different sequence of returns (i.e. returns come in a different order and are different in each period).
In isolation, $1 invested in Asset 1 becomes $38.12 and $1 invested in Asset 2 becomes $52.55 over 30 years. This equates to a compound return of 12.90% and 14.12%, respectively. But, if we combine both assets in an overall portfolio, with a 50/50 weighting and we rebalance the portfolio to maintain this weighting at the end of each period, the combined portfolio would turn $1 into $88.29 over 30 years, for a compound return of 16.11% – and this higher return is generated with less risk, as the volatility of the portfolio falls by approximately one third, which is a significant reduction in risk.
In the example above, the specific numbers that have been used for illustration are not important. What is important, is understanding the benefit that can be achieved by combining uncorrelated investments in a portfolio. And the critical point is that we can both reduce overall risk and increase overall returns by intelligently combining investments that are characteristically different to one another and then rebalancing our overall portfolio in a disciplined and regular fashion. Through thoughtful portfolio construction and disciplined implementation, we can make our investor’s journey less of a bumpy ride and achieve a better result at the end of the day.
The key consideration when combining investments is to ensure that they are in fact, characteristically different and not just ‘more of the same’. An investment that is characteristically different from another investment is one that responds differently to various phases of the economic cycle. Identifying and combining such investments, in the right proportion, is the central logic behind the All Seasons approach.
Reducing volatility provides peace of mind and higher returns
As we have seen above, as well as providing greater peace of mind, lowering volatility in a portfolio actually increases long-term returns. A further example is as follows:
Let’s assume we had the choice between investments in two different Australian managed funds that both had an average return of 8% per year, as per the table below:
Both of these funds have an “average” return of 8%. But after five years, Portfolio A is worth $146,933 … and yet Portfolio B is only worth $130,000. That’s a difference of $16,933. And it’s just the tip of the iceberg. In 30 years, Portfolio B will only be worth $483,038. Meanwhile, Portfolio A, with its ‘steady, consistent returns’ will have grown to $1,006,266 – more than twice as much!
Cash, shares and a typical balanced fund compared to the Rushton All Seasons strategy
Cash returns are currently poor, and shares are volatile. And the typical balanced fund is heavily weighted towards Spring and Autumn, so it will perform well under these conditions. In Summer, it will not perform very well, and in Winter, it will suffer dramatically. When looking at history, this becomes obvious, as most balanced industry super funds suffered considerable losses in the Winter conditions that prevailed during the GFC from late 2007 into 2009.
The key point here is that we know all the economic seasons will keep coming around – we just don’t know when and for how long they will last.
The Fund aims to provide investors with stable returns of 7%, over and above the rate of inflation, over rolling 10-year periods, with only moderate volatility of returns and an overarching focus on capital preservation, through the full economic cycle. Some of the key benefits of investing in the Rushton All Seasons Fund are as follows:
Just as important as it is to create the optimal investment mix within a portfolio, it is also critical to maintain this optimal allocation at all times. You may go to great lengths to get your sources of risk and return combined in the optimal way but each and every day they will steadily drift away from the optimal allocation, as some assets perform better than others. This is why it is imperative to continually monitor and rebalance the portfolio to ensure the optimal allocation is maintained. The Rushton All Seasons portfolio is rebalanced at the most cost-effective frequency, based on the cost of adjusting the asset allocation, compared to the benefits of doing so.
The strategy has the ability to perform well in both good and bad times
The investment strategy has the ability to perform well in both good and bad times, meaning that performance of the Fund is not based on favourable economic conditions, or solely dependent on rising asset prices. This is different to most other investments, which have very large allocations to growth assets, such as shares and property, which, by definition, rely on growth, i.e. continually rising asset prices. As most investors have few investments in their portfolio that have the ability to perform well in bad times, they tend to suffer sizeable losses when economic conditions deteriorate, and they could therefore benefit by including an investment that has the ability to perform well under these adverse conditions.
The Fund maintains a high level of liquidity and withdrawal requests may be made on a monthly basis.
Highly diversified investment
It is often said that ‘diversification is the only free lunch in finance’ and effective diversification is central to our All Seasons approach to investment management. Firstly, our strategy is based on combining multiple asset classes and investment themes, that each generate profits at different times, and under a range of economic conditions. Further, the strategy is spread over more than a thousand individual positions in multiple countries across the globe. This high level of diversification assists in smoothing overall performance, as it is our objective to maintain stability and consistency through all economic conditions.
Reduced correlation to the returns from shares
The most effectively managed investment portfolios combine a range of very good investments that are lowly correlated to each other, which provides true diversification benefits, and adds considerable value to the overall investment portfolio. It is even more important to ensure that these low correlations are sustainable over time – even under the worst possible economic conditions, i.e. when asset prices are falling, and the diversification benefits are needed the most. By combining lowly correlated investments that each produce an acceptable risk-adjusted return over time, it is possible to enhance investment performance without increasing overall risk.
Carefully managed volatility
With a high level of diversification and carefully selected investments, we maintain a focus on capital preservation and aim to keep volatility well below that of equity market investments, over the long-term, whilst producing a good return for the level of volatility accepted. In other words, we focus on generating better risk-adjusted returns.
Extensive risk management guidelines
We believe that if an investment strategy is grounded in sound academic theory and combined with a practical knowledge of market dynamics, it should continue to provide strong returns over the medium to long term, provided the various risks inherent in the process are managed well.
Our risk management procedures ensure that only those risks which we consider to be conducive to positive long-term performance are accepted, and those that don’t, are either eliminated, if at all possible, or if not, are carefully controlled. Risk management is not simply about addressing common risks either, as risks that occur rarely, are also carefully identified and managed to the extent possible.
Note: There are a number of risks associated with investing in the Fund, including Manager risk. The success of the Fund is dependent on the ability of the Manager to identify investment opportunities that achieve the Fund’s investment objective. We recommend you review all the risks discussed in the disclosure documents, in consultation with your professional adviser.