Russell Investments’ survey: Wary financial advisers see benefit of real return funds amid extreme equity valuations

Survey of 200 Australian financial advisers finds a majority reviewing portfolio derisking options

SYDNEY, 19 October 2017 – A recent survey of Australian financial advisers by Russell Investments revealed almost two thirds of 200 respondents are planning to review client portfolios as U.S. equity markets reach extreme valuations not seen since the 1990s tech bubble. In addition, more than a quarter are considering more sophisticated options, particularly real return funds, to simultaneously aim to maintain their growth targets and defend the portfolio amid a market pullback.

These survey findings appear to show financial advisers are taking heed of industry analysts’ warnings on the late-cycle, momentum driven market, as described in the Russell Investments’ latest quarterly global market outlook. Coupled with several potential geopolitical risks such as North Korea’s missile launches and Spain’s Catalonia separatist movement, current high valuations appear precarious to Russell Investments’ strategists, who see the potential for lower return expectations in the near term.

Siva Sivakumaran, managing director for Russell Investments’ Adviser & Intermediary Solutions business in Australia, said the survey findings appear positive in terms of the advisers’ responsiveness to their clients, but added he found a survey finding worrisome. "A sizeable number of advisers who are assessing high valuations appear ready to shift into more conservative funds, which could potentially be a blunt approach," Mr Sivakumaran said. "This may highlight a lack of awareness of efficient strategies designed to maintain investment goals with substantially less volatility, such as a dynamic real return fund."

Indeed, among surveyed advisers who said they plan to review asset allocation, nearly half of them are considering more conservative options (39%) or cash (7%), while an encouraging 28% are looking at real return funds.

Mr Sivakumaran points out that the use of real return funds in the industry has more than quadrupled in the past five years and now accounts for nearly AUD$10 billion in assets, according to Morningstar research. He added that real return funds are typically built to be more responsive to market events, with greater discretion to defend the portfolio in uncertain times. This reduces the intervention needed at the investor level, as the portfolio is more actively positioned based on the latest market outlook; all of which is designed to provide a smoother return profile.

“We believe real return funds offer an increasingly important answer for investors, and our best-of-breed open architecture approach takes full advantage of the firm’s core capabilities globally in asset allocation, capital markets insights, factor exposures, manager research and portfolio implementation,” Mr Sivakumaran said. “Whether it’s rapid response through our global 24-hour trading desk or our investment professionals’ deep understanding of capital markets, we have the range of capabilities needed for these sophisticated offerings.”

Mr Sivakumaran added that the institutional side of the firm also sees increasing interest in real return strategies, particularly among for-purpose organisations such as universities and charitable groups that are seeking solutions to reduce the volatility of returns and provide more predictable cash-flow.

“We believe real return funds will continue to grow in popularity as investors increasingly recognise the value of these sophisticated strategies,” Mr Sivakumaran said. “In our real return portfolios, for examples, portfolio managers use options strategies, versus an increased cash allocation, as a more efficient method to limit the downside in volatile markets.”

He added that options trading is one of the many sophisticated strategies used in these more modern portfolios. Options can be beneficial from the standpoint of timely and cost-effective implementation, allowing the portfolio manager to quickly implement a tactical view on current market valuations, instead of needing to wait up to three days to line up transactions using physical assets. Other sophisticated strategies include long- or short-term absolute return strategies that do not depend on the underlying direction of the share market, volatility strategies that reduce the funds’ reliance on traditional equity risk premia, and alternative yield sources, such as senior bank loans, that reduce exposure to rising interest rates.

More information on real return strategies is available here.

About Russell Investments

Russell Investments, a global asset manager, is one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals working with their advisors—using the firm’s core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures— to help each achieve their desired investment outcomes. The firm has AUD$368.6 billion in assets under management (as of 30/9/2017) and works with more than 2,500 institutional clients, independent distribution partners and individual investors globally.

Headquartered in Seattle, Washington, Russell Investments operates globally with 21 offices, providing investment services in the world’s major financial centers such as London, Paris, Amsterdam, Sydney, Tokyo, Shanghai, Toronto and New York. For more information about how Russell Investments helps to improve financial security for people, visit


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First Used: October 2017