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Is CPI + 5.0% a Tough Hurdle?
Rob da Silva, Head of Research
In measuring performance and judging “success”, investors tend to heavily focus on total returns, or for an added degree of sophistication, risk-adjusted returns such as the Sharpe ratio. While these are admirable metrics, the key to an investor’s future standard of living from accumulated wealth is the real returns achieved. The purchasing power of your retirement nest egg can only be improved by generating returns higher than the rate of inflation (however you prefer to measure that).
Most single-asset class products are measured against some appropriate “beta” or market benchmark in measuring success e.g. the ASX 300 Index for Australian Equities. While this is common practice, it ignores the “real” goal of optimizing real returns. In the realm of super funds, pensions, annuities and multi-asset investments products the focus on real returns is much more commonly stated and specifically targeted. Many such investments have an explicit goal of achieving “CPI plus something” as an investment return objective.
A very common goal used by both advisers and fund managers in this space is “CPI + 5.00%”. In this and subsequent notes we will explore the “level of difficulty” of this hurdle rate.
Let’s start with cash.
Its been a long-standing feature (50 years plus!) of the money markets that cash earned some positive rate of return over the inflation rate. The conventional orthodoxy was that a negative real cash rate was a sign of extreme monetary stimulus aimed at battling extreme economic conditions. Even at our last official recession in the early 90’s (remember the one we “had to have”?) a massive rate-cutting program saw the cash rate bottom out at 4.75% when inflation was running at 1 – 2 %. A positive real cash rate!
It was only at the GFC – the “Great Recession” of ’08 (which wasn’t a recession here) that we saw the real cash rate dip into negative territory.
In the recovery phase of the GFC cash rates rose back into positive territory until late 2011 when cutting rates became the norm again. Such has been the difficulty of keeping the economy on an even keel that since 2011 the RBA has only done two things – cut rates or sit on their hands!
As the graph above shows this has meant that real cash rates have been negative since June 2014, the longest stretch since the heady high inflation of the early 1980’s.
Over the last five years real cash has basically been zero. Over the last three years it has been -0.32%!
||Average Real Returns from Cash
Looking forward there is very little likelihood that the cash rate will be above the inflation rate anytime soon. Negative or zero real cash rates are the “new normal”.
|RBA Cash Rate
|"Real" Cash Return
Next month we will take a look at the “CPI + 5.00%” hurdle rate and see how the multi-asset universe has fared against this yardstick.
SQM Research's Top 5 SQM Rated Funds* - 31 January 2020
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* Any Funds in this table that have international investments will have different hedging patterns, from hedged to unhedged or variable hedging. This may have an impact on fund returns. Please refer to the Fund's product disclosure statement for details.
SQM Research's Top 50 ETFs - 31 January 2020
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For further information:
Rob da Silva - Head of Research, SQM Research
Tel: (02) 9220 4606 Email: firstname.lastname@example.org
Louis Christopher - Managing Director, SQM Research
Tel: (02) 9220 4666 Email: email@example.com
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In general, the assessment approach adopted by SQM Research incorporates a combination of qualitative and quantitative research techniques to assess property investment products. Information generated is passed through the SQM Research assessment model at the completion of the assessment process. The assessment model generates a product score, which correlates to a specific star rating (out of a maximum of five stars). Each star rating covers a scoring range, allowing products to be ranked within quarter star increments.
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