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SQM Research Ratings Update
February 2020
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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.
  Average Real Returns from Cash
1980's 6.46%
1990's 4.93%
2000's 2.60%
2010's 0.51%

Over the last five years real cash has basically been zero. Over the last three years it has been -0.32%!
  3-Year 5-Year 10-Year 20-Year 30-Year
RBA Cash Rate 1.38 1.61 2.63 4.03 5.16
CPI 1.70 1.65 2.07 2.61 2.50
"Real" Cash Return -0.32 -0.05 0.56 1.42 2.67

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”.
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.
Recently Published

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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SQM Research's Market Benchmarks - 31 January 2020

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Ratings Table
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For further information: 
Rob da Silva - Head of Research, SQM Research
Tel: (02) 9220 4606   Email:

Louis Christopher - Managing Director, SQM Research
Tel: (02) 9220 4666  Email:

About SQM Research 
SQM Research is an independent property advisory, ratings and forecasting research 
house which specialises in providing accurate property related advice, research and data to financial institutions, property developers and real estate investors. For more information please visit
Research Methodology
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.
Following are descriptions for each of the star ratings, which have been developed as a guide for dealer group research teams and investment committees:
4.5 stars and above - Outstanding. Highly suitable for inclusion on APLs.
4.25 stars - Superior. Suitable for inclusion on most APLs.
4 stars - Superior. Suitable for inclusion on most APLs.
3.75 stars - Favourable. Consider for APL inclusion.
3.5 stars - Acceptable. Consider for APL inclusion.
3.25 stars - Caution required. Not suitable for APLs.
3 stars - Strong caution required. Not suitable for APLs.
Below 3 stars – Avoid or redeem. Not suitable for APLs.
Hold - Rating is suspended until SQM Research receives further information. A rating is typically put on hold for a period of two days to four weeks.
Withdrawn - Rating no longer applies. Significant issues have arisen since the last report date. Investors should consider avoiding or redeeming units in the fund..
 * The definitions above are not all encompassing and not all individual items mentioned will necessarily be relevant to the rated Fund. Users should read the current rating report for a comprehensive assessment.

The rating contained in this document is issued by SQM Research Pty Ltd ABN 93 122 592 036. SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale clients, utilising a proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to change at any time. Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure statement and consult a licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment scheme.
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