The primary goal of objectives based investing is the achievement of a particular outcome, usually a real rate of return, which is simply the return relative to inflation.

Without a doubt real returns are the most important measure of investment outcomes for an individual. For example, it doesn’t matter if we generate 10% nominal returns (that is, without adjusting for inflation) if inflation over the same period is also 10% – as our portfolios can only purchase the same amount of goods and services.

Objectives Based Portfolios or Real Return Portfolios are different from the traditional Strategic Asset Allocation diversified funds of old in a number of ways;

  • They are more easily understood and applied to investors’ circumstances because specific outcomes can be readily matched to specific needs.
  • There is a much greater focus on risk and volatility of asset classes given the more defined investment objectives of these funds over specific timeframe.
  • They typically aim to limit the extent and severity of drawdowns. As a result, these funds exhibit a strong focus on capital protection.
  • They have much broader asset allocation ranges allowing the manager much greater flexibility in what asset classes and investments the fund invests in order to achieve its real return objective, rather than have a set Strategic Asset Allocation from which they rarely deviate.
  • They generally have a greater ability to allocate to alternative asset classes or investment strategies such as equity long/short, infrastructure, commodities (soft and hard), CTA and global macro.
  • They generally do not benchmark against traditional capital markets, such as shares and property, which can be volatile and have little relevance to the outcomes required by investors.

The development of such funds has evolved from problems that have been associated with more traditional multi-sector funds which often suffered from too much exposure to a particular asset class at the wrong time, little flexibility under their mandates to change their asset allocations, benchmarking of their returns to volatile capital markets and a focus on managing their own business risk due to comparisons to peers.