Introduction

I’m Anthony Golowenko, Head of Investments at Clime Asset Management. In this video I’d like to

  • Quickly re-cap two central concepts of ‘objective based investing’ and ‘seeking income from equities’,
  • Highlight recent risk-adjusted returns from major asset classes, and
  • Bring these concepts together via an illustrative Australian income example

Quick Re-cap

Objective Based Investing
Simply put, ‘objective based investing’ refers to investing with a specific absolute return, risk and/or income target. A growth objective might be 6% beyond inflation, and an income objective might be 3% above the RBA cash rate.
Seeking Income from Equities
Australian equities can and will very likely continue to offer investors meaningful income. But remember, this income is delivered from an inherently less stable capital base so be aware of, and ideally manage, this equity risk.
What’s risk got to do with it
Table 1 below shows the annualised returns of major asset classes over the past ten years. Also shown are the corresponding risk numbers, calculated as the annualised volatility of monthly returns, and finally as a measure of reward to risk, the Sharpe ratio.
Annualised Return, Risk and Resulting Sharpe Ratio of Major Asset Classes (10-Years)
Table 1: Annualised Return, Risk and Resulting Sharpe Ratio of Major Asset Classes (10-Years)
Source: Bloomberg AusBond, S&P/ASX, MSCI and Factset – Accumulation Index returns over ten years from 31st August 2006 to 31st August 2016
Return is often the key measure of investment success. Of these major asset class indices, over the past 10 years Australian Bonds have delivered the highest return of 6.6% p.a. and Australian A-REITs the lowest return of 2.5% p.a. What is also important is the risk taken to deliver this return. Australian A-REITs, Australian Equities and Global Equities have significantly higher risk and Australian Bonds and Bank Bills significantly lower risk. Over the 10 years, the highest risk adjusted return (return beyond bank bills, dividend by total risk) has come from Australian Bonds.
Annualised Return, Risk and Resulting Sharpe Ratio of Major Asset Classes (3-Years)
Table 2: Annualised Return, Risk and Resulting Sharpe Ratio of Major Asset Classes (3-Years)
Source: Bloomberg AusBond, S&P/ASX, MSCI and Factset – Accumulation Index returns over three years from 31st August 2013 to 31st August 2016
Table 2 shows over the past three years, standout positive returns have been delivered from Australian A-REITs and, largely due to the depreciating AUD, Global Equities. This has been achieved with a reasonable level of efficiency as measured by the Sharpe Ratio. The highest risk-adjusted return has again been delivered by Australian Bonds; an annualised return of 6.5% with a risk level of 2.4%, resulting in a Sharpe ratio of 1.7. With the current[1] Australian 5-year bond yield at 1.6% and the 10-year yield at 1.9%, the next three years seem challenging for Australian Bonds to again deliver the strongest risk-adjusted return.
Annualised Return, Risk and Resulting Sharpe Ratio of Major Asset Classes (3-Years) & Representative Clime Income Portfolio
Table 3: Annualised Return, Risk and Resulting Sharpe Ratio of Major Asset Classes (3-Years) & Representative Clime Income Portfolio
Source: Bloomberg AusBond, S&P/ASX, MSCI, Clime and Factset – Accumulation Index returns over three years from 31st August 2013 to 31st August 2016
Table 3 is identical to Table 2, except for the addition of the representative Clime Income portfolio. The far RHS column shows the total return, risk and resulting Sharpe ratio of the representative Clime Income portfolio over the past three years. It has delivered a total return of 7.1%, with a total risk of 4.7% resulting in a Sharpe ratio of 1.0.
Bringing this all together
A central concept of objective based investing is

  • Capital deployed
  • At what risk
  • For what likely outcome

Looking ahead to what the next three years might bring, due to the declining Australian cash rate and lower yields from term deposit and Australian Bonds – under an objective based framework, traditional sources of income are becoming less compelling. More investors are moving up the risk spectrum and, amongst other things, looking to equities to deliver meaningful yield in their portfolio.
With a level of risk less than half of the Australian equity and Australian property indices, a solid yield and strong risk-adjusted return – we are seeing an increasing level of interest in the Clime Income portfolio to complement equity and property allocations.
I thank you for listening, I hope you’ve found this short video useful and should you require further information please contact us via our website.


[1] Source: Bloomberg Australian Govt 5-Year and 10-Year yields as at 9th September 2016