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Schroders Institutional Series. It’s more than just Bonds vs Equities. Chris Durack Director Head of Product and Distribution. September 2012. Three random individuals. (Just) Darren. (Dame) Kiri. (Sir) Ed. Note: Any likeness to real people is entirely coincidental.

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Schroders Institutional Series

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Schroders Institutional Series

It’s more than just Bonds vs Equities

Chris Durack


Head of Product and Distribution

September 2012

Three random individuals

(Just) Darren

(Dame) Kiri

(Sir) Ed

Note: Any likeness to real people is entirely coincidental

40 year savings outcomes

End benefit as a multiple of salary

40 year average rate of return

Source: Why SAA is Flawed, Schroders, April 2012

Why the difference?

  • SAA

  • Contribution rate

  • Investment approach

  • Time horizon

1935, Darren

1919, Ed

1958, Kiri

Dinner party conversation

  • Average outcome: 10.4x Salary

Source: Schroders

What is the problem?

  • Major assumptions made

  • Approach has too many constraints

  • Path dependency

Assumption 1: Objective = SAA

Source: Schroders, Global Financial Data, Balanced fund is 30% global equity, 30% Australian equity, 30% Australian bonds, 10% cash.

Assumption 1: Objectives = SAA

Or another way…

What's the best I can promise with 90% confidence over

Years required to have 90% confidence...

Source: Why SAA is Flawed, Schroders, April 2012

Assumption 2: All members are equal

  • Year drawdown starts

Source: Schroders, Global Financial Data

Assumption 3: Equity assumptions are logically consistent

% p.a

Credit Suisse Global Returns Yearbook, 2012, Real returns from 1 January 1900 to 31 December 2011.

Assumption 3: Equity assumptions are logically consistent

  • ASX Market cap as % of Nominal GDP

Source: Schroders

Approach is wrong – something has to give

Positive Real Returns

CPI + 4-5%

Over rolling 5 – 7 year time frames

Fixed SAA


Approach is wrong – significant flexibility required in Asset Allocation

Asset Allocation

Real Return % p.a

Source: Schroders, SMART, Global Financial Data

Significantly more flexibility required

Source: Schroders

Path dependency

% increase in end benefit

Impact of contributions and investment returns as members age

Source: Schroders. 40 Year contributions at base contribution rate of 9% of salary, indexed at 3%p.a. Annualised earning base rate 8%p.a.

Path dependency

Source: Schroders, Global Financial Data. Assumes contribution of 12% of salary and salary increases each year of CPI+2%.

Path dependency

Drawdowns haven't run out yet

Source: Schroders, Global Financial Data. Assumes initial drawdown of 7% of capital at end of year and indexed thereafter with inflation. Investment return based on stylised balanced fund with fixed strategic asset allocation of 30% global equity, 30% Australian equity, 30% Australian bonds and 10% cash.

Are returns predictable?

Australian Equity Market

US Equity Market

Source: Schroders, Datastream, Predicted return is calculated using inverted Shiller PE, Annual data

Which is the better portfolio?

Source: Schroders, SMART VaR, *High yield used as a proxy for other assets (e.g. unlisted)

Which is the better portfolio?

Source: Schroders, SMART VaR, *High yield used as a proxy for other assets (e.g. unlisted)

Are markets cheap?

  • Asset class yield vs 20 year range

Source: Datastream, indices over 20 years to 31 August 2012 or since inception to 31 August 2012 if < 20 years of history available. DataStream indices for US Equities, UK Equities, EMU Equities, Australian Equities, US 10y bonds, UK 10yr bonds, EU 10y bonds, Australian 10y bonds, Merrill Lynch US Corporate Master, Merrill Lynch US HY Master, JPM Global EM Bonds, JPM GBI EM Diversified Bonds, FTSE EPRA NAREIT Developed Index.

Do you have a choice?


  • Retail Funds

Governance is a large part of the issue

Fund Impact




Fund Strategy

Asset Class Strategy




Small cap,

Large Cap,

Active, Passive




XYZ Asset Management

Performance vs Benchmark 1,3 yrs


70 / 30

Source: Schroders, stylised

We have to change the governance emphasis



  • Implementation emphasis

  • Fixed SAA

  • Asset Managers

  • Short - term alpha

  • Benchmark orientated

  • Protect business risk

  • Measurement against benchmarks

  • But who takes responsibility?

  • Outcome emphasis

  • Objective based AA

  • Asset owner

  • Absolute performance

  • Absolute risk orientated

  • Minimise objective risk

  • Measurement against objectives

Source: Schroders, stylised

Part of the solution?

How can we reshape the approach?

  • It’s not a case of if or when, but how

  • Governance must change

  • Assumptions the industry makes are wrong

    • Objectives = SAA

    • Time horizon

    • Logical inconsistency of assumptions

  • Approach has too many constraints

  • We can’t hide in the averages – this is real people’s real money

Investment presentation

Disclaimer statement

This presentation is intended solely for the information of the person to whom it was provided by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). Investment in Schroder Funds may be made on an application form in the Product Disclosure Statement (PDS) which is available from the Schroders website The information contained in this Presentation is general information only and does not take into account your objectives, financial situation or needs. Before acting on the information contained in this Presentation you should obtain a copy of the PDS and consider the appropriateness of the information in regard to your objective, financial situation and needs before making any decision about whether to invest, or continue to hold.

Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this presentation or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this presentation or any other person. Returns shown are before tax and fees and all income is reinvested.

You should note that past performance is not a reliable indicator of future performance. Opinions constitute our judgement at the time of issue and are subject to change. The information and opinions and associated estimates and forecasts contained in this document have been obtained from or are based on sources believed by us to be reliable, but no responsibility can be accepted for error of fact or opinion. For security reasons telephone calls may be recorded.

Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article. They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 ("Schroders") or any member of the Schroders Group and are subject to change without notice.

Important Information: For further information on any charts depicting return series or analysis in this presentation see “Why SAA is Flawed”, “Asset Allocation: How flexible do we need to be?”, and “Understanding the journey to retirement”, available upon request from Schroder Investment Management Australia Ltd, April and May 2012.


Employment share by activity over time

Per cent

Source: Source is 2012/13 Budget Paper 1

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