The strategy has been available in the UK for the last three years, and currently has more than AU$1.8 billion under management across the UK, France and Italy.
According to Russell Investments chief executive Alan Schoenheimer, the new ‘outcome orientated’ approach is a response to changes in the economic environment since the global financial crisis (GFC).
“Pre-GFC we had multiple decades of a seminal fall in interest rates. What that led to was a period of high returns and low volatility,” he said.
With interest rates “effectively zero” in most of the world and at “record lows” in countries like Australia, interest rates are more likely to go up than down, said Mr Schoenheimer.
In addition to low returns from fixed interest investments, investors are also faced with high levels of volatility around the world, said Mr Schoenheimer.
“Last Thursday the Japanese market dropped seven per cent in six hours. We’re living in a world of extraordinary volatility,” he said.
Clients who traditionally rely on fixed income (such as defined benefit funds, insurance companies, charities and retirees) cannot cope with the volatility of equities, said Mr Schoenheimer – but fixed income is currently providing them with next to no income.
Mr Schoenheimer said the MAGS fund would provide investors with “equity-like” returns with low levels of volatility.
The MAGS fund aims to achieve returns that exceed inflation by four per cent, according to Russell.
Mr Schoenheimer listed five core capabilities that would allow Russell to deliver the promise of the MAGS fund: capital market insights, an ‘intelligent beta’ capability, strong manager research, portfolio construction and portfolio implementation.
In particular, the active/passive aspect of the MAGS fund will be ‘actively’ managed, said Mr Schoenheimer.
“If we believe that the future is going to be a tough time for active management, we’ll wind back the active and crank up the passive,” he said.
On the other hand, if Russell sees cross-sectional volatility on the rise it will increase the number of active managers in the fund, said Mr Schoenheimer.
The fund is mainly targeted at institutional investors at the moment, but financial planning dealer group Matrix Planning Solutions has already partnered with Russell to create five ‘Partnership Funds’ for its clients.
Each of the five funds puts slightly different constraints on the MAGS fund to deliver specific outcomes for Matrix clients.
