Real return funds tend to stack up best against traditional equity funds when stock markets drift sideways or drop, and those conditions haven’t prevailed for an extended period of time since the Dreyfus fund was launched in May 2010. Over the five years ending in June, the fund’s Class I shares had an average annual return of 3.36%, while the Vanguard Total World Stock Index Fund (VTWSX) returned 9.72% and an index of one-month U.S. Treasury bills returned 0.37%.
Yet the fund has enjoyed exceptional resiliency in bear markets. It saw a maximum loss of 7% in 2011 while the MSCI World Index saw a drop of 19%. Over the last five years, the Dreyfus fund’s correlation to the S&P 500 during bearish periods was a miniscule .01, so it barely budged when the market fell. By comparison, the average Morningstar multi-alternative fund had a much higher correlation of 0.59 during bear markets.
The older U.K. version of the Dreyfus fund, which uses the same strategy, was launched in 2004, and it produced positive annual net returns from 2007 through 2010. While it did suffer a loss of 10.6% at its worst point in the financial meltdown of 2008, it recovered swiftly to generate a positive return of 6.1% for the whole year.
Free-Ranging Strategy
The 51-year-old Hutchins has a long history in multi-asset management. After graduating with a degree in fine arts from University College London she joined London-based Newton Investment Management in 1991 as a research analyst. She moved to Capital International in 2005 as an investment specialist for global equity, income and absolute return strategies and rejoined Newton in 2010 to manage the Dreyfus Global Real Return Fund.
The fund’s multi-asset investment strategy includes alternative investments, derivatives and traditional stocks and bonds. The managers use publicly traded securities rather than complex or exotic investments to participate in commodities, precious metals, currencies and infrastructure. The firm doesn’t borrow against individual securities in the portfolio or short positions in individual securities.
To help control volatility and provide downside protection, the fund uses derivative strategies, shorting futures contracts on the S&P 500 and other indexes, for instance. While such approaches may limit the fund’s upside returns in bull markets, they can be an effective safety net for the fund when the market is falling.
The team also screens companies for their environmental, social and governance (ESG) practices, an increasingly common screen among European investment managers. “We think ESG issues are all issues of risk when we’re considering buying securities,” Hutchins says.
The portfolio is divided into “return seeking” assets for growth and “risk-stabilizing” assets to control portfolio volatility and provide downside protection. The former bucket consists mainly of equities, but also includes some corporate and emerging market debt. The return part of the portfolio comprises 59.5% of the fund’s assets, but when short sales on index futures and other risk control measures are taken into account, the return-seeking portfolio falls to 46.1%; after fixed-income assets are removed, the net equity part of the portfolio is 36%.
