Inside Schroders' inflation-beating 'sleep at night' portfolio

Ask a professional investor about what matters when it comes to investing, and more often than not the response will be ‘focus on the fundamentals’ and ignore the headlines. So simple in theory, but far harder to execute in practice when the line between the fundamentals of individual companies and the forces shaping markets becomes less clear.

Are central bankers purely data-driven, or are there other forces at play? The U.S. Government is now the single largest individual shareholder in Intel - I bet few investors were expecting to see that name pop up on the register.

​No doubt fundamentals matter over time, but the extreme moves that we see in financial markets can make for a hair-raising ride and can often shake weak hands from their positions.

​Sebastian Mullins, Head of Multi-asset and Fixed Income at Schroders, has been tasked with guiding the firm's multi-asset fund, The Schroder Real Return Active ETF (ASX: GROW), on a trajectory that not only aims to deliver returns that are 4-5% ahead of inflation over rolling 3-year periods but also smooths out volatility that can cause knee-jerk reactions at the worst possible time.

“Unfortunately, you have to pay much more attention to politics now. In the past, you could often ignore it because the underlying free market drove outcomes. Today, the economy is heavily influenced by policy interventions,” says Mullins.

​Over the past three years, Mullins and his team have achieved investment returns of 9.3% p.a. net of fees, with one-third the volatility of the equity market. His philosophy centres on a seemingly simple framework that helps guide where and when he allocates capital. And while a diversified portfolio has historically relied on the negative correlation between equities and bonds, Mullins says that relationship has broken down, which means he draws on a wider range of tools to achieve the desired results.

​In this episode of The Rules of Investing, Mullins offers real-world examples that highlight why paying attention to big-picture headlines matters and explains his value, cycle, liquidity (VCL) framework, which informs his asset allocation decisions.

The episode also digs into why he is constructive on global equity markets, how he is playing it and presents a breakdown of the different tools that he uses to reduce risk in his portfolio.

Explaining the value, cycle, liquidity (VCL) framework

When staring down a blank sheet of paper in today’s news-driven environment, Mullins avoids getting caught in daily market noise by relying on a three-pronged framework: Value, Cycle, and Liquidity (VCL).

• Value: Acts as an overarching guide to identify where long-term risks and opportunities lie, though it is notoriously poor as a short-term timing tool.
• Cycle: Evaluates macroeconomic positioning across countries to determine both how much risk to take and where to take it (e.g., leaning into quality tech during slowdowns vs. small caps during recoveries).
• Liquidity: Tracks central bank policy, fiscal stimulus, market sentiment, and underlying leverage to spot market vulnerabilities before they snap.

“Recently, we saw the Korean market experience extreme volatility for about a month. Around 3.5% of the adult population in South Korea received margin calls that month due to heavy leverage in three-times levered ETFs. That was a clear tell on liquidity: everyone was stretched and vulnerable to a pullback.”

Higher inflation and higher rates - do you need to take more risk?

With inflation settling into a structurally higher regime, investors don't necessarily need to stretch further out on the risk spectrum to secure real returns. Instead of loading up on higher-beta equities to compensate for less defensive traditional bonds, Mullins advocates for two strategies:

• Active Asset Allocation: Shifting capital dynamically out of risk assets before major pullbacks occur and re-entering once positioning clears.
• Unconventional Diversifiers: Looking beyond traditional long-duration bonds toward assets like gold, real commodities, short-duration credit, and inflation-linked securities.

"You don't have to stretch for risk... There are ways to protect your funds and get real returns without increasing your overall risk budget."

Constructive but not outright bullish on equities

Despite geopolitical headlines, the broader economic backdrop in major markets remains resilient. Mullins outlines a constructive, two-phased playbook for global equities:

• Short Term (1–3 Months): A tactical rebound in mega-cap technology and global semiconductor leaders following a severe position unwind mid-year.
• Medium Term (6–12 Months): A broadening out into the equal-weighted S&P 500, offering attractive exposure to cyclical recovery across US industrials, financials, and materials backed by strong domestic consumption and manufacturing CapEx.
• Local Market Caution: The ASX 200 remains relatively subdued and valuation-stretched, with local credit offering a more compelling yield profile relative to risk.

"The underlying US economy remains remarkably resilient. US GDP growth, personal consumption, and manufacturing CapEx continue to surprise to the upside. Earnings expectations for the broader 494 companies in the S&P 500 are improving significantly, yet many institutional investors remain under-allocated to them."

The defensive toolkit

Because long-duration government bonds no longer reliably rally during every equity sell-off, Mullins believes modern portfolio construction requires a broader toolkit:

• Short-Duration & Foreign Sovereign Bonds: Avoiding long-end US Treasuries heavily impacted by deficit spending, favouring short-end yields and select European/UK debt where rate-hike risks are fully priced.
• Gold & Precious Metals: Serves as a primary hedge against monetary debasement and eroding trust in fiscal policy.
• Broad Commodities: Acts as a specialised shield against supply-shock inflation (e.g., energy, agricultural inputs) as well as secular demand drivers like defence and AI infrastructure.
• Active Currency Hedging: Utilising foreign currency exposure (specifically US Dollars) as a structural shock absorber during global risk-off events.

Rapidfire: 12-month outlook

Rather than our regular three questions to finish the podcast, I asked Mullins to give his 12-month view on a range of assets.

• AUD/USD: Slightly higher. Fair value sits around US$0.71, near its long-term average.
• US 10-Year Bond Yield: Higher. Fiscal deficit spending will keep upward pressure on long-end yields.
• NASDAQ: Higher. Supported by strong corporate earnings and AI CapEx.
• SpaceX: No idea - that's why he doesn't pick stocks!
• RBA Cash Rate: Flat. The RBA is likely done hiking, though rate cuts will depend on the labour market holding up.
• ASX 200: Higher, but lagging the growth rates of global equity indices.