Markets were hit by a highly correlated sell-off at the end of May after Federal Reserve chairman Ben Bernanke announced the central bank was considering "tapering" its asset-purchasing programme. Equities, bonds and commodities all saw their prices drop. As FE Trustnet recently highlighted, this correction was particularly problematic for targeted absolute return funds because they try to use a number of themes to guarantee their investors returns over any period.
One such fund that struggled was Standard Life GARS, which is the largest UK-domiciled fund, with more than £17bn worth of assets under management. Since the correction, it has lost around 3 per cent.
However, Morgan says that although the drop in performance was due to the management team’s long equity and bond positions, investors should not dismiss the fund as a failure because it lost money over such a short period of time.
"I don’t think one month’s poor performance is something to be concerned about. To a certain extent, they do have a core of risk assets with derivatives around them, so it was likely to fall if risk assets fell over the short-term."
"But that is part of the Standard Life process and their view is such that they have some long equities and long bonds. I understand why it had a tough time, so it doesn’t concern me. What would concern me would be if their non-correlated assets started to act similarly."
"I was at a conference with Standard Life the other day and this exact topic was raised."
"They said they expected the fund’s performance would drop because of their equity and bond positions. However, they said they were more concerned that some of their more uncorrelated assets fell as well."
Morgan points out that the fund is now up in value over the past month.
He says that correlated falls in the main asset classes present the managers with a problem, however.
"In the short-term, most equity markets around the world are correlated (i.e. they move in tandem with each other), meaning diversification overseas or into smaller companies does little to dampen day-to-day volatility, even though it can have longer term benefits," he said.
"Presently, there seems to be even more correlation than ever. When equities fall, so do commodities, corporate bonds and even government bonds, which have typically shown little connection with equities in the past."
"Such is the risk-on/risk-off world created by investors' expectations of monetary stimulus from central banks. To achieve genuine diversification in this environment means looking beyond the usual asset classes such as bonds and equities."
"This is the approach employed by the managers of Standard Life GARS," he said.
Standard Life GARS' strategy has proven fruitful for investors, according to FE Analytics; the fund has made positive returns in every discrete calendar year since its launch in May 2008.
That cumulative performance has meant the fund has returned 39.88 per cent since then, beating its benchmark – the LIBOR GBP 6m index – which has returned 8.89 per cent.
Performance of fund vs index since May 2008
Source: FE Analytics
Morgan says that Standard Life GARS' management team has a vast array of complicated investment strategies, and the sheer amount of activity within the fund means it is one of the best-placed absolute return portfolios to achieve uncorrelated returns.
"As well as having exposure to certain equity and bond markets, the managers employ 'relative' strategies such as backing the Japanese yen to either fall or rise against the US dollar, or capturing any relative outperformance of US technology stocks over US smaller companies."
"On occasions they also buy derivatives that benefit from an increase in volatility regardless of overall market direction."
Morgan says that if investors are looking for a fund that can come as close as possible to making money in all conditions, Standard Life GARS should be at the top of their shopping list.
"Whilst I am sceptical of many funds in the Targeted Absolute Return sector, I believe GARS is among the most appealing."
"Rather than attempting to predict the future, the managers prepare for the unknown, concentrating on building a robust portfolio that can work in a wide variety of outcomes. It is also flexible and does not rely on a particular philosophy that may be in or out of favour depending on the investment climate."
"No fund is a panacea of course, and its value can fall as well as rise."
"GARS is a flagship fund that Standard Life care a lot about. They put a lot of time in calculating their different strategies and I am comfortable that the fund will continue to protect its investors," he added.
Standard Life GARS has an ongoing charges figure (OCF) of 1.59 per cent and requires a minimum investment of £500.
