All three funds have similar risk profiles, aiming to outperform cash plus 5 per cent over rolling three-year periods with less than half the volatility of equities. The Invesco and Aviva funds are headed up by former members of the £21bn GARS team, and use very similar processes to achieve their goals. They too are diversified portfolios of long-only, directional and market neutral positions, with little correlation to equities or bonds.
While investors should expect the funds to eke out moderate returns over the short term, Invesco Perpetual Global Targeted Returns and Aviva Multi Strategy Target Return Multi Strategy Target ReturnMulti- Strategy Target Return have raced away from traditional absolute return funds in recent months, returning more than 2 per cent so far in 2015 alone.
Standard Life GARS has far from had a bad three months, though returns of 3.9 per cent put it well behind its rivals. It has a higher volatility and max drawdown over the period, down slightly since the oil price took a dive back in early December.
Only four absolute return funds have beaten Invesco and Aviva over three months and all have much higher risk profiles. These include CF Odey Absolute Return and CF Eclectica Absolute Macro, which are much racier long/short portfolios.
Performance of funds and index over 3 months
Source: FE Analytics
The MSCI World index has made double-digit returns over the period, though with significantly more volatility than all three portfolios.
While investors in the funds will undoubtedly be pleased with the returns, there is an argument that such a run should be viewed with a degree of caution. Strong surges in performance suggest that managers are taking on a decent level of risk, which diversified absolute return strategies like GARS aren’t designed to do.
It should be noted, however, that the volatility of both the Invesco and Aviva funds hasn’t spiked over the three -month period and remains less than half of that of global equities.
David Millar, who heads up Invesco Perpetual GTR with Dave Jubb and Richard Batty, says the recent surge in performance is down to many of his ideas working quicker than he expected. He says investors shouldn’t expect the fund to deliver as much as it has over the past three months going forward as a result.
“We’ve not changed the amount of risk we’re taking – the weekly volatility since launch has averaged out at about one third of equities and that’s where we’ve been,” he said.
“The fund has 24 ideas and I expect each to deliver a positive return over two to three years. The way the portfolio is constructed, I’d expect two thirds to be working at any one time and one third to be not working. Sometimes more than two thirds work and sometimes less, and at the moment we’ve seen a number play out quicker than we expected.”
“We’re not going to complain when we do well, but it is of course something we’ve looked at.”
The overall theme of the portfolio since it was launched in September 2013 has been “cautious optimism”, Millar (pictured) says.
“The first half of this theme has been more apparent of late and that’s benefited the fund,” he said. Among the ideas that have played out very well over the past three months include GTR’s exposure to long duration US bonds, a short position in the Canadian dollar versus US dollar and a play on French inflation via UK versus French interest rate expectations.
Millar says the strong performance of some of his ideas may cause him and his team to bring in new ones that are currently in reserve, though he doesn’t expect to make wholesale changes.
“When you look at how much the Canadian dollar and euro have moved, and what impact the Swiss central bank’s policy change has made, you’ve got to reassess,” he said.
“The fund’s objective is Libor plus 5 per cent over rolling three-year periods. That’s what we’re looking to do for someone who is investing in the fund today, irrespective of what’s happened before it.”
Performance of funds and indices since Sept 2013
Source: FE Analytics
Invesco Perpetual GTR has made a very strong start since its launch in September 2013, delivering 15.12 per cent – just a touch less than the return of the MSCI World index. Standard Life GARS has returned 9.18 per cent over the same period, with around the same volatility. It’s got a higher max drawdown though: 2.6 per cent to 1.96 per cent.
Aviva Multi Strategy Target Return Multi Strategy Target ReturnMulti-Strategy Target Return was launched last July and has made a bright start overall, delivering 6.72 per cent to investors. This puts it just behind GTR but percentage points ahead of GARS. It has done this with just over a third lower of the annualised volatility of the MSCI World index.
Euan Munro, chief executive of Aviva Investors, is considered as the “architect” of GARS by many experts. He left for Aviva in July 2013, and has been central to designing the process behind the new fund, though is not a named manager.
Peter Fitzgerald, who has headed up the fund since launch with Dan James, gave many of the same reasons as Millar for performing so strong recently.
“What can happen over short periods is that you under and overachieve what you expect,” he said.
“We’ve had positions that have performed very strongly, such as a short position in the euro and a long position in Australian interest rate expectations. No one position has dominated the performance, though.”
He says the strong performance has caused some concern in the team, though explains this is his duty as a fund manager.
“As a professional investor and guardian of investors’ wealth, I am worried whether the fund is doing badly or if it’s doing well because that can always turn around,” he said.
Like Millar he says he is in the process of making changes in the portfolio as a result of the strong performance of certain positions – namely the weakness of the Canadian dollar.
“We had a 10 per cent short position in the Canadian dollar which has played out very quickly.”
Mike Deverell, investment manager at Equilibrium Asset Management, holds GTR in client portfolios. He says he is unconcerned by the recent strong performance because Millar and his team's process has remained consistent, and returns have remained uncorrelated to the performance of equities.
"It's not out of the ordinary. They have 20 ideas-plus in the portfolio, and a load elsewhere on the side lines ready to come in," he said.
"It's very diverse and returns aren't just coming from one place. We're wary of managers that do things that are out of character, and that hasn't happened here. It's still very much in its historical volatility range."