For many investors, Standard Life Investments Global Absolute Return Strategies – commonly referred to as GARS – is almost an automatic go-to product when looking for an absolute return vehicle, but this changed for some when Invesco Perpetual launched its rival offering.
GARS launched into the retail market in 2008 and has proved popular with the investment community.
Now the largest fund in the Investment Association universe at just under £25bn, it has not only significantly outperformed its average peer since launch, but has returned more than the FTSE All Share with about one-third of the index’s annualised volatility.
Performance of fund vs sector and index since launch
Source: FE Analytics
The FE Research team, which has the fund on its elite Select 100 list, said: “Overall, the team has succeeded in sticking to the absolute return performance target. The fund has had a couple of difficult periods, typically when all asset classes have fallen together, such as in 2008 or more recently in June 2013; any loses have been made back relatively quickly, however.”
In September 2012, David Millar, Dave Jubb and Richard Batty – who were three of the senior investment staff on GARS – moved to Invesco Perpetual, where they launched the rival Global Targeted Returns (GTR) fund one year later.
This fund has also proved popular, attracting assets of close to £1.2bn since launch. As the graph below shows, it has outperformed GARS for the bulk of the period since inception, although the fund has fallen quite hard over recent weeks.
Performance of funds vs sector since GTR's launch
Source: FE Analytics
Given that the Invesco fund is managed by former GARS men, some investors might have expected the two portfolios to behave in a very similar fashion – but our data suggests this has not been the case.
Standard Life GARS tends to have a higher correlation to equities – it has a 0.58 correlation with the FTSE All Share since launch. Its correlation with bonds, represented by the FTSE Actuaries UK Conventional Gilt Over 10 Years index, is much lower at just 0.22.
GTR, on the other hand, has a higher correlation to bonds. Since launch, the correlation with the 10-year-plus gilt index has been 0.68, compared with 0.41 for the All Share.
There have been five months since launch when the Invesco fund has made a loss; the gilts index was down in every one of these. Over the same period, GARS has also had five negative months; the All Share was down in four of these.
The effects of this can be seen over 2015 so far, as GARS has made almost double the return of GTR at a time when equities have outperformed gilts.
Ben Willis (pictured), head of research at Whitechurch Securities, said: “This goes to show you can hold them together. Don’t expect them to behave in the same manner – they can complement each other very well.”
Whitechurch holds both funds in its portfolio, alongside other absolute return products, and says investors need to keep in mind that these vehicles often display a wide range of attributes despite residing in the same sector.
“Obviously the GTR team came from GARS and I suppose a lot of people thought it would be the same with just a different name attached to it. But that hasn’t been the case,” Willis said.
“To be honest, they shouldn’t be replicating each other because there are two sets of teams making diverse calls on wide-ranging areas of the market, so it would be unusual for them to have completely aligned thoughts and for the strategies to run in the same direction. They have such a broad universe to work in – both running 20-plus strategies across the whole investment universe.”
One characteristic that Willis highlights is that GARS tends to give investors a smoother ride, possibly thanks to the needs of the pension fund and other institutions that are its investor base, while GTR has made stronger gains as it has the freedom to invest more aggressively.
FE Analytics data shows that, since the launch of the Invesco fund, GARS’ annualised volatility stands at 2.94 per cent while it has posted a maximum drawdown of just 0.92 per cent. In contrast, GTR posted annualised volatility of 4.91 per cent with a 2.32 per cent maximum drawdown.
Richard Troue, head of investment analysis at Hargreaves Lansdown, says these differing profiles mean holding the funds together could be advantageous.
“As for GARS and GTR, I think there could be merit in pairing them up. On the surface they look similar, but each one has different tools at its disposal and of course they are run by different teams who will have different views,” he explained.
“It also spreads risk and while they could end up performing similarly at times, the diversification and different exposures offered by holding both makes it worthwhile.”
Given that one fund is more correlated with equities and the other with bonds, mixing the two to varying degrees leads to a number of outcomes. A 25/75 split between GARS and GTR gives respective correlations of 0.63 and 47 to gilts and the All Share; reversing these so GARS is the dominant fund results in a 0.28 correlation to gilts and a 0.56 correlation to UK equities.
The graph below shows the difference in returns from portfolios with different splits between the funds and there are only 40 basis points between them, although it must be remembered that past performance is no guide to future returns.
Performance of portfolios since GTR's launch
Source: FE Analytics
All five of the portfolios have outperformed the All Share since the launch of the Invesco fund and held up well during periods when equities were selling off, such as in the fourth quarter of last year. They have all underperformed bonds, which rallied strongly during 2014.
Comparing the portfolios with the individual funds is also interesting. The 50/50 split portfolio has an annualised volatility of 3.25 per cent – below that of both constituent funds – while its maximum drawdown has been only 0.50 per cent.
Both Willis and Troue say there are merits in holding multiple absolute return funds rather than automatically using them on their own, highlighting that the members of the IA Targeted Absolute Return sector often take widely different approaches to running money.
Troue concedes that investors often see absolute return as a “one-stop shop”.
“It's one of the drawbacks of trying to group funds into sectors, and arguably of all the sectors, absolute return is the one with the most disparity between different funds.”
“I think investors need to look at absolute return funds closely to check where they're investing, the strategy or philosophy the managers are using, and how they could fit together with other absolute return funds and in the context of the invested portfolio.”
