UK commercial property, European and Japanese equities and the US dollar are the trades that the team behind the Standard Life Investments Global Absolute Return Strategies fund are backing on a tactical view.
Standard Life Investments’ multi-asset investing team oversees the £25.4bn fund, which is commonly known as GARS, as well as the Enhanced Diversification Growth and the offshore Global Focused Strategies funds.
The team uses risk-based portfolio construction methods to target a positive return in all market conditions, with less volatility than global equity markets. This involves using traditional multi-asset techniques with hedging to build, in the case of GARS, around 30 ‘strategies’.
The FE Research team is a fan of the flagship fund and has given it a place on the FE Select 100. Our analysts said: “Risk management is in the DNA of the fund and every strategy is viewed in terms of its contribution to risk.”
“This portfolio offers investors a method of benefitting from the complexities of hedge fund-style absolute return strategies. However, it is more conventional at heart than a hedge fund and seeks to derive much of its returns through dynamic asset allocation.”
GARS has also a strong track record, having never posted a negative full calendar year since launch in 2008 as well as having lower annualised volatility and maximum drawdown than the FTSE All Share and the FTSE Actuaries UK Conventional Gilt Over 10 Years index.
Performance of fund vs sector and indices since launch
Source: FE Analytics
In the below article, market strategist Chris Faulkner-MacDonagh walks us through four areas the multi-asset investing team has a ‘heavy’ tactical stance on, suggesting the short-term outlook is strong.
UK commercial property
The team has a positive tactical view on UK commercial property, which has witnessed strengthening investor sentiment over recent years thanks to its relatively low volatility and steady income stream.
Faulkner-MacDonagh said: “Our UK real estate view reflects, in general, our positive view on the risk-adjusted returns available to invest in liquid, listed markets.”
“In that regard, we see the best opportunities in the south-east industrial parks and offices, along with retail and distribution centres around London. This reflects the ongoing recovery in the UK economy, particularly in the south, but still low inflation, which has kept a lid on borrowing costs for an extended period of time.”
Within the Enhanced Diversification Growth fund, this view is being expressed through a holding in the Standard Life Investments UK Property fund, which is managed by Nigel Chapman.
The £1.3bn fund tends to focus on prime commercial property or high-quality secondary properties. It currently has more than one-quarter of assets in cash, with 18.2 per cent in retail warehouses and 10.9 per cent in south-east offices.
Performance of fund vs sub-sector over 5yrs
Source: FE Analytics
Square Mile, which gives the fund a ‘recommended’ rating, said: “This strategy focuses on quality properties with good income and capital growth potential. This is a sensible and wellmanaged portfolio and could be suitable for investors seeking exposure to the UK's prime commercial property market.”
European equities
The multi-asset team also has a ‘heavy’ tactical stance on European equities, which have lagged their global peers after years of economic malaise and the sovereign debt crisis but – Greece aside – have seen a general pick-up recently.
“We prefer European equities, as the cyclical upturn is still in early days, leading to better earnings outlook which should help justify rich valuations,” Faulkner-MacDonagh said.
“European firms' profits are likely to continue to improve, as the impact of a weaker euro and stronger domestic demand lift top line sales growth. Importantly, operating margins are low but at this point in the cycle, they typically rise materially, which – combined with better top line – leads to a powerful swing in profitability.”
In the GARS fund, the team is playing this through a long position on European equities, with an income bias. As to be expected, the strategy had a negative month in June following the widespread concerns over a potential Greek default and an exit from the eurozone.
Performance of indices over 3 months
Source: FE Analytics
However, the fund is also running a European equity banks versus insurers strategy – which is a relatively new strategy and was a positive contributor to recent performance.
“Our analysis suggests that the bank sector will outperform the insurance sector in Europe over a three-year time horizon, partly due to the insurers being impacted more negatively than the banks by the low interest rate environment,” the team said in its latest update.
Japanese equities
Standard Life Investment’s multi-asset team also sees better value in Japanese equities than many other parts of the globe, owing to corporate governance reforms, an improving economy and ongoing easy monetary policy from the Bank of Japan.
“The Abe administration is encouraging Japanese firms to refocus efforts on improving profitability and returns to shareholders and we are starting to see results – as firms boost dividend payouts and aim to lift return on equity. These efforts support the pension industry's rotation of assets out of government bonds and into equities,” Faulkner-MacDonagh explained.
“The cyclical upturn in the Japanese economy should also help, as growth firms after the impact of last year's consumption tax increase. Finally, the Bank of Japan's [quantitative easy] policy has compressed yields, reducing the attractiveness of fixed income products and weakening the yen. These efforts are also flowing directly into corporate profits, making Japan one of the brightest spots for earnings. Stocks remain attractively valued, with P/E ratios still below long-term averages and levels in other developed markets.”
Along with Europe, Japan is one of the most popular equity markets for fund managers at the moment. The latest Bank of America Merrill Lynch Fund Manager Survey shows a net 37 per cent of global asset allocators are overweight Japan; in contrast, they are running net underweights to the UK, US and emerging markets.
The bank’s analysts added: “Japanese share prices have surged since the beginning of the year, but most investors still feel Japanese shares are undervalued. A net -11 per cent of global investors feel Japanese equities are overpriced. We think Japanese share prices are likely to continue climbing as the economy and earnings improve.”
US dollar
Over the past year, the dollar has strengthen significantly against other currencies as the country is widely expected be the first major developed economy to lift interest rates.
The graph below shows its performance against the pound, euro and yen, with a downward movement indicating dollar appreciation.
Performance of currencies over 1 year
Source: FE Analytics
Within the Standard Life Investments Global Focused Strategies fund, this view is being played through long dollar versus short euro and Korean won strategies.
Faulkner-MacDonagh said: “Regarding the US dollar we see continued upside, aided by higher US interest rates – although any further appreciation should be slower than what we have seen to date.”
“Thanks to the ongoing repair of the US labour market, wage pressures are gradually firming; the pace of pay hikes should accelerate into the latter half of 2015 as the job market tightens further. These better outcomes should give confidence to the US central bank that the economy is strong enough to weather the normalisation of monetary policy.”
