Investors in the hugely popular Standard Life Investments Global Absolute Return Strategies fund can rest assured its rapidly growing portfolio is no obstacle to performance, according to Standard Life’s Guy Stern, who says its first negative quarter for two years is unrelated to its huge inflows of late.
The fund, which is commonly known as ‘GARS’, has grown to £26bn in total assets under management following a year that saw just under £5bn of inflows from investors, by far the highest in the IA Targeted Absolute Return sector.
Stern, who is an investment director on GARS, says its downside of 3 per cent between April and July 2015 meant an overall negative quarter for the first time in two years but asserts this was caused by a broadly negative market environment rather than the fund becoming too large.
Performance of fund, sector and index in 2015
Source: FE Analytics
“If you look at how we have done in the last quarter, you will see we have not done very well,” said Stern (pictured). “The second quarter was an environment quite frankly where a lot of asset classes in the market also had a negative return.”
“That’s not an excuse, just the fact there weren’t many places that you could have been invested where you would have generated positive returns.”
“During the quarter we had 33 different strategies at work in the portfolio. Unfortunately, only five of those strategies went up, while 13 went down. That is an indication we did not have any individual strategy that grossly dominated the portfolio.”
“The portfolio is a very large portfolio and we always felt like it was going to be large portfolio. You can see from the strategy – what has been at a play in the portfolio – they are all accessed from the macro basis.”
During the past year the GARS team made several moves into more volatile trade such as going long Japanese equities, as well as increasing exposure to European equities. Both regions have seen a jump in returns thanks to quantitative easing but there has also been increased volatility.
GARS has also seen its volatility increase over the past year compared to the previous two years before August 2014, according to FE Analytics. Over 12 months, its annualised volatility has been 5.31 per cent; in the previous 12-month period it was 3.16 per cent while it was 3.99 per cent in the period before this.
Ben Willis, head of research at Whitechurch Securities, says the fund’s greater volatility may well be due to its movement into Japan and Europe but that he doesn’t think the growing size, these particular strategies or the recent losses are a cause for investor concern.
“There is scope for them to take on risk and I agree with the areas they are moving into on a valuation basis. They are very cautious and they are not going wholesale [into these equities],” he explained.
“However, it will add to the volatility of the fund but they are very careful and have a lot of institutional money. I'd like to think they are not going to do anything stupid.”
Stern says that the fund’s most recent strategies, which also include a move into property, have plenty of scope to be run even if the portfolio has further inflows.
“We never have and never will enter into things that aren’t really, really scalable. However, the capacity of GARS is not infinite. Markets have a natural capacity limit and it is different from market to market and from instrument to instrument,” he said.
“We have every confidences that we are still getting plenty of liquidity, especially given our ability to implement and exit the strategies that we have done in the past quarter”
“We are restricting ourselves to those macro strategies so we are not having any trouble with our implementation and we see our capacity as considerably bigger than we are today.”
GARS was launched into the UK retail market in May 2008. It has returned 55.06 per cent since the launch, beating the FTSE All Share with significantly less volatility. This equates to annualised returns of more than 7 per cent over the period.
Performance of fund and index since 2008
Source: FE Analytics
Over the past year the fund is in positive territory having returned 3.5 per cent while the FTSE All Share is up 5.38 per cent and the IA Targeted Absolute Return sector average is 2.26 per cent.
Performance of fund, sector and index over 1yr
Source: FE Analytics
Stern says the while the fund’s second quarter losses were disappointing, they highlighted the diversity of its strategies and how this works in falling markets.
“One gratifying indicator is that although we generated a negative total return for the quarter, it’s because the majority of our strategies actually delivered a negative return,” Stern said.
The FE Research team backs GARS and has given it a place on the FE Select 100 of recommended funds.
“Risk management is in the DNA of the fund and every strategy is viewed in terms of its contribution to risk,” the team said.
“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.”
The fund has a clean ongoing charges figure [OCF] of 0.9 per cent.