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GARS breaches £40bn: Should investors be worried by its ever growing size?

01 September 2015

There are now more than £40bn of assets under the Standard Life Investments Global Absolute Return Strategies line-up, leading to questions over whether the franchise is growing too large.

By Gary Jackson,

Editor, FE Trustnet

News that assets under the Standard Life Investments Global Absolute Return Strategies banner have passed the £40bn mark have prompted fresh headlines about the potential for size to start impacting performance, so should investors be looking elsewhere for absolute return exposure?

The strategy, which is commonly known as ‘GARS’ and comprises a unit trust with assets of around £26bn and a number of segregated mandates, is an immensely popular absolute return option among investors and is almost seen as the default choice in the sector.

GARS targets a positive return in all market conditions over the medium to long term, aiming for a cash plus 5 per cent return over rolling three-year periods. This is expected to come with less volatility than equities.

However, the fund has experienced a poor run of performance over recent months which – when combined with its ever-growing assets under management – could leave some investors wondering there are more nimble alternatives in the IA Targeted Absolute Return sector.

FE Analytics shows that GARS has lost 2.84 per cent over the last six months, while its average peer has made a small positive return of 0.36 per cent. Over 2015 so far it has made 1.03 per cent while the sector average is a 1.66 per cent return.

Performance of fund vs sector and indices over 3 months

 

Source: FE Analytics

Also, a recent FE Trustnet study highlighted it has been one of the worst performing funds in the sector since April over which time the FTSE 100 has fallen 15 per cent, which will have no doubt frustrated many of its unitholders who were using GARS to protect their portfolio against general market weakness.

It must be kept in mind that this is a short time frame upon which to judge the performance of a fund with a three-year target and that the absolute return sector is a mixed bag of funds with widely different investment aims.

Ben Willis, head of research at Whitechurch, said: “We can see how it would be easy to get concerned as the fund has had a poor month and they’d be the first to recognise that.”

“We’ve had the big correction and they’ve gone down more than their peers and probably had one of the worst months they can remember. That makes people a bit more focused on the downside but we think you have to wait and see because it’s been such a good core fund.” 

Willis has held the fund for some time and is not overly concerned by its growing size, pointing out that the bulk of its investments are made through derivatives. 

“You just have to keep an eye on it. The team were still managing to meet their objectives when they were a bit smaller and I think there’s every chance they can do it at £40bn. We’re not overly concerned at the moment,” he said.


 

“The fund size could become a problem at some point. If we didn’t believe the liquidity was there, then we’d definitely be more concerned. If there were large swathes of the fund in direct assets – buying shares in companies rather than using derivatives – then there’d be more of a concern. But right now it’s just one to keep an eye on.”

Performance of fund vs sector and indices since launch

 

Source: FE Analytics

As the graph above shows, the fund has established a strong track record since launch and performance over recent years has remained relatively strong, despite the occasional warning that it may be growing too large.

Tilney Bestinvest’s Jason Hollands also believes that GARS’ size is worth monitoring but still not something to prompt investors to cut their exposure to the fund if they are otherwise happy with its approach and performance.

“It's important to understand this this isn't like a normal single strategy fund. It is an umbrella for a very diversified suite of over 30 individual strategies. So at this size, you essentially have to ask yourself is circa £1bn on average in an individual strategy manageable?” he said. 

“Invariably the answer is that this shouldn't be an issue as most of these trades are in asset classes that have reasonable liquidity – so for now we are sticking with GARS but monitoring it closely. Performance remains very consistent and volatility is low, which suggests size isn’t materially impacting returns.” 

That’s not to say the fund can continue to grow without limit and without consequence to its approach. Hollands says that the fund’s size is something Tilney Bestinvest mentions at every meeting with its managers, to see there are any strategies that it can no longer access. 

Square Mile Investment Consulting & Research, the fund research house, makes a similar point on its review of the fund. GARS holds a Square Mile rating of ‘A’ and is one of seven absolute return funds to be rated by the group; only Newton Real Return and Jupiter Strategic Reserve have higher ratings at ‘AA’.


 

“Unsurprisingly, the fund's structure and performance success has attracted a weight of assets to its door,” Square Mile said. “The managers have always focused on liquid strategies which are highly scalable, but inevitably as the fund's assets swell, some of the investment strategies once open to the fund may no longer become so accessible.”

While many commentators are keen to play down any potential concerns over the size of GARS, most also point out that holding multiple absolute return funds can be a prudent strategy than just owning one to ensure the portfolio will not too relay on a single style or philosophy.

Earlier this year, we looked at the argument for holding GARS with the Invesco Perpetual Global Targeted Returns fund, which was set up by former Standard Life Investments managers who were instrumental in the success of the flagship product.

Adrian Lowcock, head of investing at AXA Wealth, highlights this one as an option for investors wanting to diversify their absolute return exposure from GARS and notes its “solid” returns so far, with limited volatility and correlation to global bond and equity markets.

Newton Real Return, which prioritises capital preservation while seeking cash plus 4 per cent returns per annum over the long term and has a unconstrained and flexible approach that makes use of Newton’s thematic research is another possible option, according to Lowcock.

His final recommendation is Schroder Absolute UK Dynamic, which is a long/short equity fund that invests in the UK market with a bias towards small and medium-sized firms.

As the below graph (which goes back to September 2013, when the Invesco fund launched) shows, the funds are quite different strategies and have witnessed varying outcomes over recent years.

 Performance of funds since Sep 2013

 

Source: FE Analytics


 

Invesco Perpetual Global Targeted Returns is arguably the product that is closest in similarity to GARS, being based around a number of ‘ideas’ that are accessed through derivatives. However, it tends to be more correlated to bonds while GARS tends to have a higher correlation to equities.

Newton Real Return, on the other hand, is a less complicated core multi-asset offering than the two previous funds as it invests across bond, equity and commodity markets and only uses derivatives to hedge overall portfolio risk.

FE Alpha Manager Iain Stewart has maintained a very defensively positioned portfolios over recent years, reflecting Newton’s view that structural weaknesses in the major economies and central banks’ quantitative easing programmes are reasons for concern.

Meanwhile, Schroder Absolute UK Dynamic has the potential for significantly higher returns that the other three funds owing to its focus on equities. However, with this comes higher volatility and the risk of larger drawdowns, which some absolute return investors may be keen to avoid.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.