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Standard Life GARS no longer managers’ favourite absolute return fund

09 February 2016

In the next article of the series, FE Trustnet finds out which are the most popular absolute return funds with multi-managers.

By Alex Paget,

News Editor, FE Trustnet

The £3.7bn Old Mutual Global Equity Absolute Return fund is the most popular IA Targeted Absolute Return portfolio with fund of funds managers, according to the latest FE Trustnet study, overtaking Standard Life Investments Global Absolute Return Strategies (GARS) which has consistently held top spot among multi-managers.

Over the last few years in which we have conducted this study, Standard Life GARS has always appeared in the most number of multi-managers’ top 10 holdings. Last year, for example, 39 funds held it in their top 10.

However, it is fair to say that Bambos Hambi’s highly-popular Standard Life MyFolio and RBS Your Portfolio ranges somewhat skewed the figures given they accounted for 25 of those funds. In fact, the large majority of them have a structural weighting to the £26.8bn absolute return behemoth.

Therefore, if you were to remove Hambi’s funds from the list Old Mutual Global Equity Absolute Return would have been top the popularity list last year and that is even truer this time around, given the number of non-Standard Life funds which count GARS as a top 10 holding has fallen to just seven.

Most popular absolute return funds with managers

   

Source: FE Analytics

Though two fewer funds hold Old Mutual Global Equity Absolute Return, which is five crown-rated and co-managed by Ian Heslop, Amadeo Alentorn and Mike Servent, as a top 10 holding than in January 2015 – the table shows it still holds number one spot with multi-managers.

The funds that hold it in their top 10 include Marlborough Defensive, PFS Hawksmoor Vanbrugh and GAM Star Defensive.

Heslop, Alentorn and Servent run the portfolio by blending different investment approaches (be it value, growth, momentum, etc) to create a quasi-market neutral fund. They have five distinct strategies within the fund – ‘dynamic valuation’, ‘market dynamics’, ‘sustainable growth’, ‘analyst sentiment’ and ‘company management’ – though stocks can fit into more than one of those buckets.

According to data from FE Analytics, this process has been successful.

Our data shows that while Old Mutual Global Equity Absolute Return has returned significantly less than the MSCI AC World index since its launch in June 2009 (a 48.37 per cent gain compared to a 93.47 per cent gain), it has been considerably less volatile and protected investors far better against market falls.

Its maximum drawdown, for example, has been three times lower than that of global stocks over that time.


 

In years like 2011 when the European sovereign debt crisis intensified and the index fell 7 per cent, the fund was up 11.03 per cent and, as the graph below shows, the fund has continued in a broadly upward trajectory over the past 12 months while equities have fallen considerably.

Performance of fund versus index over 1yr

 

Source: FE Analytics

As a result, investors may not be surprised to see that Old Mutual Global Equity Absolute Return has had a correlation of -0.04 to the MSCI AC World index since launch.

What investors may be surprise to hear, though, is that Standard Life GARS has seemingly fallen out of favour with professional investors.

Certainly, concerns have been raised about the sheer size of the strategy (now more than £40bn thanks to various segregated mandates) and a recent FE Trustnet article highlighted it had been one of the worst performing portfolios in the IA Targeted Absolute Return sector during the FTSE 100’s 20 per cent price fall.

Nevertheless, when looking at the list of most popular absolute return funds with multi-managers it is clear that most prefer to look for more-specific strategies rather than all-encompassing global macro funds.

Indeed, the nine funds that count Aviva Inv Multi Strategy Target Income as a top 10 holding – which was launched by an ex-GARS team member – are all run by Aviva managers.

Also, it seems few fund of funds managers like to take big bets in designated absolute return funds as when we have run this study for other asset classes – such as UK equity income, UK growth and bonds – far more multi-managers held them in their top 10.

Therefore, many may hold absolute return funds further down their portfolio as a hedge against volatility and try and allow their themes and fund picking skills to drive performance.

Nevertheless, there are funds in the absolute return space which are more popular than others (especially those which focus on a specific area of the market) and an example is Majedie Tortoise, which features in 11 top 10s.

It has some notable backers in the form of the Schroder MM team, the F&C MM team and FE Alpha Manager Bill McQuaker’s Henderson Multi-Manager Absolute Return fund.

The £1bn fund is a global long/short equity portfolio managed by Matthew Smith and Tom Morris. It is now closed to new investors due to its popularity and the group’s wish to not let potential capacity issues to affect performance.


 

According to FE data, Majedie Tortoise has returned a hefty 125.62 per cent since its launch in August 2007 including positive returns in falling markets such as 2008 and 2011. As a point of comparison, the MSCI AC World index has made 24 per cent over that time.

Performance of fund versus index since launch

 

Source: FE Analytics

Though it has by no means blemished Smith and Morris’ long-term track record, 2015 turned out to be a poor year for the fund as it fell 7 per cent during the difficult market conditions. Nevertheless, as of its recent factsheet, Majedie Tortoise is net short the market. Its largest short book exposure is to consumer goods and financials.

Henderson UK Absolute Return (which is the next most popular fund with multi-managers with 10 top 10s) is one long/short equity that did perform well during last year’s China and oil price-induced sell-off.

According to FE Analytics, the five crown-rated fund – which is co-run by FE Alpha Managers Luke Newman and Ben Wallace and is £1.1bn in size – made a hefty 7.74 per cent while the FTSE All Share returned 0.98 per cent.

Performance of fund versus index in 2015

 

Source: FE Analytics

Thanks to the managers’ long and short exposure which suited the trend of diverging stock performance in the UK market, Henderson UK Absolute also posted a maximum drawdown of just 1.36 per cent last year.

The FTSE All Share’s maximum drawdown, on the other hand, was 12.12 per cent in 2015.

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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.