Too many financial advisers place the likes of Standard Life GARS or Aviva Investments Multi Strategy Target Return in investors’ portfolios without fully understanding their investment processes, according to Mark Dampier (pictured). 
The research director at Hargreaves Lansdown says that the firm sold out of GARS years ago following the departure of various members of the team, including current Aviva CEO Euan Munro, who left in 2013.
The behemoth £26.2bn fund is the best-known fund within the IA Targeted Absolute Return sector and has proven to be popular since its launch in May 2008, attracting the second-largest amount of money in its sector over the last year.
Generally, according to research from the Investment Association, absolute return funds saw the biggest net retail sales compared to any other IA sector in February, having attracted a total of £243m in that one month alone.
This boost in interest for the sector could be the result of increased nervousness in markets following the volatility experienced in 2015 and at the start of this year, which was caused by fears surrounding China’s slowdown and the collapse in commodity prices.
Performance of indices vs sector since 2015
Source: FE Analytics
Dampier, however, says that there are plenty of clearer cut options for cautious investors that don’t involve delving under the cover of complex long/short funds for safety.
“The problem we have with these kinds of funds generally is the ability to analyse them really well,” he said.
“I kind of get [GARS] because I spent a lot of time with Standard Life on the product originally and in some ways I’m trusting someone like Keith Skeoch particularly in the way it works, and they’ve put a lot of money into it as well.”
“They’ve got a lot of money and they’ve put a lot of money in it, but from our point of view, I’d have to question that if it went wrong, would we understand why it has gone wrong? That’s what bothers me.”
Standard Life GARS, as with many other funds that use derivatives to hedge against market falls, is renowned for adopting several complex investment processes simultaneously.
While the funds are used for cushioning the blow of any unexpected market plummets within an investor’s portfolio, Dampier warns that it would be difficult for most investors and advisers to tell when the funds themselves are experiencing genuine long-term trouble.
For instance, GARS has underperformed the FTSE All Share and Barclays Sterling Gilts index over the last six months, which may have surprised investors given many believe the fund is supposed to offer protection when markets are volatile
Performance of fund vs indices over 6months
Source: FE Analytics
This data could be interpreted in various different ways – while some investors believe this time frame is far too short to take into account (especially as GARS aims to generate over generate positive returns over rolling three year periods), others could raise eyebrows at the fact it has posted a negative return.
“I can explain the fund and the strategies, I don’t actually think that’s very difficult, but can I really nail it and explain the decision behind being short the yen and long the dollar and how all of these strategies link together? Just suppose they suddenly correlate or something, I’d just struggle,” Dampier continued.
“The problem I have with absolute return funds is that they are perceived to be low-risk funds which is what they’re intending to do. I’m not trying to criticise GARS, it’s really more about the point of saying, if they’re low-risk funds but end up not being low-risk, from an adviser/broker point of view you’ve got a real problem on your hands.”
“Then you have to explain why, what you’re research is and how good it is. We can analyse most of our funds really well, we’ve got great quant strategies here, but for these types of funds we haven’t found a system that really enables us to do that as well as we’d like.”
In contrast, he says that the IA UK Equity Income sector presents more straightforward options for low-risk portfolios, as quant processes will be able decipher returns made directly from the fund manager’s stock-picking skills.
Dampier also believes that the sector consists of numerous attractive offerings and lists Neil Woodford’s Equity Income fund and Leigh Harrison’s Threadneedle UK Equity Alpha Income as two stand-out funds.
“I just think with a low-risk fund you have to be even more cautious about what you’re saying to clients and I guess I’m a bit of a traditionalist in saying that’s why I like the equity income sector so much,” he explained.
“For 32 years it’s been a sector which is basically the essence of investing. It’s trying to buy out-of-focus stocks on high yields and sell them when they’ve re-rated.”
“It’s something that’s pretty simple to explain to someone, but I would suggest to you it would be quite hard to have a client in front of you and explain exactly what GARS does – explaining even five of the 30-odd strategies they’re using to clients would be a challenge.”
“I think what you’re doing when buying funds such as Aviva, Standard Life and Invesco Perpetual [Global Targeted Returns] is believing they won’t let you down because the teams have put so much work into them which I kind of respect, but I’ve been let down by companies before.”
The research director says that it is predominantly ill-informed financial advisers that make the mistake of buying into a fund without fully understanding it, then convincing their clients to hold them in their portfolios.
Another factor that Dampier says investors need to watch is the size of these funds as their popularity continues to snowball - GARS is currently £26.5bn, Aviva’s total return offering is £1.4bn and Invesco Perpetual’s is £5.1bn.
In an article published last month, BRI Wealth Management’s Dan Boardman-Weston told FE Trustnet that the firm sold out of GARS last year because of its size both in terms of AUM and strategy. He explained that he would rather buy into smaller, more nimble funds despite the fact he is confident that GARS invests in liquid assets.
“Hats off to the guys at Standard Life and GARS because generally speaking I think they’ve done a cracking job, but there’s a lot of money in it now and the same goes for the other better-known absolute return strategies,” Dampier said.
“They’re solution funds and I understand the whole basis of that. I would imagine that most advisers that hold them haven’t got a clue about them really in reality and I don’t suppose they’ve even spent the time that I have up in Edinburgh talking to them beforehand.”
“The struggle for us comes from being able to analyse them as fully as we’d like to. You could argue that maybe we’re being too fussy, but I could argue that the rest of the market place isn’t being fussy enough.”
