A nimble approach to investment decisions and a good grasp of risk management during recent times means that the FE Research team now prefer JPM Global Macro Opportunities over the behemoth Standard Life Investments Global Absolute Return Strategies fund, according to research manager Charles Younes.
The FE Research team recently removed the £26.6bn Standard Life Investments Global Absolute Return Strategies fund – which is often known as GARS – from the FE Invest Approved List, citing concerns over its performance and team structure.
The fund, which is the biggest in the IA Targeted Absolute Return sector and sometimes seen almost as the default choice in this area, had been on the team’s list of favourite funds since inception in 2012 but has now been given a sell rating.
GARS has a strong long-term track record in meeting its aim of returning cash plus 5 per cent but performance has been lacklustre over more recent timeframes. Indeed, over the past 12 months the fund has made a 3.03 per cent loss and is now failing to meet its three-year target.
Rolling 3yr returns of fund vs sector and index
Source: FE Analytics
Younes (pictured) said: “The concern here is that the GARS objective is to return cash performance, even if the management team’s views are wrong. They set up offsetting strategies so that the fund could at least return positive performance even if the positioning is miscalculated. When the strategies are in place and effective, the fund should at least be returning cash plus 3 per cent.
“We see this year as yet another example of their risk management process failing to work as effectively as it used to and the team have failed to fix the weaknesses that have been apparent since June 2013.”
FE Research also has concerns about the management team of GARS. Although the team has lost a number of members in recent years, Younes is more concerned over the number of new members that have been brought in.
“The team has grown up over time as the strategy has expanded, with 36 new people joining the team over the past three years,” Younes said.
“Following these new arrivals, we query whether the organisational structure is still efficient? Is communication still effective between the different teams? With Guy Stern, head of multi asset and macro investing, does he have enough time to facilitate the communication and exchange of information between teams? Is the management/investment process still flexible?”
Responding to the comments, Standard Life Investments said: “In the past year, GARS behaved as we would expect in terms of risk, providing investors with low levels of volatility and drawdown relative to risk assets. Periods like this have occurred before in the history of GARS and by sticking to our process and philosophy, while adapting to changing underlying drivers, we are confident the fund will resume its upward path.”
Following the decision to remove GARS from the FE Invest Approved List, a new absolute return fund was brought in: JPM Global Macro Opportunities, which is managed by James Elliot, Shrenick Shah and Talib Sheikh.
Younes says that both funds are “pretty similar” in that they take a global macro approach and have a medium-term view over three-year periods. One key difference is that JPM Global Macro Opportunities targets a return of cash plus 7 per cent, which means it will be a more volatile offering than GARS.
JPM Global Macro Opportunities only launched a little over three years ago but has beaten its target in the time since – albeit by a narrower margin than in recent past following a 5.2 per cent fall since mid-September.
Performance of fund vs sector and index since launch
Source: FE Analytics
“What I like about this fund compared to GARS is that the process is much more flexible. They have three dedicated portfolio managers working on the strategy on a daily basis,” Younes said.
“Taking the example of Brexit, the JPM team didn't want to take any risk around Brexit the week before the referendum so everything related to that - UK equities and bonds - was put to zero. The week after, when the market had over-reacted to the result, they put that beta back into the portfolio.”
“With GARS, there can be a delay as they have to wait for the investment committee to come back then agree that it's the right time to put more risk in or take it out. That's what I prefer JPM to GARS, as I think it has the potential to be more dynamic and more flexible.”
Younes adds that the team behind JPM Global Macro Opportunities appears to have done a better job than GARS at risk management in the recent past, especially at times when corrections between asset classes has picked up.
“The risk management is advanced,” he said. “Contribution to risk and performance is monitored on the daily basis, following a multi-dimensional risk analysis framework: by traditional/sophisticated strategies, by asset class, by macro theme and by region.”
The fund currently has eight macro themes being implemented in its portfolio, which are summarised in the table below. Low inflation is the largest on a risk breakdown basis at 18.7 per cent, followed by China in transition (17.3 per cent) and Europe gradual growth recovery (16.6 per cent).
Source: JP Morgan Asset Management
Exposure to these themes is taken through traditional assets, such as market returns/beta or focused basket of equities and bonds, or sophisticated assets, like relative value and exposure to idiosyncratic risk premia. The team will also use multiple assets to implement a single theme.
JPM Global Macro Opportunities has an ongoing charges figure of 0.78 per cent.