Analysts are mixed on whether investors should have sold out of Standard Life’s Global Absolute Return Strategies (GARS) after its recent period of underperformance.
The behemoth GARS offering has proven to be one of the industry’s biggest success stories in recent years but assets under management (AUM) have slipped back in the last 18 months, down from a reported peak of more than £50bn seen last year.
Last year, the absolute return strategy product experienced £4.3bn in outflows while in the first quarter of this year £2.8bn was pulled from the offering.
In its unit trust, the strategy has fallen from more than £26bn in AUM to its current size of £24.5bn.
Performance has underwhelmed during this period, with the fund down 2.91 per cent over two years, as the below chart shows.
Performance of fund over vs sector and benchmark over 2yrs
Source: FE Analytics
However, since launch in 2005, the fund has returned 53.97 per cent, significantly above the average absolute return strategy (28.13 per cent) and its six-month Libor benchmark (11.65 per cent).
Following the recent period of underperformance, FE Trustnet asked analysts whether the outflows seen at the start of the year were warranted.
IBOSS co-founder and manager Chris Metcalfe said there are a number of reasons why investors could have decided to sell out of the strategies.
While the manager has never bought into the strategy, he said the team do continuous work on it as part of their review of the sector for their multi-asset portfolio range.
The biggest area of concern for investors in the strategy is the defection of a number of managers from the strategy to new firms.
Dave Jubb, David Millar and Richard Batty left Standard Life to set up the Invesco Perpetual Global Targeted Returns fund in 2013, and Metcalfe said this made it difficult for investors to know which strategy to invest in.
“We were asked whether we would be holding the [Invesco] fund at launch and we said [that] we wouldn’t,” he said.
“The point we had then was [that] we couldn’t tell from the outside whether the three guys that left and set up the Invesco Perpetual version were the best players of the team or [whether] the best players were still at Standard Life. So we said [that] we can’t hold either fund because we couldn’t tell.
“If you speak to Invesco Perpetual they will say [their managers] were the movers and shakers and if you ask GARS they would say it doesn’t matter because they are a team of 30 and they’ve got 27 left.”
Performance of funds since Invesco Perpetual fund launch in September 2013
Source: FE Analytics
Since the three managers moved to Invesco Perpetual, their fund has outperformed the GARS strategy by 10.4 percentage points, and Metcalfe said if he were to invest in one of the strategies it would be the Invesco Perpetual fund.
“We’ve watched the funds over time since then and now, when you look at it, if you had to say who was doing well it looks like Invesco Perpetual, judging by the numbers, have done much better than GARS,” the manager noted.
“So we would suggest that if you were holding GARS and you were concerned about people leaving then actually the data has done nothing to make you feel any better.”
As well as this, while 2016 was a year of underperformance – GARS lost 2.68 per cent over the year – it has been a poor performer since April 2015 – it lost 4.16 per cent between April 2015 and the end of 2016.
“It had a good start to the year but after April 2015 it has been pretty poor with some periods very poor and some just poor. That’s quite a sustained period,” Metcalfe said.
“Regarding the money coming out – percentage wise £2bn out of £27bn isn’t actually that great. I’m surprised it has been as small as it has.”
However, not all agreed. Rob Burdett, co-head of the multimanager team at BMO Global Asset Management, said: “In Q1 of this year it had £2.1bn come out of it. I think that is an aggressive, wrong response.”
“All funds go through a bad patch but I think the fact is that maybe these funds were mis-bought,” he added.
“I don’t think anybody can say they are mis-sold. Standard Life have gone out of their way to run training days for advisers to get people on board, but I still think people have gone in thinking they’ve found a silver bullet that doesn’t exist.”
He said investors expect the fund to never lose money and are as such “mistreating it when it goes down”.
Burdett noted that the defection of some managers hasn’t helped on this front, as it has made for a “convenient reason to sell”
Meanwhile, Laith Khalaf, senior analyst at Hargreaves Lansdown said investors selling the fund due to the recent underperformance are thinking too short-term. 
“Performance of any fund is a long-term game and is really something that you need to judge over a much longer period than that – really five-to-10 years,” he said.
“I think people can be too short term in terms of accepting periods of disappointing performance and that is probably truer in the absolute return space.
“There are probably expectations of underperformance baked into more traditional assets like UK equities whereas in the absolute return space you have higher expectations that you are going to get year-in year-out returns.
“But 18 months of disappointing performance is not enough to justify a withdrawal from a fund if you had conviction in it to start with,” Khalaf (pictured) added.
“If you’re investing in a fund you do need to have the conviction in it to start with to stick with them if they do have a relatively short period of underperformance.
“Sustained underperformance is a much bigger deal and you do have to react to that but if you are looking at the performance over a 12-18 month period and are going to chop and change your portfolio you will incur higher costs.”