Standard Life Global Absolute Return Strategies [GARS] has grown to £16.7bn in size, making it the largest UK-domiciled fund on the market. It has become popular as a low-risk way to steadily increase capital and uses a variety of strategies, many using derivatives and many akin to those used by hedge funds, to that end.
However, MacKinnon, chief investment officer of discretionary firm Thurleigh, says he is wary of over-complicated investment strategies, and on those grounds he refuses to hold it on behalf of clients.
"I don’t invest in GARS because I would never invest in something I don’t understand," he said.
"I teach business [he is a fellow of Pembroke College, Oxford and has lectured at Cass] and there are three CFA charterholders on my fund and we aren’t sure how it works."
GARS has a large team split into three: a team that examines the global economy and looks for market inefficiencies, a multi-asset team that implements the strategies, and a risk team that ensures the fund is not too reliant on any one of those strategies.
The fund has made 20.03 per cent over the past three years, according to data from FE Analytics, and has made a positive return in each year since launch.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Last year three of the guiding lights who helped form the fund – David Millar, Dave Jubb and Richard Batty – left Standard Life for Invesco, and MacKinnon says this is another reason to be cautious.
"I would be very wary of investing in a fund like that where the originators of the strategy have left."
"It’s like if my team were to leave and I remained here, it might look like everything was continuing as normal, but these guys are my brains," he said.
Funds such as GARS seek to make money in all market conditions by employing various strategies and using derivatives such as taking short positions.
"People want to think that somebody has found the key, some magic pill to put things right."
"We don't own any hedge funds. A lot of our clients own hedge funds, but they give their money to us, they don’t put it in a hedge fund."
"That business model is wonderful: when you can get 2 and 20 from your client, good luck to you."
"The whole structured product area is worrying too."
MacKinnon explains that a recent product he looked into on the Dow Jones EuroStoxx 600 promised a certain return unless one of the companies on the index went bust in the next five years.
"Can Mrs Jones in Pontypridd really have any concept of the risk of that happening?" he asked.
MacKinnon says that his scepticism served him well when he was pitched the Madoff Ponzi scheme and refused it on the grounds that it was not clear how it made money.
The biggest difficulty facing investors right now is protecting their spending power against inflation, the manager argues, which he thinks will likely be around 5 per cent for at least five years, and he says that the solution is relatively simple.
Equities are the only reasonable choice to this end, particularly those playing the theme of the emerging market consumer.
MacKinnon says that as emerging market consumers get richer they look to branded goods, and companies that feed into these markets are best placed to beat inflation over the longer term.
For this reason, he holds Morgan Stanley Global Brands, FE Alpha Manager Alexander Darwall’s Jupiter European and the JPM Global Consumer Trends fund.
Morgan Stanley Global Brands has had an excellent run in the post-crisis era as investors have fled to the safety of the stocks it buys: global franchises such as Microsoft and Unilever.
The fund has made 55.35 per cent over three years, making it the best-performing fund in the entire IMA Global sector, according to data from FE Analytics.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Unfortunately it is now soft-closed, but MacKinnon says funds such as Darwall’s do a similar job.
"It’s not a European fund but a fund of global companies that is marketed as a European fund," MacKinnon said.
Darwall’s £2.1bn fund, which has five FE Crowns, has made investors 275.19 per cent over the past decade.
Over five years it has returned 63.57 per cent in the midst of the worst crisis on the continent for generations.
The fund’s benchmark, The FTSE World Europe ex UK, has made just 15.38 per cent in that time.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The manager says index-linked bonds are too expensive to buy right now, and that he has sold out of them completely.
"If I could get RPI plus 1 per cent over 10 years right now I’d bite your hand off," he said.
He adds that, in real terms, index-linkers now offer negative yields.
Gold is also no use to the manager.
"Gold makes good jewellery and it works on 1000-year cycles, but on human lifetimes it’s a very volatile asset."
"It has gone down by 13 per cent in a few months."
The manager holds a significant part of his portfolios in emerging market index funds, and he is unfazed by the fact the MSCI Emerging Markets index has underperformed developed markets over the past three years.
"Three years is just trivial, it’s just noise and we aim to hold things for much longer," he said.
"The world doesn’t change that much, that’s a fact, so your investment outlook doesn’t change that much."
"People think you have got to be endlessly active but that’s not true."