I don’t know how many times I’ve referred to “historically low interest rates” and “above-target inflation” in the last two years or so, yet still I allow the bulk of my savings to get eroded away in my savings account.
The time had come for me to start practising what I preached, and so began the process of looking for a way of preserving my capital from inflation, currently hovering around the 2.5-3 per cent mark. My savings account was yielding less than 1 per cent at the time, so it doesn’t take a mathematician to work out that I was bleeding money in real terms.
Looking at the cash ISA rates on offer, I wasn’t particularly impressed. There are a handful of options that would have given me a real yield, but all the money swishing around the system as a result of quantitative easing makes me nervous that inflation could go a lot, lot higher. I’m not expecting hyper-inflation, but I’d say I’m in the camp of Ruffer’s Steve Russell, who believes higher inflation is a question of when – not if.
I realised very quickly that I needed to take on some risk if I wanted to comfortably preserve my capital. I’m not really a fan of structured products, and given the negative newsflow surrounding gold at the moment, I haven’t got the stomach for buying a chunk of bullion and hoping for the best.
I talk and write about open and closed-ended funds every day for a living, so let’s be honest – I was always destined to put my money to work in one. The question was: which one?
I already have some investments elsewhere, with varying degrees of risk. I have the bulk of my ISA in the Newton Asian Income fund, and I’ve got my pension in Sebastian Lyon’s Personal Asset IT. Around the edges, I have exposure to the likes of Aberdeen New Thai IT, Trojan Income and M&G Global Dividend.
As you can see, I have a fair bit of equity exposure. I’m in the process of saving for a house, and being in my mid-20s, I’m not planning to retire any time soon.
Though I have a fair time horizon, I think that I’m taking on adequate risk at the moment. I’ll need access to the money I’m transferring from my savings account quite often, to fund things like holidays and birthday presents. As a result, I need to make sure I’m insulated from a sudden shock in the market.
Equities are an obvious hedge against inflation. However, they’re unpredictable at the best of times, and given the steep rise we’ve seen in markets in recent months, I’m not comfortable putting all of my savings in risk assets.
Remember, even the “safest” equity funds lost in excess of 20 per cent during the Lehman crash of 2008.
Performance of funds and index in 2008
Source: FE Analytics
If equities are risky, then bonds are safe – right? Wrong. Well – at least according to the vast majority of multi-asset managers out there.
Bonds are embarked on a 30 year bull run, with yields coming in particularly aggressively in the last four years or so. Aggressive quantitative easing has so far ensured that yields have stayed low, but even the most bullish fixed interest managers find it difficult to deny that valuations across the corporate and sovereign debt market are expensive.
Performance of indices over 5yrs
Source: FE Analytics
Just recently, highly-rated fund of funds manager Robin McDonald said that the F&C Macro Global Bond fund – which is aggressively shorting government bonds – will soon be the only fixed interest portfolio worth holding.
So equity funds are too risky, and bond funds are too expensive. What’s left?
Absolute return funds have had very bad press since the launch of the sector back in 2005, for the same reason why active funds often make the headlines for the wrong reasons: the average one hasn’t done very well.
In general, Absolute Return funds aim to deliver a positive return and hopefully beat cash no matter what the market is doing, which is exactly what I’m looking for. The problem is, very few Absolute Return funds actually do this.
Part of the problem is the vague definition of the sector. Some Absolute Return funds aims to deliver a positive return over one year, while others target three – or more. Some are prepared to lose money have a volatility and max drawdown similar to an equity fund, which understandably puts off investors who are looking for a low-risk option to protect their savings.
Our data shows that more than half of the funds in the IMA Absolute Return sector lost money in 2008, with five – including the Polar Capital UK Absolute Return fund – lost in excess of 10 per cent. Over a three year period, both the CF Odey UK Absolute Return and City Financial UK Equity have an annualised volatility higher than the FTSE.
As I highlighted in a past article, I’m not looking for an average fund though; I’m looking for the best. There will be plenty of investors who disagree with me, but I’ve chosen the Standard Life Global Absolute Return Strategies fund.
With £16.7bn under management, my choice is hardly original, but I want something that is highly established, and supported by a firm that is rich is resources and experience. With billions of pounds of pension money included in this sum, I feel reasonably confident that my money is in safe hands.
Many point to the complicated structure of the fund as a reason not to invest. However, after talking to some of the managers of the team, as well as FE analyst Charles Younes (pictured), I think I have adequate knowledge of how the fund works.
Standard Life uses a team approach, which is in itself an attraction for me. The fund doesn’t rely on the expertise of an individual, and so the process is unlikely to be effected by a departure.
The team is split in to three: the economists, who analyse macro themes; the implementation team, who look at ways of playing the chosen theme; and the risk team, who make sure the play on the theme doesn’t distort risk levels elsewhere in the portfolio.
"GARS is all about balance, which is where the risk guys come in,” said Younes “They make sure all of the plays complement each other, and that there isn’t too much risk in one area.”
The fund uses between 30 and 40 strategies at any given time, to create a diversified portfolio with a low correlation to the market. The team sometimes takes long positions in areas that they are positive, but they tend to use market neutral positions, to eliminate market risk.
For example, they currently have a US equity large cap vs small cap position, which means that the only return it will make is the difference in returns between the large and small cap market.
The team tends to hold a significant portion of its assets in money market instruments to keep downside risk to a minimum and to ensure liquidity is at a sufficient level.
Since its launch in to the retail market in May 2008, the fund has performed strongly. Our data shows it has returned 44.34 per cent over the period, comfortably its sector average, cash and inflation.
Performance of fund versus sector and indices since launch
Source: FE Analytics
It had a difficult start, losing around 9 per cent in the depths of the financial crisis. However, it protected against the downside far more strongly than the vast majority of equity, bond and multi-asset funds.
Aside from 2008, it has delivered a positive return every calendar year since launch. Its biggest test came in the down market of 2011, when it managed to beat both cash, with returns of 2.14 per cent.
Year-on-year performance of fund, sector and indices 2009-2012
| Name | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) |
|---|---|---|---|---|
| Stan Life Inv - Global Absolute Return Strategies | 6.91 | 2.14 | 9.82 | 18.47 |
| IMA Absolute Return | 3.41 | -1.26 | 4.32 | 8.61 |
| UK Consumer Price Index | 2.71 | 4.2 | 3.73 | 2.83 |
| Bank Of England Base Rate | 0.5 | 0.5 | 0.5 | 0.65 |
Source: FE Analytics
It has a correlation of 0.31 to the FTSE 100 over three years, which is low even for an absolute return fund.
Of course, many equity funds have returned a lot more than the fund, but none have done so with less volatility or max drawdown. If the markets tank, I want to be safe in the knowledge that my savings are protected from the majority of the downside.
Take last week’s market correction, for example. The FTSE 100 shed 3 per cent in the last two days; GARS lost only 0.5 per cent.
Standard Life Global Absolute Return Strategies has a minimum investment of £500 and an ongoing charges figure (OCF) of 1.59 per cent. Unlike many of its rivals such as Jupiter Absolute Return and Insight Absolute Insight, it doesn’t charge a performance fee. The icing on the cake, in my opinion.
