Munro left the firm to become chief executive at Aviva Investors, and with two high profile members of the team having left last year questions are being asked about the stability of the fund.
The departure also comes on the heels of disappointing performance for the absolute return fund in the second quarter of the year.
However, Stern (pictured) says that the fund was designed explicitly to be able to survive changes in management. He adds that the recent poor performance was entirely within the risk/return parameters the team would expect in a difficult period for all markets.
"Our philosophy is if you are going to build a robust portfolio you have to be able to bear different stresses: market stresses, political stresses, and also those on your own portfolio,” he said. “So it’s important to have the right kind of succession planning." "I came to the company in 2008 to take over the multi asset portfolio management area, and I have been running that area and the fund on a daily basis for little over five years."
"It’s a player-manager type of structure. People on the leadership role in the functions don’t just manage the functions but get involved."
Munro’s departure is seen as problematic as he is largely seen as the architect of the fund, having been involved in its launch and direction.
Stern stresses that there are a number of people still on the fund who have been there since the start, meaning here is no lack of continuity.
He himself joined just one year after the fund was launched, he adds, and hints there could be new hires on the horizon.
"Watch this space – there might be names that change; we are always looking to add names to our team," he said.
"We have been growing quickly and want to be sure we have the right names in the right places."
GARS has become the biggest retail fund in the UK market, with assets under management currently standing at £17,8bn, according to data from FE Analytics.
Sitting in the IMA Targeted Absolute Return sector, the fund aims to beat cash plus 5 per cent in each calendar year, and our data shows it is ahead of this benchmark over the past five years.
Performance of fund versus benchmark and sector over 5yrs
Source: FE Analytics
The fund has produced top quartile returns in its sector in each calendar year since 2008.
However, many investors were disappointed with the portfolio’s performance when markets sold off in May this year.
The fund is able to go short and to invest in a wide variety of assets to make money in down markets, but our data shows it lost 5.67 per cent from 23 may to 25 June, more than the average loss in the sector.
Performance of fund versus sector and benchmark 23 May to 25 June
Source: FE Analytics
This is, of course, a very short time period, but the unexpected volatility is concerning for investors.
Stern says the drawdown was the third worst period since the fund’s inception ,with the very worst coming in 2008 when the fund lost 14 per cent.
However, he says that the drawdown was well within the risk and return parameters he would have expected given the make-up of the fund, and points out that the fund suffered only half the losses of global equities.
The bad result was simply the result of a majority of the fund’s strategies going down at the same time, resulting from a period when all markets, not just equities, fell.
The key driver for this was the emergence of a new environment in which central banks are looking for an exit from monetary easing, causing volatility in the markets to rise, Stern says.
“Central banks need to develop some kind of exit strategy from the monetary experiment we are in,” he said.
“We are about to go through a very painful process of easing out of monetary expansion that will create volatility as well as opportunities.”
Stern also points out that in July the fund has already recovered most of the losses it made in May.
Currency trades were among the best and worst-performing positions in the second quarter, he explains, with a position long the US dollar relative to the Canadian dollar delivering positive returns.
Stern explains that it is a trade the team have been waiting to come off for a while.
The Mexican peso versus the Australian dollar and the US dollar versus the Yen also came good, while a positive position in global equities and security selection completed the top five performers.
Positions in Russian and Chinese equities held the fund back, although Stern says he remains convinced that the emerging markets, and these countries in particular, have better prospects than most commentators admit.
The most harmful position, however, was in inflation-linked bonds, and Stern says the fund has now closed its position in linkers, which it has held since inception in 2008.
“People have missed the extreme change in interest rates in the developed world. It’s not simply that the 10-year bonds in the US, UK and Germany have gone up 100 basis points, but real rates are going up very strongly, which hit our inflation linked bond holdings.”
“We feel that even inflation linkers are unlikely to rise materially on a three-year horizon, so we exited this strategy.”
“We would prefer to hold index linked bonds from a risk point of view but not from returns.”
The fund has also closed a position aiming to take advantage of strength in German bonds versus French bonds, and replaced it with a similar position on the countries equity markets.
Stern explains that the team believes that German exporters are in a good position to benefit from slowly recovering global growth, while the French economy remains troubled by an uncompetitive structure.
The fund is also seeking to profit from the market believing that the eurozone will raise rates faster than is likely.
However, GARS has slashed its overall duration from around 4.5 to 5 years, as it was last October, to just 1 year today.
“This is not because we expected a sharp rise in interest rates but we are saying that interest rates at those levels were not rewarding you for the risk of interest rates drifting upwards,” Stern said.
Stern says that as a monetarist he believes ultimately the amount of money printing we have seen will lead to inflation, but he does not foresee this in the near future.
He says we will not see any significant increase in inflation above the 2 per cent target for 12 to 18 months at least, thanks to the spare capacity – excess unemployment – in the economy.
“The fact is you almost never see inflation when you have this much spare capacity,” he said.
On the matter of Munro’s departure, FE Research analyst Charles Younes initially said he was concerned about the long-term implications for the GARS fund.
However, after a thorough review, the team has decided to keep the fund in the FE Select 100 list.
''In the short term, the impact of this departure looks minimal,” he said. “The investment process won't be impacted as the process has never changed since inception. Guy Stern joined the GARS team in 2008 and has perfect understanding on the process and investment approach."
''Even though Munro co-founded the GARS fund and could be described as its architect, I'm highly confident that this departure won't have a direct impact on performance, as the strategy is in place and the team responsible for running it is larger. I'm also confident that Stern has the investment skills to maintain the level of performance of the fund.''
However, he added: “Our main concern is that the team experiences no more turnover as there have already been three minor departures this year. We think the first test for Guy is to ensure that the team will now remain the same.”