The behemoth Standard Life Investments Global Absolute Return Strategies fund dominates its sector from both an assets under management and reputation point of view, but investors should be wary of using just one absolute return fund to cover all their needs.
Earlier this year, FE Trustnet looked at the argument for pairing up the fund – which is often known as GARS – with Invesco Perpetual Global Targeted Returns, which was launched by managers that were instrumental in the success of the Standard Life Investments product and is seen as one of its biggest rivals.
Fund pickers we spoke to told us that they frequently pair up absolute return funds, in order to allow one to cover the other’s weaknesses in times of market difficulty. With this in mind and with retail investors shifting their attentions to the absolute return sector, we have looked through both the onshore and offshore universes to see if they are any funds to challenge GARS’ dominance.
This is no easy task, as GARS has built up its assets of £25bn on the back of a strong track record. Since launch in May 2008, the fund has returned 55.95 per cent, which is more than the return of FTSE All Share and the average absolute return fund – although it has lagged the strong returns of gilts.
Performance of fund vs sector and indices since launch
Source: FE Analytics
What’s more, it has achieved this with annualised volatility of 5.39 per cent. While this is more than the 3.01 per cent sector average, it is significantly below the All Share’s 15.22 per cent and the 10.92 per cent produced by the FTSE Actuaries UK Conventional Gilt Over 10 Years index.
This performance profile, along with low maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – and far more positive periods than negative, means the fund is highly rated by analysts.
The FE Research team, which has placed the fund on its Select 100 list, said: “Overall, the team has succeeded in sticking to the absolute return performance target.”
“The fund has had a couple of difficult periods, typically when all asset classes have fallen together, such as in in 2008 or more recently in June 2013; any loses have been made back relatively quickly however. It should be noted that the fund’s long-term performance has been achieved with only one-third of the risk level of equity markets.”
Of course, GARS is a mainstay in many investors’ portfolio and is likely to have a presence going forwards. However, FE Trustnet has looked through the IA Targeted Absolute Return and offshore FO Absolute Return sectors to see if any funds look as attractive and could be diversifying additions to a portfolio.
As there are relatively few absolute return funds with histories dating back to the financial crisis, we have looked at those with rival GARS over the past five years when it comes to annualised volatility, maximum drawdown and the number of positive periods.
While this time frame misses out a major market correction, it’s important to note that even GARS hasn’t been open to retail investors for the full market cycle.
Smith & Williamson MM Cautious Growth is the only absolute return fund that is beating GARS on all three metrics as well as total return over the past five years. The £15.6m portfolio has made 32.40 per cent, but like GARS has underperformed UK equities and gilts.
Performance of funds vs indices over 5yrs
Source: FE Analytics
Over this time, the fund has posted annualised volatility of 3.12 per cent against GARS’ 4.21 per cent; maximum drawdown of 2.49 per cent against 3.15 per cent; and 44 positive months against 41. It also has a higher Sharpe ratio, which indicates risk-adjusted returns.
The Smith & Williamson fund, which is managed by James Burns and Genevra Banszky von Ambroz, aims for long-term steady capital growth through a portfolio that has at least half of assets in zero dividend preference shares (also known as ‘zeros’) and synthetic zeros.
Zeroes, which are the shares issued by ‘split capital’ investment trusts, have been ignored by investors over recent years following their place in the midst of a major scandal about 10 years ago. However, they can be attractive investments when chosen correctly.
Smith & Williamson MM Cautious Growth can also invest in more conventional securities. For example, it bought shares in the Woodford Patient Capital Trust at launch and holds investment trusts such as BH Global and Battle Against Cancer Investment Trust in its portfolio.
While the above fund may focus on quite a niche asset class for some investors, there are others that are offering strong competition to GARS using more mainstream investments.
Kames UK Equity Absolute Return, managed by David Griffiths, David Pringle and Malcolm McPartlin, has beaten the Standard Life fund on all three metrics examined over three years. It has significantly lagged GARS from a total return point of view, but as the below graph shows has given a much smoother ride and has had the lowest maximum drawdown at 1.54 per cent.
Performance of funds over 5yrs
Source: FE Analytics
However, the strategy behind the fund is a complex one that sees the managers attempt to create market-neutral positive returns through long-only positions, pair trades between individual stocks and thematic investments. Analysts point out that it is similar to a hedge fund and may be more appropriate for experienced and sophisticated investors.
Square Mile, which give the fund an ‘A’ rating, said: “This is a complex fund designed to produce a simple result, which is steady fund price appreciation. There are a number of things that can go wrong with such an approach but we believe that Kames has structured the fund in such a manner to minimise these.”
“Assuming the investment hedges work as expected, this leaves the main risk with the managers and the success of the fund rests with the accuracy of their calls. We believe that the two Davids have talent and receive good support from the wider team at Kames. This is a relatively new fund but so far the managers have delivered what they have promised.”
Paul Brain’s Newton Global Dynamic Bond fund focus on bonds and similar debt instruments to produce a consistent positive return. Again, it has beaten GARS on volatility, positive periods and maximum drawdown over five years but is currently slightly behind on returns.
Performance of funds over 5yrs
Source: FE Analytics
The fund has 23.6 per cent of asset in corporate bonds, with 18.6 per cent in high yield. It is also running a small short positon on conventional developed world government bonds, but is 11.4 per cent long in emerging market government bonds, 7.7 per cent in quasi-government debt and 4.9 per cent in index-linked bonds.
Brain is experienced bond manager and also runs the Newton International Bond, BNY Mellon Global Bond and BNY Mellon Global Dynamic Bond funds.
Insight Absolute Insight and Oyster Absolute Return are two other funds that have outperformed GARS on all the metrics aside from total return.
The Insight fund, which is headed by FE Alpha Manager Sonja Uys, has the lowest annualised volatility of the fund’s mentioned here, at just 2.05 per cent – less than half that of GARS. It invests in other funds run by Insight and appears on the FE Select 100.
According to the FE Research team: “The risk/return profile of the fund may look boring, but this is exactly what its managers are aiming for: to provide small but regular positive returns, minimise volatility and preserve investors’ capital.”
“Derivatives are used heavily within the underlying funds and Insight regards this as a quicker and cheaper method of implementing its views. However, these instruments can be risky if not carefully controlled and although Insight has extensive experience in this area and a robust process for managing these risks, investors must be aware of the pitfalls involved.”
Oyster Absolute Return, meanwhile, built up most of its track record in the offshore universe but has recently joined the IA Targeted Absolute Return sector. The fund aims for consistent capital growth and has posted 45 positive months out of the past 60; GARS has been up in 41.
The fund aims to preserve capital while operating within a defined risk budget. Risk management is an “essential component” of the fund and looks at this in the context of several factors, including liquidity, concentration and counterparty risks.
It also attempts to maximise returns in a given risk framework by targeting investments with the most attractive Sharpe ratio. Essentially, the fund is aiming to generate the highest performance with the lowest volatility.
In a coming article, FE Trustnet will be putting the multi-asset sectors under the spotlight to see if any funds there could be suitable for more aggressive absolute return investors.
