Exposure to commodities and liquidity issues around large-caps versus small-caps were some of the reasons for the popular Standard Life Investments Global Absolute Return Strategies fund’s fall of almost 3.3 per cent in a single week, during a second consecutive quarter of losses.
FE Analytics data shows the £26.1bn fund, which is known as GARS, fell by 1.91 per cent in the third quarter of the year after markets sold off on fears over China’s economic health and uncertainty around US rate rises. This followed a 1.52 per cent fall in the previous three month-period.
Over the year to date, GARS has posted a positive return of 2.48 per cent. This is slightly below the rise in the FTSE All Share but a percentage point more than the performance of the Barclays Sterling Gilts index; the fund has been less volatile than both indices over the period.
Performance of fund vs indices over 2015
Source: FE Analytics
The graph above shows that the absolute return fund has gone through a period of high volatility compared with its own history. Admittedly, this is a short period of time on which to judge a fund with a rolling three-year performance target.
Roger Sadewsky, one of the managers of the portfolio and an investment director in Standard Life Investments’ multi-asset investing team, says the fund performed how it should have done in the turbulent market conditions surrounding the ‘Black Monday’ crash.
“Our drawdown was somewhat less than the underlying market’s. So although we aspire to have positive returns in all periods, we should recognise the dramatic extent of these falls,” he said.
“We are also consistent against volatility that is a quarter to a half that of equities – which is what you should anticipate. If you look at the actual underlying assets in the portfolio, they really did behave in a way that we were pleased by.”
“That is to say, those protective strategies, such as that short in the US small-cap sector, the Russell 2000, was very protective when we paired it with the long side in the tech sector.”
One position that hurt the fund’s performance over the quarter was its exposure to commodities. GARS is long global miners, which have suffered recently on the back of depressed commodity prices and slowing economic growth in China.
Performance of indices over 2015
Source: FE Analytics
Sadewsky said: “The underlying thesis here was that we wanted some exposure to the upside in case we were to see a more positive environment on our time horizon for the commodity complex.”
“Certainly that position would have fulfilled that role. Clearly we had other strategies that did pretty well in a period where mining did very badly – Australian interest rates in particular helped to offset that.”
“Our thesis had been that we felt the underlying cash flow of the balance sheets that the miners were exposed to would have been stronger than they actually anticipated.”
The Standard Life GARS team eventually exited the position after dividend cuts in the mining sector led the managers to question “whether this was a strategy that we truly felt was asymmetrical on our three-year view”.
“I think there’s something in this story around the veracity of the commodity falls in the impact being slightly more dramatic than we’d have felt within our time horizon,” Sadewsky added.
The investment director also pointed out that the differences in liquidity between large caps and small caps meant that GARS suffered a big drawdown in the week after the ‘Black Monday’ crash. This was because it delayed the time it took one of its positions – long on large caps and short on small caps – to pay off.
“In the midst of the drawdown – which was between about 17 August and 25 August – the sector was down about 10 per cent. The fund was down about 3.3 per cent in that week, which on a very short-term view, some people might say showed diversification wasn’t as great as we’d have hoped,” Sadewsky said.
“Actually, I think that was well within our targets. What you can see there is that the price action reflects the underlying liquidity of the market, so it can take a few days for the big-cap stocks to outperform the small caps.”
“I think that’s due as well to the fact that in these kinds of liquidity periods, people sell what they can so it takes a little while for the big caps to start outperforming and initially I think the liquidity of the big caps led to a slightly higher drawdown.”
Despite recent quarterly losses, GARS has a strong long-term track record. Since launch in May 2008, the fund has posted a 53.54 per cent total return and outperformed the FTSE All Share in the process, although it has lagged the gains of the Barclays Sterling Gilts index.
Performance of fund vs indices since launch
Source: FE Analytics
It has achieved these gains with annualised volatility of just 5.42 per cent; as a point of comparison, the FTSE All Share’s has been 15.27 per cent while Barclays Sterling Gilts’ stands at 6.74 per cent.
This performance profile has not only led to the fund being the biggest in the Investment Association universe, but won it recognition among analysts: it sits on the FE Invest Approved list and holds an ‘A’ rating from Square Mile Investment Consulting & Research.
Standard Life Investments Global Absolute Return Strategies has a clean ongoing charges figure of 0.89 per cent.
