SLI’s Gars team warns on inflation risk

Rowan Garrow, investment director on the £10.8bn Gars fund, said the management team had taken a long position in global index-linked bonds because it maintains “inflation is undervalued in the market at the moment”.

“Given the volume of stimulus and aggressiveness of central banks... we think there is more risk of inflation than markets are currently pricing in,” Ms Garrow said.

She added that while inflation had come off slightly in the UK, it was more of a threat in developed markets than emerging ones because investors were “expecting too much, too soon”.

The director said the Gars team had been “gradually increasing” the fund’s exposure to risks in the market over the past year, keeping its investments diversified and ensuring its volatility remained at 4-8 per cent.

But Ms Garrow said Gars was having to be “more clever” about the way it diversified because of anticipated ongoing volatility.

“If things go wrong you’d expect you want to be in government bonds,” she said. “But we don’t expect they will offer the same kind of diversification benefits.”

Ms Garrow said Gars continued to short the euro and go long in the dollar, which benefited the fund last year but performed less well this year. The fund has grown by roughly £2bn in assets under management since November.

Ms Garrow said Gars did not have a “specific number” for its potential capacity but that it was “something we are very conscious about, but not worried about”.

She added the team was confident it would be able to handle running the fund at two or three times its current size.

The firm recently signed deals to promote the fund globally in Switzerland, Sweden and the US, where Gars investment director Tam McVie moved earlier this year.