Standard Life Investments’ Gars team has pointed to currency positions and a short US duration strategy as the major contributors to its disappointing start to 2016.
The £26bn absolute return fund fell by 3.1 per cent during the first three months of this year, bringing its cumulative performance over the past 12 months to a loss of 4.3 per cent.
The sell-off in equities at the beginning of 2016 was prompted by fears of a slowdown or even recession in the US.
With the Federal Reserve adopting a more cautious tone on interest rate hikes as a result, Gars’ long US dollar position suffered, as did its bet that US bond yields would rise,
Other currency plays which hit the fund included a long Mexican peso versus short Australian dollar position, which cost the fund 0.3 per cent and has now been closed.
Adam Rudd, investment director of Standard Life Investments’ multi-asset portfolio team, said: “We did make a significant loss on currency positions. The drawdown experienced during the first [part of the] quarter was offset only very slightly in the second half of the quarter.
By contrast to the Federal Reserve’s policy, Mr Rudd said moves by the European Central Bank and the Bank of Japan were less aggressive than expected, hurting the likes of Gars’ short euro position.
Further easing measures announced by the European Central Bank and the Bank of Japan both disappointed market expectations, which weakened the fund’s positions in both the euro and yen.
“Our indirect currency exposure where we are long Japanese equities, long European equities... there is a feed through from a stronger currency, so the stronger euro and the stronger Japanese yen meant that those equity positions cost us [a further] 70 basis points.”
Mr Rudd said the fund’s long-term performance is still in line with its goal of cash plus 5 per cent return, though admitted the first quarter was not the first time that Gars has been struggled in a time of limited risk appetite.
He said that its slump in 2009, as well as its negative quarter in 2013 following the US bond and equity ‘taper tantrum’ sell-off, showed the fund could withstand periods of underperformance.
“While we’ve had a negative return clearly we didn’t participate in even as much as half of the equity drawdown at any point peaked or troughed during the quarter, so we’re still delivering on the return to risk that we attempt to,” Mr Rudd said.
Though the fund’s process remains the same, a number of holdings within the fund were adjusted during the first quarter in hopes of stemming the underperformance.
A position in European banks versus insurers was removed early in the year, for example, because low interest rates did not hit European insurers as hard as expected.
The team also added a trade based on the view that US inflation is being significantly under-priced by the market, moving some money away from its short US duration trade.
However, Mr Rudd said the managers were standing by their US dollar positions. The team increased their weightings in two pair trades over the quarter, going long the dollar against both the Singaporean dollar and the Korean won.
“We feel [these short positions] are proxies for short Chinese currency exposure,” Mr Rudd said.
The team also continue to hold a long dollar versus short euro position.
He added: “After a period of strong performance from the dollar there’s clearly the potential for the coincidence of weak returns from the dollar even in a risk-off environment...but still Europe is one we think can meaningfully depreciate relative to the US.
Elsewhere, Gars took two defensive steps in terms of its US equity exposure, decreasing its beta by selling call options on the S&P 500 and also increasing a long large cap versus short small cap trade.
It also added to its long US investment grade credit position after spreads widened in January and February.
