Market irrationality and bouts of pessimism are to blame for a lacklustre performance from Standard Life Investments’ (SLI) flagship Gars strategy, according to the fund’s managers.
The team behind the £26bn strategy said its “sizeable negative return” over the last 12 months came about due to “too many periods of pessimism where irrationality and short-termism have reigned”.
The fund lost 4.8 per cent in the 12 months to the end of July 2016, compared with a 6.9 per cent return in the 12 months to July 2015.
Gars remains ahead of its cash plus 5 per cent target over three years, having returned 7.6 per cent in this timeframe, but FE Analytics figures show the fund lost 3.8 per cent in the first seven months of 2016.
In a note from the fund’s managers, the team said it was confident the portfolio would return to positive performance, and backed its central case for global markets.
The note said: “Our analysis of the drivers behind Gars’ performance showed that in periods where markets have responded to rational, long-term economic drivers, the portfolio did well.
“As in the past, we stay true to our investment process and philosophy: keeping return-seeking risk on the table in as diverse a manner as possible.”
Of the fund’s 42 distinct investment strategies, only 11 delIvered a positive return over the period. Some 14 dragged down performance while 17 remained flat. SLI said the extent of the negative returns more than offset the effect of 11 positive strategies, leading to the overall subdued performance.
The team said that while the fund’s volatility was lower than that seen in risk markets, returns suffered due to “long-term investment views being markedly different from the short-term factors that have frequently driven markets”.
The fund’s long equity exposure – concentrated in Europe and Japan with some mining exposure – produced a loss of 2 per cent. The managers exited mining stocks in the latter part of 2015 and SLI said equity exposure would remain at record low levels of around 12 per cent in future.
Its rates strategies also provided a mixed bag of results with the fund seeing a 1.5 per cent return from Australian rates positions but lost 1.1 per cent on US exposure. Emerging market losses combined to create an additional 0.5 per cent drag.
Currency plays were another source of weakness, with dollar exposure in particular costing 0.6 per cent. The team blamed this on concerns over the pace of US rate increases.
However, within credit, the managers took advantage of the market sell-off in the latter part of last year - with the holdings returning 0.3 per cent over the 12 months.
The note added: “The diversification we build into Gars provided some degree of protection over the past year. However, when market behaviour is being driven by views markedly different from our own central case, it does not always prevent the portfolio from losing money.”
