Ratings firm backs up brutal honesty threat in Gars review

Ratings firm backs up brutal honesty threat in Gars review

Upstart fund ratings agency Fundhouse has delivered on its pledge of shaking up the industry with impartial reviews by listing a series of concerns with the £23bn Standard Life Investments Gars fund.

In a 19-page research document, seen by Investment Adviser, the firm has alleged fundamental problems with the fund’s claim to a diversified approach and said its charges seem “disproportionately high”, calling for a fee cap.

Fundhouse differs from the major fund ratings agencies in that it receives no payments from fund houses and is instead paid for by financial advisers, and the firm has pledged to give straight answers to its clients on fund quality.

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In its scathing Gars review, which is largely rejected by Standard Life Investments (SLI), Fundhouse’s analysts said the majority of returns have come from bond-market strategies and the bulk of other positions “added little value”.

The report, which gives the Gars fund a tier 3 “negative” rating - the lowest rating available - has also questioned the “efficacy” of Gars’ risk models and the “skill” of the managers outside of fixed income strategies.

Fundhouse said its analysis suggested that more than 70 per cent of Gars’s returns since launch have come from fixed income strategies, mainly traditional investments in corporate and high yield bonds.

A chart of the returns from the Gars fund compared a global corporate bond index suggests a high level of correlation between the two, according to Fundhouse, with the total return nearly identical from launch to November 13 2014.

The report also criticised SLI for raking in huge fees from the fund’s investors.

The fund’s 0.75 per cent clean-fee annual management charge is fair, the analysts said.

However due to the large size of the fund SLI is currently receiving roughly £158m per year from investors, according to the report, which “seems disproportionately high”.

The analysts called for SLI to cap the fee to pass on benefits of scale to investors.

Gars is short for Global Absolute Return Strategies. The fund has grown rapidly since its launch in May 2008 to become the second-largest fund in the Investment Association universe, touting its ability to deliver returns from a hugely diversified range of assets.

“We do not believe that Gars is dominated by one risk, and this is not something that can be determined only by looking at correlation or performance attribution,” said Standard Life Investments in a statement.

The fund has around 30 different strategies designed to generate “returns irrespective of prevailing market conditions” so, by definition, not all strategies will be delivering returns at the same time, the group said.

Given the strong returns from duration and credit since the financial crisis, “they should be expected to be a large contributor to the return of a multi-asset portfolio”, it added.

SLI also argued that other strategies had in fact contributed to returns, citing 2013 and 2014 as years in which the fund’s equities and currency strategies were the top two contributors.