Morningstar raises alarm after Gars hits £40bn

Morningstar raises alarm after Gars hits £40bn

Morningstar has warned that capacity issues are beginning to impact the Standard Life Investments (SLI) Gars fund now it has passed £40bn in assets under management.

Randal Goldsmith, a senior manager research analyst at the ratings agency, said the portfolio’s “stretched” capacity is now having a particular effect on stock selection.

Mr Goldsmith said investors in the fund should more closely monitor its inflows, and be on the lookout for evidence that managers are struggling to identify new ideas in which they can invest meaningfully.

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“In our view, capacity issues are now having an impact which makes this issue key,” he said.

“With this stretched capacity, we are already seeing changes to the fund and in particular have seen a reduction in the fund’s ability to produce alpha from stock selection.”

Mr Goldsmith added that SLI had previously committed to reviewing the growth in AUM when the strategy, which incorporates retail and institutional products, reached its current £40bn mark.

SLI said in response that the fund continues to have considerable capacity available.

A spokesperson for the fund group said: “Gars continues to successfully deliver its return and risk objectives for clients and we remain confident of our ability to manage its growth, given its use of highly liquid investment strategies of a global nature, breadth and scale.

“We regularly monitor the portfolio and its structure and the results of our studies have consistently showed that Gars has available capacity well beyond the level it is today.”

The spokeseperson added the fund has delivered its performance target of cash plus 5 per cent (gross of fees) over a rolling three-year period on a consistent basis.

According to FE Analytics, the fund has returned 12.71 per cent over the past three years, with a Sharpe ratio of 0.57 and volatility of 3.37 per cent over the period.

Mr Goldsmith is not the first analyst to have been critical of the fund in recent months. In January, ratings agency Fundhouse said too few of Gars’ non-fixed income strategies had added value. SLI said in response that equity and currency strategies had been the largest contributors to performance in 2013 and 2014.

Morningstar, meanwhile, reinstated its bronze rating for the fund earlier this year. The rating had been put under review after the departures of three senior portfolio managers in September 2012, followed by team head Euan Munro in July 2013.

However Morningstar’s analysts said in March they were satisfied with the replacements, adding that they had confidence in team head Guy Stern.