Since reaching a peak in April last year, the Gars fund has since seen a reversal of its performance, losing 3.2 per cent year-to-date, against the Investment Association Absolute Return sector return of 1.7 per cent over the same period.
A report from research provider MPI stated: “With many investors concerned about Gars’ recent performance, we wanted to shed some light on the factors that might be contributing to the complex global ‘go anywhere’ fund’s performance results.”
According to the study, the fund’s exposure to the fixed income markets was scaled back in the middle of last year, meaning it missed out on the latest leg of the bond market rally, while the fund’s short duration exposure meant it suffered after the Fed’s rate rise was pushed forward.
Meanwhile, long exposure to European equities has detracted from returns, while long exposures to UK equities and US corporate bonds have contributed positively, the report read.
Michael Markov, co-founder and chairman of MPI, said the managers’ decision to cut down this fixed income exposure has set the strategy apart from those of its peers in the Morningstar global alternative multi-strategy category, and cited this as a main reason for the fund’s underperformance.
If the US dollar strengthens and US interest rates rise, the fund may be able to recover some of the losses this year Michael MarkovGoing forward, the Gars fund appears to be positioned to profit from further Fed rate rises and a strengthening of the US dollar, Mr Markov said, adding: “We observed that the fund’s returns exhibit significant strategic factor bets.
“If for example, the US dollar strengthens and US interest rates rise, the fund may be able to recover some of the losses this year.”
Mr Markov also pointed to long-standing concerns the Gars fund had a capacity issue when it hit £40bn assets under management in August last year, but said his analysis could “not confirm or refute” these concerns.
A spokesman for Standard Life said: “In the last year Gars behaved as we would expect in terms of risk, providing investors with low levels of volatility and drawdown relative to risk assets, but returns were disappointing due to our long-term investment views being markedly different from the short-term factors that have frequently driven markets.
“Periods like this have occurred before in the history of Gars and by sticking to our process and philosophy, while adapting to changing underlying drivers, we are confident the fund will resume its upward path.”
In a note which went out to clients this month, Standard Life said: “Given the range of our views which we seek to reflect in Gars we would not expect all positions to perform well simultaneously. However, every position is expected to deliver a positive return over our time horizon.”
Research company Fundhouse released a report back in April this year criticising the structure of the Gars fund.
It said it was worried about the extent to which the vehicle is diversified, pointing out that 15 out of the 127 strategies within the fund contributed to the bulk of the returns.
The group, which still rates the fund negatively now and has done since January 2015, suggested this meant the major pay offs were concentrated, while most of the strategies failed to add value.
The group also found mixed evidence of Gars using long-term investment strategies, and said most trades were under 18 months in length, despite the fund aiming to add value by holding investments for long periods.
Standard Life Investments had defended this, pointing out that between the launch of the fund in 2008 and the end of 2015, around 60 per cent of the strategies within Gars delivered a positive return.
A spokesman said: “In our multi-asset suite of products we take longer-term market views and combine them in such a way that our portfolios are resilient to unexpected market shocks.”
Simon Torry, chartered financial planner at SRC Wealth Management, said: “I am not a big fan of active fund management and the recent performance of Standard Life’s flagship Gars fund adds further weight to my convictions.
“I also have concerns about ‘absolute return funds’ in general, and in the case of Standard Life it would appear that a number of strategic ‘bets’ have not paid off and this has significantly affected performance.”
Although Mr Torry admitted these type of investments can offer investors some protection in times of market volatility, he said it is important to carefully consider the long term growth prospects, adding: “After all, surely it is better to suffer a ‘bumpy’ ride but still arrive at you destination than to have a smooth ride only to end up somewhere else?”
Speaking to FTAdviser, the investment director of Fundhouse Andrew MacFarlane said he was wary of multi-strategy absolute return funds like Gars, describing them as “structurally challenged”.
Although he admitted each fund should not be tarred with the same brush, he said his concern centres on whether the funds are able to achieve their “ambitious” target of 5 per cent return with no more than half the volatility of the equity market.
“Historically, the bull-run in both the bond and equity asset classes have masked the limitations of these funds in other areas where they have aimed to deliver returns.
“If they don’t have equity and fixed income tailwinds, we find little evidence that they can deliver such high returns, which is why we think clients should dial down their expectations.
“But for the clients sake, given such a huge amount of money is invested in this type of fund, we hope we are proved wrong.”
