Standard Life Investments has tried to alleviate concerns from investors about how it plans to ensure the performance of its Gars fund is firmly on track, after the £26bn fund was haunted by losses last year.
The Global Absolute Return Strategies vehicle, or Gars, made a loss of 1.6 per cent over the past year, underperforming the IA Target Absolute Return sector which returned 2.3 per cent over the same period, according to FE figures.
In a note released today (26 January), the fund managers acknowledged that Gars’ performance had been particularly bad in the first half of last year, which was only “partially mitigated” by the returns in the second half.
In the third quarter of 2016, the fund’s performance crept back with returns going into positive territory after incurring losses in the 18 months prior.
The fund’s latest note said that as performance picked up, clients “consistently” asked for details on the steps the team were planning to take to get the portfolio back on track.
The overall scale of performance potential offers a substantial cushion against uncertainty Standard Life InvestmentsOne change made to the positioning of the vehicle in the final quarter of 2016 was to boost its equity exposure, largely by adding to the baskets of European and US stocks.
“Europe valuations look attractive compared to other developed markets,” the note read.
The fund managers also decided to top up the exposure to US equities in response to the country’s improved earnings outlook.
“This has been brought about by improved economic growth, the potential for lower corporate taxes, stronger oil prices and, for financial services companies, rising interest rates.”
When it comes to sectors in the US, the fund’s preference for banks over consumer staples proved “extremely successful” towards the end of 2016, the note read.
Towards the end of last year, the managers also increased exposure to global real estate investment trusts (Reits), which they said are well-protected against inflation and provide equity-like returns but with lower volatility.
Looking at bonds, the note said parts of the global corporate bond market “remain buoyant”, however, over recent months the managers decided to cut exposure to corporate bonds in the UK and halve its European corporate bond weighting.
With the balance of monetary and fiscal policy expected to tip towards the latter, the investment managers expect this to bolster the range of investment opportunities.
“This will not necessarily benefit equity and bond markets overall. However, it is precisely the kind of environment in which the highly diversified approach we take in Gars should prove rewarding for investors.”
While investors have been pouring their money into absolute return strategies such as Gars, the sector has recently been mired in criticism over its poor performance, with absolute return funds loitering at the bottom of the league tables last year.
I would steer clear of the whole sector until evidence to the contrary is available Blair CannThe Gars team admitted that events never unfurl exactly as they predicted, but said the scale of the fund’s potential to perform offers a “substantial cushion” against uncertainty.
“We believe what gives additional confidence is that our approach has been consistent throughout Gars’ 10- year history and has worked well longer term.”
Blair Cann, certified financial planner at M Thurlow & Co, said he has had a "bee in his bonnet" about absolute return funds for a while.
"When these funds first appeared they guaranteed a positive return in any market," he said, adding however that most of these funds have recently lost money.
"I have never been a fan of these funds and have never recommended one, and those advisers who have will have faced difficult reviews with their clients."
Mr Cann pointed out that Gars has not just been a poor performer over one year, but has achieved 4.1 per cent over three years, against the sector average of 6.4 per cent.
The adviser said he had "little confidence" in the fund turning its performance around, adding: "I would steer clear of the whole sector until evidence to the contrary is available."
Marvin Evans, principal of Old Bank Wealth Management, said he was concerned that the Gars team seem to be relying on value strategies to produce returns.
"If markets fall heavily, then clients would be protected," he said, adding however Gars investors might lose out if markets continue to rally.
Dan Farrow, director of SBN Wealth Management, said “No matter how many conference calls or manager reports an adviser reads, they will never really know what goes on within the fund.”
He pointed out that now we are in a “one dimensional” environment where markets have just gone one way, then strategies which are not ‘long only’ have suffered.
“I guess you have to ask what the manager means when they state that the fiscal environment will be good for a well diversified fund, because to me it’s just unsubstantiated waffle.”
