Where did it go wrong for Gars?

The fund was £20bn in 2018, and as recently as March 2020 was more than £4bn before falling to the £1.2bn in size it was on the day FTAdviser revealed the news of the review. 

Euan Munro, currently chief executive of Newton Investment Management and in a previous life, the creator of the Gars at Standard Life, is a no-nonsense character.

The grandson of a Scottish coal miner, Munro told FTAdviser that he created the strategy after the dotcom bust of 2001-03 when he saw equity markets endure sustained falls, and wanted to create a product that could perform well when equities were performing poorly. 

Initially performance was strong, with the fund returning more than twice the sector average from launch until 2012.

But if relative simplicity was central to Munro’s vision for the fund, it quickly drifted away from such a path, according to one wealth manager.

He says: “The search for the elusive magic beta product has been ongoing since I started in markets in the 1980s. I have sat through numerous mind-numbing presentations on why the latest black box, algorithm or snake oil would lead to the promised land.

"Gars was just another manifestation of the search, which was in the right place at the right time in terms of asset gathering. It actually peaked at £27bn. Size was not the main reason it failed to produce performance – the instruments they deal in are very liquid."

"Basically all of these strategies rely on predictable trends, mean reversion and movements within certain standard deviations. The problem over the past 15 years is that trends have broken down, for example, bonds going up at the same time as equities, there has been no mean reversion and there have been some big moves.

"Hence virtually all of them have performed badly, particularly after their high costs. They also never admit it but they rely on reasonably high levels of volatility since they write a lot of options/futures etc and this has also been scarce in this period.

"I would like to think this is the end of them but I can guarantee they will reappear in some other guise at some point in the future.”

Munro departed Standard Life in 2013 to create a Gars-type strategy at Aviva Investors. His exit had been preceeded by that of David Millar, who had created a similar product for Invesco.

Numbers crunched

When performance was strong, Standard Life heavily marketed Gars, laying on workshops to help financial advisers to understand the intricacies of the product, and marketing the strategy abroad. FTAdviser understands significant inflows came from Japan around this time. 

Gars is essentially now a global macro fund; those are very hard to get right, and not everyone is good at that.James Sullivan, Tyndall Investment Management

Performance has been weaker in recent years: the stated aim of the fund is to deliver a return of cash plus 5 per cent on a rolling three-year basis. Over the past three years to February 9, the fund lost 11 per cent. 

It did outperform in 2020, when volatility was high, and it is a frequent argument used by absolute return fund managers that their product is designed to perform best in volatile times. 

James Sullivan, head of partnerships at Tyndall Investment Management, says: “Gars is essentially now a global macro fund; those are very hard to get right, and not everyone is good at that. Gars seems to have made some bad macro calls and chosen poor themes to invest in.” 

A glance at the top 10 holdings in the fund right now reveals a series of currency trades, including one that is long sterling, short dollar (that is, the fund will profit if sterling rises relative to the US dollar) and a similar trade involving sterling and the Brazilian currency.

The evidence suggested that there were question marks over the sustainability of these returns.Rory Maguire, Fundhouse

Overall, the fund's largest 'long' exposure is to sterling, with 63 per cent of the investments performing better if sterling rises – that compares with net short positions in the Australian, Norwegian and Chinese currencies.

The largest individual position in the fund is a short-dated UK government bond, while a futures position in Italian government bonds is another top 10 holding. 

Only one equity is listed among the top 10 holdings. 

Rory Maguire is managing director at Fundhouse, an investment management firm that published a negative rating on the Gars fund in 2015.

He says: “When we reviewed the fund eight years ago, it had performed well and was very popular with clients.

"But the evidence suggested that there were question marks over the sustainability of these returns. We felt that they had a disproportionate gain from a few bond allocations when bond markets had delivered outsized gains to the market as a result of QE.

"Equally, we felt that they were not taking enough risk to achieve cash plus 5 per cent and looked destined to undershoot over time. What they are all trying to do is very low odds; high returns with low downside is very desirable, but not likely to be achieved over the long term.

We felt that if bond markets fell, they may struggle in other areas where skill was not obviously evident.Rory Maguire, Fundhouse

"Although they had hit cash plus 5 per cent, we felt it was linked to the market environment more than their skill: markets were delivering high returns with low downside (again QE related). And finally, broader skill was not obviously evidenced here (across a wide set of asset classes).

"We felt that if bond markets fell, they may struggle in other areas where skill was not obviously evident.”

He adds that he shared those views with Forest and colleagues at Abrdn at the time, and they respectfully disagreed with his views. 

QE or not QE 

Jason Hollands, managing director at Evelyn Partners, takes a somewhat different view as he feels that while QE did boost the returns from bonds and so make the target easier to achieve, the low-volatility environment also reduced the appeal of such products among financial advisers.

He says that while the current elevated levels of volatility in markets may mean that interest in absolute return funds is restored: “The challenge however is that a great many advisers, wealth managers and investors have lost faith in such funds and will be reluctant to allocate to them, especially as bonds – the traditional stabiliser for portfolios to be held alongside equities – are now back on the radar again, given higher yields.”

Another factor likely to be central to the review is the economics of the product. The key investors information document for the fund lists the ongoing charges at 1.32 per cent. 

When the fund was £18bn in size, that 1.32 per cent would have generated revenue in the region of £230mn for Abrdn, at the present £1.2bn in size, the fund would be generating around £14mn in revenue.

All of the above leaves much to ponder for those reviewing the fund at Abrdn, and for those advisers considering allocating to a product that was once a staple of client portfolios.    

David Thorpe is investment editor at FTAdviser