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Cooking with Gars

Investing certainly is not getting any easier. There are so many economic problems arising that you could be forgiven for going off investments altogether. In fact, the vast majority of investors I come across nowadays are bearish, which is actually making me feel increasingly bullish.

Some seem to be confusing economics with the stockmarket but the two do not work in the same way and I believe markets can make progress despite continuing poor economic news.

Admittedly, it is easy to make the case for a pessimistic scenario. So where can more cautious or bearish investors go now that bond markets have returned to fair value and cash still provides minimal returns?

One area is absolute return funds, which aim to provide modest but steady growth for investors while controlling risk. A fine example is Standard Life’s global absolute return strategies – or Gars for short – a fund aiming to give annual returns of Libor plus 5 per cent before charges over rolling three-year periods. Since the retail version of the fund was launched in May 2008 the correlation with the stockmarket has been relatively low, with the fund providing 17.4 per cent growth against the FTSE 100 losing 7.6 per cent over the same period. The track record as an institutional fund goes back even further to June 2006 and this too is impressive over a rather testing period.

What does the fund actually do? Here, it gets slightly more complicated but, to keep matters straightforward, it essentially looks at managing around 25 different investment strategies, which, when blended together ,should give a positive, or absolute, return over three years. These strategies incor-porate equities, bonds, currencies and interest rates, as well as many others, in a diversified approach designed to ensure no single one dominates and potentially derails the fund. The fund is run by Standard Life’s multi-asset team, which comprises 20 people whose speciality is generating strategic ideas and providing risk analysis.

The words absolute return probably suggest to some clients that positive performance is a sure thing. Of course, this is not the case. However, Standard Life has gone to quite some lengths to ensure the fund achieves its target. Whereas most absolute return funds operate a single approach, often using equities to go long or short, it is pleasing to see the wide range of strategies employed by Standard Life to ensure that fund performance is not reliant on a single one succeeding.

However, the fund will often take on a higher exposure to the stockmarket than others in the absolute return sector, so it does often experience volatility. To give you some idea of this, the maximum loss an investor could have seen on the fund to date is 15 per cent against an equity market loss of 40 per cent over the same period. The fund is clearly not risk-free but it should be far less hair-raising than a pure equity fund.

The fund broadly adopts Standard Life’s house view, which is usually based on a number of key themes. These currently include a recovery in corporate profits, low inflation in the developed world and some pressure on inflation in emerging markets. However, the various strategies are designed to pay off in a range of different scenarios and at different points, so the fund tends to deliver a reasonably smooth level of return. A further bonus is the absence of a performance fee, which is unusual for this type of offering.

This fund could certainly prove useful for pension investors, especially those looking to reduce risk in their portfolio five to 10 years before retiring but who want a better return than cash or bonds can provide. For others, it could be a core holding with more risky funds arranged around it. Finally, Gars could be worth considering for those sitting on large amounts of cash who are willing to take a little more risk with a portion of it. No single fund can solve everything, though, and Gars should ideally be grouped with other absolute funds to provide a genuinely diverse approach.

Mark Dampier is head of research at Hargreaves Lansdown

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