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Can Gars break out of its slump?

Global Absolute Return Strategies fundStandard Life Aberdeen’s flagship fund and behemoth of the absolute return sector, Standard Life Investments Global Absolute Return Strategies fund, gained popularity with IFAs and DFMs when it launched in 2008.

But the fund has fallen from its £26bn peak, and stands at around £17bn now. It missed its objective of return of cash plus five per cent per annum over a three-year period for three consecutive years. Over the past year, the fund has returned -3.2 per cent; and -5.0 per cent over three years, compared to the IA Targeted Absolute Return sector’s average returns of -0.4 per cent and 4.2 per cent for the same period.

Signs of a slowdown in gross inflows three years ago inspired further investor redemptions. Nervousness escalated in February 2018, when the fund reported record outflows that jumped from £4.3bn two years before to £10.7bn.

According to Charles Stanley pension and investment analyst Rob Morgan negative performance was caused by some key poor calls made by the management, led by Guy Stern, starting in 2015.

Morgan says: “They were premature in calling the end of the equity bull market while predictions of higher interest rates and inflation, the basis of certain relative trading strategies, were detrimental.

“More recently, the portfolio’s emerging market equity and debt positions have been affected by a stronger US dollar.”

Standard Life Aberdeen outflows top £31bn as Gars continues to struggle

An Aberdeen Standard Investments spokeswoman says the company admits it made mistakes in predicting the end of the cycle as well as the negative impact of other “strategy-specific issues”, but remains committed to reducing redemptions over time.

Gars employs different strategies to maximise returns while keeping volatility low, intending to provide positive returns in all market conditions, but some see this as unrealistic.

gbi2 managing director Graham Bentley warns about the opaqueness of absolute return funds’ investment techniques. He says: “The more complex the strategies are, the less predictable the results.”

Moreover, using multiple strategies to minimise overall volatility of a portfolio may have a downside: “If you are using a variety of tools to dampen risk, almost by definition, you are dampening down the returns as well,” Bentley says.

Chelsea Financial Services managing director Darius McDermott, on the other hand, continues to favour the fund’s mix-and-match approach: “We still like the concept of SLI Gars: the multi-strategy approach in a multi-asset fund.

“In down markets it has also done its job: falling far less than the stock market in 2008 and later in 2016. However, it has been disappointing and underperformed over the past three consecutive years and has not met its cash-plus target in that time.

“While we supported it for many years, we have since downgraded it to a generic switch rating.”

Fund research company Square Mile portfolio manager Charles Hovenden says that periods of negative performance come with the territory in the absolute return sector. The research firm continues to recommend Gars to investors, as the fund remains in the Square Mile Academy of Funds. Hovenden says that Square Mile will continue to monitor the fund.

Speaking to Money Marketing, the ASI spokeswoman says: “The strong performance of other asset classes and low market volatility in recent years has undoubtedly made investors look away from the volatility managed absolute return sector. We know that such a benign market environment won’t last forever and when this happens, Gars and other volatility managed products should do well.”

When Gars first started out, it was the only fund of its kind, but later faced an exodus of senior staff, who started copycat funds at competitors. In 2012, senior manager trio David Millar, Dave Jubb and Richard Batty joined Invesco Perpetual to launch a similar fund. In 2014, one of the lead managers, Euan Munro, went to Aviva and introduced his version of an absolute return fund there.

The £12.7bn Invesco Perpetual Global Targeted Returns and the £5.2bn Aviva Investors Multi-Strategy Target Return fund have provided one and three-year returns of -1.6 and 4.2 per cent; and -1.3 and -1.1 per cent respectively.

The ASI spokeswoman says that the company’s advice arm 1825 has three holdings in the absolute return multi-asset sector, including Gars, which comprises around five per cent of the total portfolio fund allocations.

Gars’ downgrades

2014
After months of review and processing each of the underlying trade ideas since inception, Fundhouse rates SLI Gars negatively when it seemed to be at the height of its powers, and despite the fact that fund was doing well at the time and achieving its goals. “In our opinion, the market had provided disproportionate tailwinds and so we thought the returns were achieved in an environment that was atypical,” says managing director Rory Maguire.

Hargreaves Lansdown senior analyst Laith Khalaf removed Gars from its Wealth 150 list of top funds it recommends to investors following the departure of one of the fund’s architects, Euan Munro, to launch a similar fund at Aviva.

2017
FE downgraded Gars’ rating to one FE crown. The fund research and rating agency saw red flags in the large number of people working on the fund and wondered how efficiently the 60-strong team could communicate. Moreover, FE felt there was a risk that the management was falling behind and the investment approach was not dynamic enough for a macro strategy, according to FE research manager Charles Younes.

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  1. According to Investopedia:-

    As an investment vehicle, an absolute return fund seeks to make positive returns by employing investment management techniques that differ from traditional mutual funds. Absolute return investment techniques include using short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets. Absolute returns are examined separately from any other performance measures, so only gains or losses on the investment in question are considered.

    Given the use of all those techniques, it’s hard not to surmise that the prospects of any AR fund NOT achieving its objectives are considerably greater than it doing so. One wonders how many advisers who recommended AR funds to their clients actually took a good look at how they’re supposed to work before doing so.

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