Choppy markets punish Standard Life's Gars megafund

Stormy seas


Standard Life’s Gars strategy has been hurt by choppy markets over the past 12 months

Gars’ weak performance – according to FE Analytics data and confirmed by Standard Life – reflects a generally lacklustre 12 months for absolute return funds, although some have performed well.

Gars was set up in the aftermath of the crash and has been one of the UK funds industry’s biggest success stories. The strategy manages a total of £50 billion, including a flagship fund with £26 billion. The Gars strategy, like other absolute return strategies, aims to make returns irrespective of market conditions, from a cocktail of derivatives and physical assets.

Investors, wary of both stock and bond markets, have proved enthusiastic, pouring €51 billion into absolute return strategies across Europe in the 12 months to May, according to data provider Morningstar. Standard Life’s core Gars fund gained €2.3 billion in that period, although it suffered outflows of €75 million in May.

But the majority of absolute return funds lost money over this period, averaging a fall of 0.15% over the 12 months to June. This was the sector’s worst performance since the same period to June 2012, when fears mounted over the future of the eurozone and their value fell by 1.57%.

Gars investment director Andy Ford said he was “not happy” with this return, although he stressed its annualised volatility was only 4.2% against 10.1% over three years. Performance returns from Gars remain ahead of target over five years, he said. Ford added that Gars had returned to health following previous periods of poor returns in 2008-9 and 2010-11.

Ford said: “We’re having to deal with wild swings as a result of anxiety in the marketplace, which is producing exaggerated reactions to odd data points.”

He cited recent swings in US non-farm payroll data. A note published by Russell Investments agreed, saying “markets are being driven more by noise than fundamentals”.

Ford said that “we need to choose our battles with care”, now that central bank stimulus has pushed bond yields into negative territory.

He added that Gars had taken a long position in UK equities, but a short position in sterling against the dollar: “We expect sterling to fall further, but this will benefit certain UK equities.”

It has maintained its long position in the dollar and US banks, taking the view that rationalisation has improved their trading position. But it has shorted US consumer staples.

In Europe, however, Gars chopped a long position in banks ahead of Brexit and the Italian banking crisis. It is wary of a China slowdown, which could punish commodities exporter Australia and lead to a cut in local interest rates. It has shorted the Korean won and Singapore dollar.

Gars came out of Brexit relatively unscathed. In the month to July 12, it generated a positive 40% return.

Over three years, according to Bloomberg, Gars’ annualised performance has fallen to 3.2%, well below its target of cash plus five percentage points.

On April 14, Manuel Arrive, senior director in the Fitch Ratings fund and asset manager rating group, told Financial News: “Market conditions have been difficult over the past 12 months, with much lower liquidity than we have seen recently. Managers [of absolute return funds] have had to trade when they can rather than when they want.” He said stop-losses, where miscalibrated, were triggering losses. Slow summer trading does not help.

Two funds set up in the aftermath of Gars’ success have performed better. Aviva Investors’ multi-strategy target return fund, led by former Gars leader Euan Munro, has beaten Standard Life over one year by breaking even, while Invesco Global Targeted Return, staffed by former Gars managers, rose 3%.

However, many other absolute returns have fared worse. Argonaut Absolute Return, run by Barry Norris, reversed a stellar run to produce a bottom-ranking loss of 13.9%. A spokesman said the rot began in January during a squeeze in short positions. “Of the 24 shorts Barry had, more than 20 posted negative earnings, yet rose in price. The reverse was true for the long book.”

Mainstream managers that have performed poorly include Columbia Threadneedle’s Absolute Return, which fell by 8.6%. A spokeswoman said: “Many of our absolute returns funds have a higher risk tolerance and some have been negatively affected by our currency positioning due to volatile markets.”

BlackRock Dynamic Return fell 7.9%. A spokeswoman said: “Our exposure to Europe and short emerging market positioning has been a detractor to overall returns.” Adjustments have been made, including diversification into precious metals. BlackRock runs other absolute return funds which have performed better.

Schroders, which did not comment, sponsors funds at both ends of the performance table. Its emerging-market hedged product came top of the FE Analytics table, with a 22% return. Its European and Asian absolute return funds were also in the top 10.

BNY Mellon’s absolute return bond fund, run by Insight Investment, excelled with a positive 16.3% return. But a majority of diversified bond funds have done less well.

Pioneer Investments‘ sterling absolute return bond fund is down 5.4% over the 12 months. A person familiar with the product said the long/short sector where the fund operates had been challenging, but he expressed confidence that returns would improve, given that the team in charge is highly rated.

BlueBay’s Investment Grade Absolute Return bond fund, normally a strong performer, lost 4.7% over the year, below its peers. A spokeswoman said: “We manage over the medium term and so feel shorter term comparisons are of less relevance. However, performance has started to improve again.”

Additional reporting by Mark Cobley

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