25th September 2013
The Standard Life Global Absolute Return Strategies fund (or GARs, as it’s more commonly known) is not only the poster child for absolute return investing, it is also one of the most phenomenally successful fund launches of all time. The UK fund now stands at £17.76bn, with another £10bn in the firm’s wider strategy. Unsurprisingly, other fund management groups have looked enviously at fund flows into the product and wondered how they can win a piece of the action. Cherry Reynard reports on a new rival.
The trouble is, as a multi-asset fund, GARs requires fund management experts with specialism in a broad range of areas. That necessitates a big team – it is estimated that as many as 30 investment strategies are at work at any one time in the GARs process. This is not a one-man-and-Bloomberg-screen approach. The only real rival so far has been the Newton Real Return fund, which can also call on a big team available in a global bank and has gathered around £8.3bn of assets. But that may be set to change as Invesco, on many measures the UK’s largest fund management group, enters the fray.
The group poached David Millar, Dave Jubb and Richard Batty from Standard Life in September last year, and is now coming to the market with its own version of GARs. The new Global Targeted Returns fund has been run as a model portfolio since March and is now being brought to market as trade website Investment Week reported. The fund aims to return 3m LIBOR +5% every year on a rolling three year basis with less than half the volatility of global equities, by implementing its ‘best cross-asset class ideas’ through a selection of Invesco Perpetual funds and derivative-based strategies.
It is, in essence, a new and improved version of the fettered fund. It aims to identify short and long term trends – the tapering of quantitative easing, the impact of technology – and then find the right investments to benefit from those trends. In this, it is similar to the GARS fund, which has a less specific targets, but aims to deliver a positive absolute return in the form of capital growth over the medium to longer term in all market conditions. It will invest in ‘futures, options, swaps, forward currency contracts and other derivatives), transferable and fixed interest securities, cash and other collective investment schemes’ as ratings website Morningstar reports.
So far, so similar. Trustnet discusses the GARS investment process.
He says: “All of the decisions in GARS are made using three teams. The first team is the economists, whose role is to analyse macro data and identify short and long-term trends. They have experts across all the different asset classes. When a trend is identified, they pass it onto the implementation team, who try and find the way to play the theme on an absolute and risk-adjusted return basis. If the macro team are positive on US equities, they will look into long positions on an index, or perhaps a market-neutral position between US equities and European equities. This idea then goes onto the risk-team – perhaps the most important of the three. Their job is to make sure the play on the theme doesn’t distort risk levels elsewhere in the portfolio.”
Invesco can also call upon a broad range of investment expertise. In Neil Woodford, they have the UK’s foremost equity manager, and in Paul Causer and Paul Read some enviable bond expertise as well. Equally, they can call upon the broad range of investment expertise in the group’s US franchise. Both the Invesco and Standard Life funds at heart strive to make money from dynamic asset allocation.
Perhaps the biggest advantage for the Invesco fund is simply that it is new. The GARS fund’s size has long troubled even its most ardent supporters as Mindful Money reported this year. Its strong long-term track record has started to wane more recently and 2013 is the first year that the fund is behind its wider Morningstar category. The fund is third quartile over one and three years in the IMA Targeted Absolute Return sector. More importantly, rival firms have targeted GARs staff. In addition to the three who left for Invesco, in July Euan Munro, director of multi-asset investing and fixed income, and widely viewed as the architect of GARS, announced that he was to leave the group to join Aviva Investors.
This departure caused, among others, Morningstar OBSR to suspend its bronze rating on the fund, and put the fund under review. “Morningstar OBSR acknowledges the continuity offered by Guy Stern, the experienced Head of Multi-Asset Management who has been appointed to SLI’s Board as Head of Multi-Asset & Macro Investing, and the large, broad team that will still provide input into the portfolio’s strategy. Nevertheless, Mr Munro was a key architect of the product and Morningstar OBSR has changed the fund’s Rating while it reviews the impact of his departure.” Invesco has no such legacy. It can present itself as a new, fresh approach, smaller and more nimble than the original GARS fund.
It should be said that GARs may face another rival if Munro decides to build up Aviva’s offering in this area. He has gone as a business head rather than a fund manager, but may believe that it is an avenue Aviva should explore. It would certainly have the fund management capability to do so and a similar institutional capability to Standard Life Investments.
Invesco Perpetual has struggled a little to diversify away from its core equity income and bond franchises in the past, but its Luxembourg-based fund – Invesco Balanced-Risk Allocation fund – is almost €4bn in size and has run since September 2009. The UK-based balanced risk range, the group’s first foray into multi-asset for UK investors, has failed to generate significant interest with the largest fund in the range just over £200m in size. Ultimately, the market is ripe for a strong alternative to GARs. The latest Morningstar fund statistics shows that money continues to flow into the strategy in spite of weaker recent performance.
However maybe investors should show a little patience.
Investment expert Brian Dennehy, managing director Dennehy Weller & Co, says: “We haven’t recommended the GARS fund for a while. Firstly because we believe there is a high possibility of sharp falls in risk markets and secondly because GARS tends to be more exposed to such periods than most funds in that sector. Nonetheless, GARS has been an outstanding fund within a sector that has been largely dull, at best, with few other successes. We wouldn’t recommend any new fund. We’ll give Invesco Perpetual 6 months and see how they get on. That would be our advice to all investors – there’s no rush.”