Would even Einstein understand the Standard Life Global Absolute Return Fund (GARS)?

Date Published: 21 June 2016

Category: Investment, Uncategorized

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I have a confession to make — I have never understood GARS – its complex strategies, the risks of these strategies, or how it could possibly achieve its targeted returns, in all market conditions.

Objective – according to the factsheet:

‘The Standard Life Investments Global Absolute Return Strategies Fund aims to provide positive investment returns in all market conditions over the medium to long term. The fund is actively managed, with a wide investment remit to target a level of return over rolling three-year periods equivalent to cash plus five percent a year, gross of fees’.

Returns

Of course we can all shoot for the stars and have lofty aims but when investing other people’s money — they should be realistic.

I accept it would be wonderful to aim to provide positive investment returns in all market conditions over the medium to long term, but how can anyone have any confidence in such a claim?

GARS also targets rolling three year returns (before fees) of cash + 5% pa.  According to the 2016 Credit Suisse Annual Investment Returns Yearbook, from 1900 to 2015 the annualised real returns from a globally diversified investment via US Bills was 0.8% pa, Bonds 1.8% pa and Equities 5% pa.

If we assume these US Bills represent the real returns of cash, Standard Life are targeting real returns of 5 + 0.8% = 5.8% pa — greater than the real return associated with having 100% invested in a global diversified portfolio of equities based on this 115-year period.

Risk

Looking at their latest end of April 2016 factsheet, it says the fund has an expected volatility of just 4.1% pa.  To put this into context, the volatility of various asset classes over the five years to end May 2016 is as follows:

t1

Compared to the volatility of MSCI World equities at 13.3%, a target of 4.1% volatility could be obtained by investing 31% in equities and the rest in cash.

In my view it is very unlikely for Standard Life (or anyone else) to achieve real returns consistently greater than that expected from investing 100% in equities but with just 31% of the risk (being the 4.1% expected volatility expressed as a proportion of the MSCI World 13.3% volatility).  Getting something for nothing is a rare quest in life and even rarer in investment.

Can Anyone possibly understand the strategy?

According to the latest factsheet http://uk.standardlifeinvestments.com/O_M_Gars/getLatest.pdf , the fund contains:

  • 9 ‘Market Return Strategies’ — these I can understand but then….
  • 13 ‘Directional Strategies’ — these include a ‘US real v nominal steepener’, an ‘Australian forward-start interest rates’ and a ‘Long European payer swaptions’ strategy
  • 10 ‘Relative Value Strategies’ includes a ‘US butterfly’. Can somebody please help? — my brain is in meltdown!

The real issue, for the many IFA’s and pension trustees who seem to be investing in this mammoth fund in which the retail part alone is worth £26bn, is how can they advise this product as suitable to retail clients if it is seemingly so hard to understand?  How can they possibly understand what all these different strategies mean?  How might these different strategies interact with each other under different market conditions?  What precisely are the counterparty risks involved in any derivative style contracts used by the fund? The fund apparently utilises an ‘Extensive use of Derivatives’ — ‘While the fund will not borrow cash for investment purposes, the total value of exposures to markets will routinely exceed the Fund’s net asset value’.

One great rule of the investment superhero, Warren Buffet is “Never invest in a business you can’t understand.”  This also applies to funds — do these professional investors/advisers really understand how GARS works and its inherent risks?  Could there be some future investment event that might cause the vast majority of these GARS strategies to fall in value?  Could an investor then sue their professional adviser or trustee for not properly understanding the complexity and risk of this fund?

Is there a simple index fund strategy alternative?

I set myself the task of constructing a simple strategy of four index funds that closely match the performance and risk profile of GARS over the last 5 years.

Unfortunately, many index funds available today, did not exist much longer than five years ago and I realise I cannot analyse all these same funds over the period since when GARS started (May 08), after which it put in some blistering performance.   You might say this shows the perils of back testing and that would be a fair criticism, but let’s look at this simple index strategy anyway.

This Index Strategy is made up as follows:

BlackRock – North American Equity Tracker 10%
BlackRock – UK Equity Tracker 15%
iShares – £ Corporate Bond 1-5yr ETF 35%
iShares – Core UK Gilts ETF 40%

This Index Strategy is an easy portfolio to understand — 75% in bonds (made up by 53% in UK gilts and 47% in shorter term corporate bonds), and 25% in equities (made up by 60% in UK equities and 40% in US equities).

Here is how the performance over five years compares:

t2Source: SCM, FE Analytics
The value of units can fall as well as rise. Past performance should not be seen as an indication of future performance.

Until January 2016 the two lines track each other very closely.  If you then look at the individual years we find the following:

Performance Table

t3
Source: SCM, FE Analytics
The value of units can fall as well as rise. Past performance should not be seen as an indication of future performance.

But what about the risk, as measured by volatility? — the table below illustrates that the index strategy was less volatile over this five-year period, but slightly higher over some of the other periods.

Volatility Table

t4
Source: SCM, FE Analytics

Maybe it’s time to KISS & tell? KISS — Keep It Simple Stupid and tell your adviser or trustee not to invest in funds if they don’t really understand them.

Alan Miller — CIO, SCM Direct.com

alan@scmprivate.com

Tel: 020 7838 8650

 

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