A number of absolute return funds have struggled lately, but Standard Life Global Absolute Return Strategies (or GARS) has gone from strength to strength - although there are no guarantees this will continue. The fund’s approach is different from many absolute return funds: rather than focusing on a single asset class GARS brings together around 25 strategies across various asset classes targeting returns of 5% a year over LIBOR (UK interbank interest rates) on a rolling three-year basis.
The construction of the portfolio begins with Standard Life’s ‘house view’ of the economic environment. Presently they believe we will see a period of modest growth and avoid the so-called "double-dip" scenario, though they do think a double-dip is a more likely outcome than a rapid "V" shaped recovery. Although the best outcome for the fund is likely to be achieved if Standard Life’s central view is proved correct, the strategies GARS comprises are designed to perform over a two to five year period in a number of scenarios. Investors should note, however, positive returns are not guaranteed so the fund could fall in value as well as rise and the fund’s use of derivatives brings about additional risks.
Current themes in the portfolio include the view interest rates will remain low globally, which would make bonds paying a high level of income look attractive. The GARS team are therefore confident in holding high yielding bonds and have a preference for government debt in countries such as Australia where comparatively high interest rates are on offer. They are also bearish on the Euro and are "short" (see below for explanation) against the Pound. Although this particular strategy has already fared well they are happy to maintain their position as they see more downside. Another currency strategy at the moment includes being short Polish Zloty versus the Czech Koruna, believing the former to be overvalued relative to its eastern European neighbour.
A further successful strategy recently has been government bonds. The fund has been short Japanese government bonds versus European (primarily German) government bonds. Their view was Japanese bonds would fall in price owing to demographic trends, but the trade has worked for a different reason: the sovereign debt crisis in Europe saw a ‘flight to safety’ to bonds of stronger European nations and prices rose. These bonds have now been sold and replaced with US government bonds to continue the relative trade against Japanese bonds.
The recent market downturn has hindered the part of the fund invested in equities, but overall returns have remained positive as the fund’s other strategies are uncorrelated to equity markets and have largely paid off. So far the fund is living up to our expectations and I believe it is well worth considering as a long-term holding which doesn’t solely rely on the performance of the stock market. We also like the fact there is no performance fee attached to the fund; they are common in the absolute return sector. Standard Life’s own confidence in GARS is reflected by the fact it is used in their own final salary pension scheme. We share their confidence and are happy to retain the fund in our Wealth 150 list of favourite funds in each sector.
Standard Life Global Absolute Return Strategies Fund
| Initial charge | 4.00% |
|---|---|
| Initial saving | 4.00% |
| Annual charge | 1.50% |
| Annual saving | 0.10%* |
*Annual saving is not available in the SIPP
Find out more about this fund including how to investPlease read the key features of the Standard Life Global Absolute Return Strategies Fund in addition to the information above.
Key features of the Standard Life Global Absolute Return Strategies FundShorting - an explanation
Traditionally investors buy assets they believe will rise in value. Shorting is different. The principle is that the fund manager borrows shares he believes will fall in value and then sells them, hoping by the time he needs to repay the lender the share price will have fallen. The difference between the two prices is the profit or loss. For example:
- Manager borrows 10,000 shares and sells them for £2 each = £20,000.
- Purchases these shares six months later at 80p each, cost = £8,000.
- Profit = £12,000
Had the share price risen by the same amount, it would have cost more to purchase the shares than received from selling them, resulting in a £12,000 loss. Shorting can be effected in a number of ways; fund managers generally short via contracts with a broker rather than actually taking delivery of the shares. This example also ignores transaction and other costs, but it hopefully explains the principle.
