Volatile markets have been an overriding investment theme in recent years, putting absolute return funds in the spotlight. We asked Tam McVie, investment director, absolute return funds at Standard Life Investments for an insight into the company’s Global Absolute Return Strategies Fund.
1. How would you sum up the approach of an absolute return product like the Global Absolute Return Strategies (GARS) Fund?
The Fund aims to deliver a return similar to the long term return historically achieved from investing in equities whilst delivering it with significantly less volatility. This equates to a performance target of exceeding its cash benchmark by 5% per annum (before the effect of fees) with a half to a third of the volatility of equities.
In essence the Fund is focused on generating asymmetric returns, i.e. more returns on the upside compared to the downside.
2. The team behind the GARS fund are a multi-asset investment team, can you give some examples of the different assets the fund could be invested in at any one time?
The Fund can invest in markets across the globe, this freedom allows the team to seek out the best investment opportunities irrespective of geography or asset class. This may include finding opportunities in traditional markets such as equities or corporate bonds but also opens opportunities in currency markets or indeed the future direction of volatility for example.
3. Can you provide an example of how the fund can position itself to profit from a falling market?
The fund uses strategies know as relative value strategies which can generate profits irrespective of the direction of markets. Take our US Large cap versus US Small cap strategy, this profits from larger companies out-performing their smaller counterparts irrespective of whether US equities are going up or down.
Conversely it loses monies should the reverse happen irrespective of market direction. In the short term when equity markets fall, it is not uncommon for smaller companies, which are generally perceived to be more risky, to fall by more than their larger counterparts generating a profit for the fund.
Over the investment horizon of the strategy, the team expect larger companies to out-perform smaller companies in the US as they are cheaper on a valuation basis, are less domestically focused and should be able to access credit, in the form of corporate bonds or bank lending, more easily than their smaller counterparts
4. How much risk to the overall fund is taken by implementing individual strategies, such as taking a position that would benefit from a fall in the price of an asset or assets?
There are financial instruments, called options, which can offer investors protection from falls in markets. The problem is, that much like taking out insurance, the more likely it is that you may require the protection, as a result of a price fall in this instance, the more expensive the premium. This represents a constant dilemma for investors but particularly so in periods of greater levels of uncertainty.
The Global Absolute Return Strategies fund takes a different approach. Rather than paying for protection, the team seek to identify strategies with a 3 year investment horizon with the expectation that each strategy can deliver a positive return in our central view over that time horizon.
These strategies are specifically chosen so that in the shorter term they should behave differently to one another, so that if some strategies are losing money others will be making money. Ultimately the aim being that the fund can generate returns over time without the same peaks and troughs of investing in equity markets.
5. Are absolute return funds designed for particularly volatile market conditions, or can they provide a workable investment strategy during times of more subdued volatility?
It is the recent financial crisis, its subsequent aftershocks and the heightened correlations between asset classes which have brought absolute return funds into the spotlight, however they are designed to deliver returns in all market conditions.
This should not be interpreted as 'absolute return funds will only ever deliver positive returns' - this is definitely not the case. Any investment strategy which is aiming to deliver a return greater than that available from a deposit account has to take risk to do so and as such will have periods of negative returns.
What's more, one should not expect an absolute return fund to keep up with equities in the good years. In which case why are they so popular? In essence it is their focus on delivering their returns to investors whilst being mindful of the amount of risk taken which is key.
It is these characteristics which in turn can bring diversification benefits to a wider portfolio regardless of the volatility of markets.
You can invest in the Standard Life GARS Fund for 0.00% initial charge with Fair Investment Company »
No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment please contact us for advice.
The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors.
The fund may use derivatives for the purpose of efficient portfolio management and to meet its investment objective. The sterling value of overseas assets held in the fund may rise and fall as a result of exchange rate fluctuations.
© Fair Investment Company Ltd