In a company presentation seen by our sister publication Portfolio Adviser, the absolute return behemoth blamed its recent performance woes on a series of bad predictions, including misjudging the end of the equity bull market.
A source who attended the briefing said the Gars team admitted they have been finding it difficult to predict a turning point. The managers revealed they prepped too early for the end of the equities cycle, making the call as far back as 2015, the year the fund’s performance began to slip, according to the source.
Although the bull market persisted in 2016, the Gars group held their position, believing that inflation and higher rates would come along, which they said hurt performance further.
The team also took aim at the media during the presentation. According to a source, the team bemoaned the level of press attention on Gars’ outflows and said they “want to give two fingers to sniping in the media”.
Gars recorded redemptions of £10.7bn ($14.1bn, €12.1bn) in 2017, up from £4.3bn the year before.
Rocky performance
SLI Gars targets a return of cash + 5% per annum over a three-year rolling period.
But it also targeting relatively low volatility, which some have suggested is unrealistic. Gars has an expected volatility of 4.0% compared with the MSCI World’s equity volatility of 11.3%.
Over the last three years to 30 June 2018 Gars has delivered volatility of 3.9% per annum, with a maximum drawdown of -7.0%. By comparison, global equities have delivered volatility of 9.2% with a maximum drawdown of -11.5%.
Since its inception, the fund’s annualised volatility is 5.1% per annum.
The mega absolute return fund has delivered half the level of returns of its benchmark, the 6-month GBP Libor +5%, since inception at 44.9% versus 84.6%.
But performance in recent years has dipped into negative territory, prompting a steady stream of outflows. The fund has shrunk from its peak size of £26bn down to its current £17.9bn.
Over one and three years, the fund has returned -3.1% and -5.9% respectively compared with the IA Targeted Absolute Return sector’s returns of 0.6% and 4.5%.
The 6-month GBP Libor +5% has returned 5.6% and 17.9% over the same periods.
Market uncertainty
A spokesperson for Aberdeen Standard Investments said that “investing in Gars has proved to be a consistent strategy for meeting clients’ needs for good returns with low levels of risk and, over the long term, the fund has performed broadly in line with expectations since its introduction in 2006.”
They added: “Gars was close to achieving its performance objectives from the start of July 2016 to the end of January 2018,” albeit this was on a shorter time frame than its three-year objective.
In the last six months the spokesperson said “a variety of strategy-specific issues has negatively impacted performance”.
During the presentation the Gars team said the fund had been hurt recently by having too much equity, more large cap than small-cap stocks and being long 10-year Italian bonds versus German interest rates.
The team’s emerging market equity and debt positions also took a beating from a stronger dollar.
However, the Gars team noted that the fund’s diversified strategy should serve it well since “market uncertainty has increased substantially” since the start of the year.
The ASI spokesperson said with valuation levels in many asset classes appearing full, the team expect to benefit from a decline in asset prices and that they have already identified numerous attractive relative value strategies.
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