The sharp decline in Chinese share prices has increased the volatility of world stock markets with many of the main indices losing ground in the last few weeks. One of the best ways to protect your capital against these sorts of events is to have a good absolute return fund at the heart of your portfolio.
There are lots of these products on the market, but by far the most popular is Standard Life Investments Global Absolute Return Strategies, or GARS for short. This is one of the largest open-ended funds in the country with just under £26 billion in assets under management.
GARS aims to provide positive investment returns in all market conditions over the medium to long-term. It is actively managed with a wide mandate and targets a return of cash plus 5% a year measured over rolling 3-year periods.
The fund is run by Standard Life Investments’ multi-asset team who are able to invest across many different areas of the financial markets. Their principal objective is to exploit market inefficiencies using derivatives and more traditional asset classes such as equities and bonds.
It is similar in concept to a hedge fund, with one of the strategies being a relative value position that favours German equities over French equities. This was taken out in 2013 because the managers felt that the advantage conferred by German government policy over French government policy was not reflected in the valuations of the two stock markets.
Another longstanding trade is Japanese equities versus Korean equities. The long-short exposure was designed to exploit the beneficial impact of the weak yen, which has given Japanese companies a competitive advantage over their Korean counterparts.
About a year ago the managers opened a position in Australian interest rate forwards to take advantage of the fact that they expected the central bank to keep rates low to help support the economy. There are also numerous currency bets including one that is long the US dollar and short the euro.
Since it was launched in May 2008 the fund is up around 50%, whereas the FTSE 100 is almost back to where it started from. The volatility and maximum drawdown – the worst peak to trough decline – are also far better than the main blue chip index and despite the recent stock market weakness it is still showing a small gain in the year to date.
Most funds would struggle to beat the market with such enormous assets under management, but it is less of an issue for GARS because of the wide remit and the fact that it can use highly liquid derivative contracts to implement its trades.
Standard Life Investments Global Absolute Return Strategies is on a lot of financial advisor buy lists and is home to a significant amount of pension money on account of the attractive risk-adjusted returns. There is no reason why it can’t continue to deliver decent performance in all market conditions at a lower level of volatility than a normal equity fund.