NEWS, VIEWS & TRUTHS (14TH JAN – 18TH JAN)

Published on: January 18, 2019

As the snow lies on the ground and the air chills to sub-zero temperatures, why even consider going outside?  Instead, sit back and absorb this week’s News, Views and Truths.

It has been a rather busy week, with Brexit and all.  And yet the market has shrugged it all off with the FTSE 100 up 0.53% for the week and just shy of 7000.  Now perhaps it is pricing in a soft Brexit; more likely being the rise in crude oil prices benefitting the oil majors which are a significant constituent of the index.

What we do know is that 2019 has started off with a bang, with the index up 3.28%.  It’s all about time in the market folks.

And this publication will not be referencing Brexit today; I’ve already done that this week and you can find that here.

What I will be referencing is the twin perils of following the herd and putting all your eggs into one basket; a modern-day cautionary tale of investing. Shall we begin?

In 2008, Standard Life launched the Global Absolute Return Strategies Fund, known in the trade as GARS.  This was a whole new kettle of fish in the retail investment world and delivered one of the first “Absolute Return” funds, with the aim to provide a positive return to investors over a defined term.  My goodness, that sounds like exactly the sort of thing that myself, as an investor, am looking for.  And it was. By the millions.

This was not a particularly new approach to investing, just new to the retail investment space.  Hedge funds across the globe had been running similar strategies for years and used a whole host of derivatives to make hundred, if not thousands, of bets on financial markets. Things like betting that the FTSE 100 would go up more than the S&P 500, or that Sterling would fall more than the Japanese Yen.

And Standard Life in particular had specific experience in this; GARS was based upon their internal staff pension fund scheme which had been running for years.

Then we get to timing; genius.

Launched in 2008, investors were desperate for a fund that offered a low volatility target and did not correlate to traditional asset classes as all asset classes fell during the Global Financial Crisis.  Roll all of this in with a target return of prevailing cash plus 5% per annum over a rolling 3-year period, ladies and gentlemen, we have a winner.

And by winner, I mean billions of pounds in investors’ money.

£26 billion in fact. That is a lot of money. That made GARS the biggest fund in the UK, by a long, long way.

Standard Life made GARS their absolute focus, promoting the fund overseas with a major target being the US. Large municipal and university endowments, desperate to discover the next big thing, hoovered up the proposition, building up significant allocations to the fund.  Closer to home, Standard Life offered a new range of funds to UK investors under the name “My Folio”; a collection of funds where one of the major holdings was always GARS.

Then, Standard Life decided to cut out the middleman, create their own financial advisory arm under the 1825 banner and subsequently invest all of their clients’ money into portfolios, of which one of the top holdings was always, you guessed it, GARS.

As long as the fund was making money, everything was fine. Until it wasn’t.

Investment is a performance game.  Although past performance is no guide to the future (and that is absolutely correct), GARS started to miss its targets on a regular basis.  In the short term, due to the fact that its targets were not particular great, it wasn’t too much of a problem; clients moving out were outweighed by the huge number of clients going in.

But the fund really began to come under the spotlight in 2013 when Euan Munro, believed by many to be the architect of the investment strategy, left Standard Life to join Aviva.  His departure was followed shortly after by David Millar, David Jubb and Richard Batty leaving to join Invesco Perpetual, all three responsible for the day-to-day running of the fund.

Managers leave funds, that’s not new.  However, such a complex, broad strategy, investing billions across the globe, requires a huge team and such a “supertanker” fund requires a lot of steering.  Once Standard Life found replacements and then put them in a position so that they could employ their own investment thesis, performance started to drop off.  This is the last 4 years of performance.

GARS has lost 3.51%, whereas a “Moderately Cautious” investor returned, on average, 15.86%.  Yet when reviewing funds back in, investors were flocking into the funds because performance looked like this.

Past performance is not a guide to future performance.

Three Counties sold our clients’ exposure to GARS in 2013, funnily enough when I joined. Our thesis was that the management changes, combined with the size of the fund and the breadth of their exposure throughout all aspects of Standard Life’s global business was too great; that the risk of GARS failing was a systemic risk to the share price of Standard Life and as such, the pressure on the managers to simply retain the value was too great to generate the returns that we had experienced to date.

We made that decision in the face of the industry continuing to pile in, simply because it was assumed that this performance would continue ad infinitum.

Nothing continues ad infinitum. Everything changes. Past performance is not a guide to future performance. If it did, you would not need advice with regards to your investment.  Three Counties has been employing this approach to investment for 30 years now; if it ain’t broke, don’t fix it.

Standard Life continues to utilise GARS across their retail investments, be this the “My Folio” range of funds or the portfolios invested directly through their 1825 advice arm.  And clients are continuing to suffer because of their corporate need to feed the GARS beast; as at the end of November 2018 the fund stands at £12bn, with the announcement last week that lead manager, Guy Sterns is leaving after a “wide restructure of the team”.

Perhaps performance will pick up; perhaps the massive size of the fund resulted in the underperformance? This may be the case, but what is for certain is that it will not be able to recover the losses that it has incurred for clients. Be warned.

And finally…. a playlist. A Burt Baccarat inspired playlist, delivered by my co-Director, Mr David Heppell.  Have a great weekend; it’s cold outside so stay warm and I shall hopefully see you all next week.


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Updated: November 2020