Mark Dampier: There are no absolutes, but GARS sets a Standard

The Analyst
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The Independent Online

Investing certainly doesn't get any easier. There are so many problems being raised about the economy you could be forgiven for going off investments altogether. In fact, the vast majority of investors I come across nowadays are bearish, which is actually making me feel increasingly bullish! I fear some investors are confusing economics with the stock market, but the two do not work in the same way and I believe markets can make progress despite continuing poor economic news.

Admittedly, it is also easy to make the case for a pessimistic scenario. So where can more cautious or bearish investors go now that bond markets have returned to fair value, and cash still provides minimal returns? One area is "absolute return" funds, which aim to provide modest but steady growth for investors whilst controlling risk. A fine example is the Standard Life Global Absolute Return Strategies fund (or GARS for short), which aims to give annual returns of 5 per cent plus Libor (an average of inter-bank lending rates) before charges over rolling three-year periods.

Since the retail version of the fund was launched in May 2008, the correlation with the stock market has been relatively low, with the fund providing 17.4 per cent growth against the FTSE 100 losing 7.6 per cent over the same period. The track record as an institutional fund goes back even further to June 2006, and this, too, is impressive over a rather testing period.

So what does the fund actually do? Here it gets slightly more complicated but, to keep matters straightforward, it essentially looks at managing some 25 different investment strategies, which when blended together should give a positive (or "absolute") return over three years. These strategies incorporate equities, bonds, currencies and interest rates, as well as many others; a diversified approach designed to ensure no single strategy dominates and potentially derails the fund.

The fund is run by Standard Life's "multi-asset" team, which comprises 20 people whose speciality is generating strategic ideas and providing risk analysis. I'm sure the words "absolute return" suggests to some clients that positive performance is a sure thing. This is not the case, and no absolute return fund is guaranteed to go up. However, Standard Life has gone to quite some lengths to ensure the fund achieves its target.

Whereas most absolute return funds operate a single approach, often using equities to go long or short, it is pleasing to see the wide range of strategies that Standard Life employs. This way fund performance isn't reliant on a single one succeeding. However, the fund will often take on a higher exposure to the stock market than others in the absolute return sector, so it does often experience greater ups and downs.

To give you some idea of volatility, the maximum loss an investor could have seen on the fund to date is 15 per cent against an equity market loss of 40 per cent over the same period. So, while the fund is clearly not risk-free, it should be far less hair-raising than a pure equity fund. Broadly speaking, the fund will adopt Standard Life's "house view", which is usually based on a number of key themes. At present, these include a recovery in corporate profits, low inflation in the developed world and some pressure on inflation in emerging markets. The various strategies are, however, designed to pay off in a range of different scenarios and at different points, so the fund tends to deliver a reasonably smooth level of return. A further bonus is the absence of a performance fee, which is unusual for this type of fund.

So, who should use this fund? It could certainly be useful for pension investors, especially those who want to reduce risk in their portfolio five to 10 years away from retirement but who want a better return than cash or bonds can provide. For others, it could be a core holding with more risky funds arranged around it. Finally, for those sitting on large amounts of cash and willing to take a little more risk with a portion of it, GARS could be worth considering. No single fund can solve everything though, and GARS should ideally be grouped with other absolute funds to provide a genuinely diverse approach.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

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