Standard Life GARS: Too Big to Function?

Capacity issues are now having an impact at Standard Life GARS, reducing the fund’s ability to produce alpha from stock selection, say Morningstar fund analysts

Morningstar Analysts 27 August, 2015 | 3:14PM
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Randal Goldsmith: The main strategy used by the Standard Life multi-asset investing team in their absolute return objective is diversification; layers and layers of diversification within the GARS portfolio. They break down into four broad areas, one is traditional multi-asset type of investing, holding on for the risk premium of assets, another is directional holding for a revaluation of assets that have no inherent risk premium, another is pairs trading and the final one is alpha generation from securities selection.

Those strategies are applied using a combination of direct investments and derivatives, so when you look at the portfolio as I say it is highly diversified, it is relatively complex and there is inherent leverage in some of the positions.

I am not particularly worried about further team changes at the Standard Life multi-asset team, the approach to GARS is very process driven and team based. And the team is very large, it is over 40 currently so they could lose people at the junior or mid-level and it wouldn’t make any particular difference.

It might be different if they lost an overall team head or head of risk management but there is no more reason for that to happen than for a fund manager of any other fund.

Investors should not be particularly concerned about the negative return in the second quarter of this year. Standard Life does not aim to generate consistently positive return on the GARS fund, what it aims to do is generate Libor plus 5% over three years rolling. And if you look at the portfolio construction approach it is not designed to be market neutral so in a difficult quarter, as the second quarter of this year was, it is not going to be totally independent from it.

Capacity is potentially an issue for this fund. If you look at the growth of funds under management it also £40 billion now and Standard Life did say they would stop and review at that point.

And already it is having an impact in some areas, for example the alpha generation part of the portfolio. That part is smaller now than the other strategies and smaller than it used to be. So in that sense yes it is already having an impact. I think it is an interesting thing to watch. 

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