Standard Life Investments’ flagship Global Absolute Return Strategies (Gars) fund has avoided a key ratings downgrade.
SLI has recently been plagued by questions over its widely popular, but recently underperforming £42 billion Gars strategy.
The fund returned to positive performance in the fourth quarter, but there is another dark cloud hanging over it – pension consultants’ fund ratings.
Gars escaped a downgrade in Mercer’s latest review this month. The investment consulting giant put the fund on ‘Watch’ in July, but the possibility of a demotion still hangs over the strategy.
Described by UBS as the ‘gate-keepers of institutional flows for Gars’, pension consultants advise on around 60% of the fund’s assets under management (AUM).
In its July update, Mercer said that the fund was put on watch because of increasing concerns over its size. The analysis further showed that less of the portfolio could be liquidated quickly and that it was taking longer for the team to implement trades.
Mercer noted at the time: ‘We believe that capacity management is a key issue for Standard Life, considering that the strategy has grown from £41 billion at the end of 2014 to £53 billion at the end of March 2016.’
The watch status was retained in the most recent review this month, which means the consultants have uncertainty about the rating and do not believe that this will be resolved soon. Mercer declined to comment.
In a broker note last month, UBS assigned a sell rating to Standard Life and underlined the importance of the Gars strategy to the wider group. UBS stated that in 2017, Gars’ performance needs to be very strong, describing it as a ‘critical year’ for the fund.
Highlighting that it is likely to take consultants at least two years for a proper assessment to be reached, the fund is likely to have some leeway to turn performance round. The UBS note pointed out that consultants continue to have high regard for the investment process, long-term track record and the management team, despite the recent period of underperformance.
UBS has estimated that the fund saw outflows of around £3 billion in the fourth quarter of 2016, highlighting that over £500 million of this was redeemed from the UK version in December.
The investment bank expects net outflows to increase to £3.9 billion in the first half of this year and estimates that they will total £6 billion over 2017.
On the consultants’ view, it added: ‘Demand via pension consultants for Gars increased significantly 12-18 months ago; it is too early for those consultants to do a complete U-turn and direct flows away from the fund.
‘Although there is no evidence that consultants are specifically directing flows away from Gars – the narrative has changed and Gars is now on “Watch”. Gars will be given the time to improve performance through 2017 – fund performance needs to be very strong in our view. It will be given the time to do this, but we think 2017 will be a critical year in this regard.’
Gars has struggled with performance over the last year, delivering negative returns in the first two quarters. It returned to the black in the second half of the year and was marginally ahead of its benchmark in the fourth quarter, up 1.4%.
Over 12 months to the end of December it returned -2.3%, lagging the peer group average of 1.6%. However, over three years it is up 6.7% versus 6%.
Commenting on how Gars manages liquidity, a Standard Life Investments spokesperson said: ‘Gars’ investment positions tend to run for several years, resulting in low turnover and much higher scalability. This means that the fund doesn’t have the same issues that a higher frequency trading strategy may encounter as it grows in size.
‘We regularly monitor all our holdings, and the market more broadly, and remain confident that we can meet our investors’ expectations.’