The launch of Aviva’s Gars-like rival has been eagerly awaited since Euan Munro (pictured) the architect of Gars, joined the firm back in January.
But few could have predicted how ambitious Aviva’s new absolute return strategy would be: three funds in the pipeline, with the aim of raising £10-15 billion, which they say could double the fund house’s profitability in the process.
And Aviva is not the only one hoping for a slice of Standard Life Investments’ (SLI) Global Absolute Return Strategies’ £20.6 billion market share.
In recent weeks, BlackRock launched a low risk absolute return fund, while last September, Invesco Perpetual launched a challenger fund to SLI with three ex-Gars managers.
As all three multi-strategy absolute return funds compete to generate a positive return, can they succeed in attracting the billions they are targeting?
The juggernaut: Standard Life Investments’ Global Absolute Return Strategies fund
Fund size: £20.6 billion
Three-year return: 17.7% vs 9.4% by Alternative Ucits Multi-Strategy sector average
Five-year return: 44.4% vs 29.6% by sector average
The range will comprise: Multi-strategy Target return fund: will target Libor plus 5%, focusing on three buckets. These are market returns, for example, positions that make money on a two or three-year view; risk-reducing returns; and opportunistic returns.
Target Income fund: target return 4-6% pa
Target Inflation fund: target return CPI+ 3%
Gavin Haynes, managing director at Whitechurch Securities, is doubtful Aviva will hit its targets any time soon.
‘I think it’s ambitious. We have already seen the highest profile retail fund launch with Neil Woodford this year. The fact is that he got £2 billion with what is a mainstream asset class, which means I would not expect it to take anything like that in the early days, but it depends on institutional demand.
‘Obviously Gars is a fund used by pensions and it is primarily institutional demand where the money would come from.’
Gars recently acknowledged it could not guarantee hitting its return target this year. Haynes expects that if the strategy failed to hit its objectives over the long term, it could lose some assets to competitors as investors seek to diversify their absolute return exposure.
Keep it nimble
Bestinvest equity analyst Rob Harley said that while the firm has Gars on its recommended list, would-be challengers could offer a more nimble approach to absolute return.
‘People now might look at SLI and think it is getting a bit big. There are some markets it can’t operate in as effectively because of its size,’ he said.
Harley added that the huge success of Gars, coupled with its large size, could compel investors to look for the same model elsewhere.
When it comes to its rivals, he highlights that SLI has done a good job of firmly establishing the concept of a multi-strategy absolute return offering.
‘It has taken several years because they had not done it before, but the expertise is there now. It won’t take them several years [to establish the rival offerings]. What is interesting is the quality of the ideas that get into the portfolio,’ he said.
‘The Gars team have been working together for a long time and there are a large number of people contributing to that process, so the risk with these product launches is idea flow. Where are the new ideas going to come from, and to what extent are people incentivised to contribute to the process?’
While Charles Stanley’s Shauna Bevan believes there will be continued appetite for absolute return launches, she warns these types of strategies could face a liquidity crunch.
‘One concern is the derivatives are provided by a small number of investment banks and you could question whether there is enough liquidity in the market, assuming they were all to launch Gars-like products,’ she said. ‘There is definitely the demand, but there will be a capacity issues on some level.’
Bevan added that she welcomes the launch of other strategies, as they give her research team more choice in an environment where clients want low volatility returns.
‘Along with our peers we are looking for ways to mitigate equity risk. From a business point of view it makes perfect sense to launch a rival to Gars, which is a perfect asset gathering machine,’ she said.
It is clear that the appetite for taking a bite out of Gars’ £20.6 billion legacy shows no signs of abating, and it is unsurprising that rival investment houses want a piece of this lucrative trade.
However, much will depend on the quality of their execution, their resources and ultimately whether the juggernaut that is Gars can continue on its trajectory.