Standard Life Investments (SLI) saw outflows from its flagship Global Absolute Return Strategies (Gars) fund accelerate to £2.8 billion in the first quarter.
The group reported in February that it experienced net outflows of £4.3 billion from the strategy in 2016, a £13.7 billion reversal from the £9.4 billion inflows it enjoyed the previous year.
Gars has been one of the industry’s big success stories of recent years, prompting a slew of rivals to poach some of its team members and launch similar products.
However, a period of sustained underperformance and growing concerns about Gars’ size, which reached around £53 billion last year, led investors to pull £400 million from the mandate in the second quarter last year, in its first ever quarter of net redemptions.
Pension consultants Mercer, which advises a number of large local government mandates with significant positions in Gars, put the fund on a ‘watch’ rating last July, citing concerns about its capacity. The watch rating was affirmed in February and the prospect of an uptick in outflows, should the fund be downgraded, was a key factor behind UBS slapping a ‘sell’ rating on parent group Standard Life in January.
The investment bank estimated that Gars experienced net outflows of around £3 billion in the fourth quarter, believing £500 million of this was withdrawn from the UK fund, which is now £25.1 billion, in December alone.
UBS branded 2017 a 'critical year' for Gars to turn around performance, and projected that the strategy will see another £3.9 billion walk in the first half of 2017, which, if its earlier analysis rings true, would necessitate a slowdown in redemptions in Q2.
The retail version of Gars returned -3.1% and the institutional share class -2.6% in 2016, its first negative calendar year and lagging its six month Libor benchmark's modest gain of 0.6%.
Over the full year it anticipates £6 billion will be withdrawn. Continued underperformance could prompt more pension funds to dump Gars, it warned, highlighting that many trustees work on two year performance cycles.
The Gars strategy is a key revenue driver, accounting for around 30% of SLI’s revenues, according to RBC analysis last year.
SLI announced its flows data in a trading update posted alongside its parent group’s unveiling of the prospectus providing further details of the £11 billion Standard Life/Aberdeen merger.
It stated that net inflows for the first three months of the year totalled £0.3 billion, with respective outflows of £1.1 billion and £0.7 billion from its institutional and wholesale divisions offset by positive inflows from its retail, which includes its wrap platform, and workplace distribution.
The group said this reflected the growing diversity of ‘growth channels’, reflecting its desire to avoid being overly reliant on the Gars behemoth.
SLI’s total assets under management rose from £277.9 billion to £278.1 billion year-on-year.