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‘It was not terrible, but it was not great’: ASI’s Fowler and Bint on why the future looks bright for GARS

Bint and Fowler explained the exodus from GARS since 2016 was the result of a “static” portfolio, which relied on false assumptions and led to poor performance.

“You cannot get away from the fact that performance was not good enough,” Bint said. “There are other reasons [for the outflows], but simply, performance was not hitting the objective that our clients had a right to expect.”

Launched under the Standard Life Investments umbrella in 2008, GARS was once the largest fund in the UK, with £26.8bn in assets under management (AUM) at its May 2016 peak. 

Today, the fund stands at just 10% of that figure, with an AUM of £2.6bn, according to figures from Morningstar.

In the three years to 31 December 2018, GARS underperformed both its peers and benchmark in total return and annualised total return terms, according to data from Refinitiv.

The fund’s objective is to provide investors with returns equal to cash +5% (LIBOR GBP 6 Month + 500 basis points), which over the three years was 17.9%. Instead, GARS lost investors 7.5%.

Since then, GARS has begun to turn around its performance, although it has yet to meet its objective. In the three years annualised return to 31 August 2021, GARS offered investors 4.45%, according to Morningstar Direct data analysed by Punter Southall Wealth, compared to its target of 5.6%.

Static risk

Absolute return investment director Fowler, who has been with the team since June 2015, argued the period of underperformance was partly caused by misjudging markets.

“From 2015 to 2018, the portfolio risk was relatively static,” he said. “It was assumed that positions would just perform or come good over long horizons.

“But markets do not behave that way, as we saw in 2020. New things happen and you need to react to them.”

Instrumental to addressing this issue was Katy Forbes, according to Fowler, who has worked with absolute return products since Standard Life Investments opened the absolute return bond strategy more than a decade ago and was appointed head of absolute return in 2019.

“Katy is willing to change the risk profile of the funds very adaptively as new information comes in,” Fowler said.

“For example, in February 2020 Katy took a very bold decision, in conjunction with the other portfolio managers, to shut down the risk of the portfolio, particularly in the equity space.

“There was a modest drawdown from peak to trough for GARS, but the absolute return performance was protected and that gave GARS the chance to finish the year and generate an above-target return in 2020.”

People matter

While adapting the risk profile began to correct the underperformance, addressing the underlying issue started with the “realisation that people and processes matter”, Fowler said.

“GARS was originally started by a few portfolio managers who were just very good at what they did, and it was a small, tight knit team.

“Then, the resources expanded dramatically but the processes did not keep up in terms of making sure those broad resources were able to channel that information into the portfolio management team to make use of it for the fund as easily as we would have liked.

“It was not terrible, but it was not great.”

While Forbes was one key figure, the first big change came with the hiring of Aymeric Forest from Schroders to become global head of multi-asset solutions, he explained.

“As Forest came in to lead the department, he continued what was already underway, which was a series of portfolio management changes and process tweaks.

“We now have processes which enable more than 100 people to contribute meaningfully into the discussions that deliver returns for GARS.”

A fundamental change in the day-to-day operation of GARS came in the form of asset class steering groups, which bring together team members “from senior level portfolio management to junior analysts” in a daily meeting to share ideas.

There are eight of these steering groups covering equities, foreign exchange, fixed income, commodities, private markets, emerging markets, volatility and ESG, which all contribute to a morning meeting each day.

Size also matters

The input of these steering groups and the more than 100 people that comprise them help determine the enormous number of holdings within the fund, which, according to data from FE fundinfo, currently stands at 1,567.

However, Fowler and Bint argued this is nothing for investors to worry about as GARS is a macro fund which holds “typically 25-35 different investment ideas”.

“[A concerned investor] looking at the individual securities would be the same as worrying about not having enough information on all the companies in an S&P 500 ETF,” Fowler reasoned.

Bint added that what is more important is the ability of the managers to explain each of the investment ideas to clients.

“You can explain those investment ideas in no more than three or four sentences,” he said. 

“There may be complexity in implementation, but the
way that the ideas are generated is straightforward.

“For example, the strongest strategy in the first quarter of 2021 was a position where we owned US government bonds and were short German government bonds.

“We felt there was much more potential for the US authorities to loosen policy rapidly than there was in Europe, which would see a significant fall in US bond yields relative to German bond yields. That is exactly what happened.”

'It was not terrible, but it was not great': ASI's Fowler and Bint on why the future looks bright for GARS

Rebuilding trust

Despite these changes, GARS continues to struggle with outflows and has shrunk 25% since the beginning of the year, which both Fowler and Bint agree stems from a lack of trust in the infamous fund.

“The single most important thing is to rebuild trust,” Bint reasoned. “That means rebuilding performance.

“All we have focused on for the past two-to-three years is to repair that performance track record.

“Once your track record is repaired, you then have a right to go back to the broader marketplace and say ‘look, we are here, we are fit for purpose, we are fit for business, please look at us again’.

“We do not expect it to be easy, but we do expect if we can continue to deliver performance there will be clients who are interested in investing with us.”

Fowler added that many conversations they have had with investors have revealed a reticence to engage with absolute return while there continues to be an “extraordinary market” for traditional assets.

“There has been a lack of interest in absolute return while there has been such a strong growth environment overall,” he said.

“However, I think we are heading to a period where a broader toolset is going to be required as investors [will not] be able to get away with just being long bonds and long equities.”

When asked if there were plans to return to the goliath that GARS once was, the answer is simple – no.

“We are focused entirely on the performance of the fund and seeing great results for our clients,” Bint said. 

“If assets come after that, that is obviously a very desirable outcome from our perspective.

“But you do not get the assets without the performance.”

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