Long/short currency and equity plays in developed markets as well as weightings in European and Japanese equities are just some of the strategies in the Standard Life GARS portfolio that bolstered its performance over the last quartile, according to Adam Rudd. 
The investment director, who has been at the firm since November 2012, says that the behemoth and famously defensive fund has remained above its target return of cash plus 5 per cent with 4 to 8 per cent volatility over the last rolling three-year period.
During the last financial quarter in fact, the fund held 19 strategies that provided a positive performance and 11 that negatively impacted the fund, which overall led to a strong performance.
“We typically will refine this in any given quarter where more strategies are outperforming or underperforming,” Rudd said. “That’s indicating we’re not overly reliant on individual strategies, it’s about getting more views right than wrong, which explains the returns we’ve had. It also gives us confidence about delivering a more consistent positive return over time.”
Standard Life GARS, which is £26.7bn in size, is able to invest across any cap size, any region, any asset class, and can short positions through advanced derivative techniques.
Rudd said that this breadth of universe and investment freedom combined with strict risk controls and a three-year time frame are the main reasons that the investment vehicle is so distinctive and why it can demonstrate resilience at any point in a market cycle.
Though the fund was one of many which failed to the deliver a positive return during the FTSE 100’s bear market, it outperformed its LIBOR GBP 6 Months benchmark by more than eight times during the last financial quarter, providing a total return of 1.59 per cent. This is a period when the UK equity market has been particular volatile.
Performance of fund vs benchmark over Q4 2015
Source: FE Analytics
Holdings that significantly contributed to this outperformance included positions in European and Japanese equities, which increased the fund’s returns by 60 and 30 basis points respectively.
Rudd says that he expects this story to continue, and as such is maintaining these positions going forwards to take advantage of the divergence in global growth that is unfolding at the moment.
“We think earnings growth in Europe and Japan is likely to be higher than other regions – not just compared to emerging markets, but other developed markets such as the US,” the investment director said.
“There are reforms in Japan specifically targeting higher returns on equity. We’ve seen the benefits to exporters from weaker currencies, so those factors support the earnings outlook.”
Performance of indices over 3yrs
Source: FE Analytics
Other ways that the GARS team is hoping to play multi-speed growth this year is through holding Mexican government bonds.
This is an asset class that has increased in popularity due to both falling yields from US treasuries and the potential for improved economic prospects in the region prompted by a US recovery.
“In Mexico we think the growth is likely to be comparable to the US but the yields in Mexico are a lot higher – there is almost a 4 per cent spread compared to US treasuries of an equivalent maturity,” Rudd explained.
“This gives us a significantly higher break-even in terms of how much interest rates have to rise before we’d be losing money by holding a long duration position in Mexico.”
The team is also positive on the US economy relative to other regions including Korea, and as such adopts a long/short position in the US dollar versus the Korean won. It believes that the Korean currency will be forced to adjust in order to support the region’s competitiveness and growth and that meanwhile, the tightening of monetary policy in the US is likely to lead to dollar strength.
Another strategy in the fund the team says will benefit from changes in the US economy and has been successful over the last quarter is its long/short position in US large-cap technology stocks versus US small-caps.
This strategy was the largest contributor to Standard Life GARS’ positive performance last quarter, adding 80 basis points to its total return.
“In the fourth quarter we had a significant small-cap underperformance and tech sector outperformance within the US equity market,” Russ continued.
Performance of indices over Q4 2015
Source: FE Analytics
“[Our strategy] is based on valuations which arguably look more attractive for large-caps than small-caps. Earnings growth expectations of 25 to 30 per cent over next two years we think are really unsustainable for small-caps and we don’t think it will be delivered, even if you get nominal growth in the US of 4 or 5 per cent.”
The final play that worked particularly well for Standard Life GARS and that the team expects to continue to do well is a multi-option strategy based on US relative interest rates - this added 20 basis points to the fund’s return over the last quarter.
The team refers to this strategy as a “butterfly” that is designed to exploit the flattening of the front end of the US curve– the team currently holds a long position at the 10-year point of the yield curve, and a short position at the two-year point of the yield curve.
“We think it’s a cheap way of expressing a bearish view on rates at the front of the curve. It’s not an outright short position, we’re short the two-year and 30-year points in the curve and long by twice as much as the 10-year point,” Rudd explained.
“The US has begun its rate hiking cycle and our short US forward interest rates position… is based on the view that we think real interest rates are still below consensus trend growth expectations and below real policy rate expectations.”
“As we move through the cycle and the US demonstrates it’s able to withstand higher rates, that’s a strategy we expect to be rewarding.”
Since its launch in May 2008, Standard Life GARS has provided a total return of 54.24 per cent. It has a clean ongoing charges figure of 0.9 per cent.
