Morningstar issues Standard Life GARS capacity warning

Morningstar senior manager research analyst Randal Goldsmith has issued a capacity warning to investors in the Standard Life Global Absolute Return Strategies fund as the flagship vehicle reaches £40bn assets under management.

Goldsmith says the investment research firm is “keeping a close eye” on asset capacity and argues the size of the fund is now affecting performance.

He says: “With this stretched capacity, we are already seeing changes to the fund and in particular have seen a reduction in the fund’s ability to produce alpha from stock selection.

“Whilst the fund and its management team is in good shape, investors should keep a watchful eye on the level of inflows into the strategy and for signs that the managers are struggling to identify new ideas that they can invest in meaningfully.”

Standard Life has already pledged to review the growth in assets under management within the GARS fund.

Since the fund launched in May 2008 the team has lost some key individuals, which led Morningstar to put its bronze rating under review while considering their impact.

The fund has had to weather the departure of a number of key individuals in recent years. Three senior portfolio managers left the GARS team in September 2012, followed by team head Euan Munro in July 2013, and then Ian Pizer early in 2014.

The fund is currently managed by Guy Stern, who has headed the team since Munro departed.

Goldsmith, however, is not worried about changes to the team, which current employs 40 people. He also says investors should not be concerned about the negative returns seen in the second quarter of this year due to market volatility.

Over the year to 26 August the fund has returned 1.9 per cent, below the average return of 2.8 per cent for the IA Targeted Absolute Return sector, according to FE. 

Goldsmith says: “SLI doesn’t aim to generate consistently positive return on the GARS fund and the portfolio construction approach is not designed to be market neutral. What it aims to do is to generate Libor plus 5 per cent over 3 years rolling.”