Should investors heed warning over £40bn GARS capacity?

Following Morningstar’s capacity warning of Standard Life Global Absolute Return Strategies fund, is it time for investors to find “smaller” alternatives or continue believing in the current fund’s strategy?

Morningstar senior manager research analyst Randal Goldsmith issued a capacity warning to investors in Guy Stern’s GARS fund on Thursday as Standard Life flagship vehicle reaches £40bn in assets under management.

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

However, Chelsea Financial Services managing director Darius McDermott says although the fund is “big and complex”, he is not prepared to write if off yet.

He says: “When markets are very negative most absolute return funds are a little bit negative as well. Also, Standard Life, from our research, is quite in the middle of the sector, it is not worse or better than the majority of absolute funds.”

AXA Wealth head of investing Adrian Lowcock adds that this fund is very different from the typical equity or bond fund and its complexity means it is difficult to judge if its size will impact performance.

He says: “The managers use many different investment strategies, investing across a wide range of assets including equities, bonds, commodities and currencies, utilising a wide array of tools to achieve their investment returns. The fund uses liquid investments in liquid markets, which will reduce capacity risks.

“Given the complex nature of this fund it is also difficult to tell whether capacity is impacting on performance and fund structure over whether it is the team’s investments decisions and reactions to global events that are driving it.”

Over the past five years the fund has returned 28.92 per cent compared to 18.41 per cent for the Investment Association’s Targeted Absolute return sector.

However, 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.  

Lowcock suggests investors may wish to consider alternative funds which are not as large to avoid the risk of capacity affecting performance.

He suggests the £2.9bn Invesco Perpetual Global Targeted Return, which is managed by former members of the Standard Life GARS fund, the £230m Schroder UK Absolute Dynamic fund, managed by Steve Cordell, and Iain Stewarts’ Newton Real Return, which has £9.6bn in assets.

Despite the risks of the fund’s overcapacity, McDermott says the fund will continue to be on his radar. 

He says: “We’ve been supporting the fund since 2008. It is big and generally I am always concerned about big funds but the other thing that always gives me confidence about GARS is the fact that Standard Life group has its pension invested in it. And the day they don’t have their pension in it is the day that we exit.”