Ten-year stretch keeps standard up

As Standard Life Investments celebrates its first decade it plans to rebuild its fixed income reputation and launch equity income and property portfolios next year, writes Will Jackson.
Standard Life Investments

Standard Life Investments is a wholly-owned subsidiary of Standard Life. The firm has assets under management of about £120 billion, of which £50 billion is in equities, with GBP 40 billion in fixed income and GBP 10 billion in property.

In an environment of ever-worsening economic data and corporate cost-cutting, last month’s tenth anniversary celebrations at Standard Life Investments (SLI) must have been a bittersweet experience.

But despite the general mood of gloom among fund managers, SLI has achieved much since its launch on November 16, 1998, including expanding its global presence with a joint venture in India and opening offices in Hong Kong and Boston, Massachusetts.

Assets under management have also grown, doubling from £60 billion to £120 billion. Equities, which grew by 55% over the period, continue to form the bulk of the business but Jacquie Kerr, head of mutual funds at SLI, says a new bond fund will shift the focus back towards fixed income in 2009.

“We were a major force in fixed income in the 1990s and I would like us to become a major force again,” says Kerr. “We have a 5% share of the market and we are looking to increase that to 6%.”

Kerr declines to comment on the likely structure of the fund but confirms that it is scheduled for launch in the first quarter of 2009, subject to Financial Services Authority approval. The firm’s existing fixed income products are performing well, according to data from Morningstar. Of the four SLI products listed in the Investment Management Association’s (IMA) Sterling Corporate Bond sector, three funds – AAA Income, UK Ethical Corporate Bond and Select Income – achieved first quartile returns for the one and three years ending December 8.

Justine Fearns, the head of research for AWD Chase de Vere, holds client money in Select Income and welcomes the prospect of a renewed focus on bonds at SLI.

“Some of the Standard Life fixed income funds have not been as consistent over the last couple of years, but there is a huge capability there,” says Fearns. “Presumably the new fund will have a few more tools in the kit – you need flexibility to play properly in the fixed income space.

“There are different views on this, but mine is that funds should be able to move up and down the curve to generate consistent returns.”

However, both Fearns and Shane Balkham, a fund of funds manager at Bates Investment Services, are more interested in SLI equity funds run by Karen Robertson and Harry Nimmo.

Balkham is not using SLI products in his portfolios, but says Robertson’s £650m UK Equity High Income and £260m UK Equity Growth funds are on his “radar”. He is also keeping tabs on Nimmo’s UK Smaller Companies portfolio with a view to investing in the second half of 2009.

Nimmo, who has run the £270m fund since its launch in 1997, produced strong relative returns over both the past one- and three-year periods. Over the longer time-frame the fund fell by just 6% compared with an average decline of 32% in the UK Smaller Companies sector. Fearns says Robertson and Nimmo are the SLI managers she can “name off the top of [her] head”. She holds UK Equity High Income and UK Equity Growth, both of which were recently upgraded to AAA-status by Standard & Poor’s (S&P). “I like what Karen Robertson brings to the party,” adds Fearns.

Plans to expand the range of offshore SLI equity funds available to British investors have been delayed by the firm’s third party administrator, according to Kerr. As Fund Strategy reported on February 18, SLI expected to open up its Luxembourg-domiciled India, China and European smaller companies portfolios to British advisers by the end of this year. British distributor status and sterling share classes are likely to be added to the funds in 2009.

Kerr adds: “It was always a ‘nice-to-have’ rather than a priority, but I am reasonably optimistic this will happen in the first quarter of next year.”

Within the onshore range, the next product launch is likely to be a global, possibly European-focused, equity income fund in the second quarter of 2009. Kerr says the fund, which will tap into demand for geographically diversified equity income exposure, is still “on the drawing board” and declines to give further details.

Despite a tough period for the firm’s Select Property and Global Reit funds, which declined by 51% and 61% respectively over the past 12 months, the firm is also considering launching a British bricks and mortar property portfolio.

However, Kerr’s immediate focus is on promoting the firm’s Global Absolute Return Strategies (Gars) unit trust. The fund, an institutional portfolio that was opened to retail investors in May, aims to outperform the British six-month sterling London Interbank Offered Rate (Libor) by 5% each year, gross of fees, over three-year rolling periods. To achieve this target the fund exploits inefficiencies across global markets, using traditional investments combined with advanced techniques.

Sophisticated strategies include relative value, duration, credit spreads, inflation and volatility. Tam McVie, investment director for mutual funds at SLI, says the fund has “kept risk on the table” throughout 2008, with risk diversified across a wide range of asset classes. The portfolio has a net long position of about 25% in equities, in addition to currency plays and a small degree of exposure to listed property. Other plays include bets that the Swiss equity market will outperform Germany and that the volatility of the S&P 500 index will fall, relative to the Nikkei 225.

After a tough September for the fund, McVie says short duration and relative value positions boosted performance. The fund has proved popular with retail investors – assets under management broke through £500m earlier this year and have since topped £800m, of which about £100m is retail money. The award of an S&P A-rating this month is likely to encourage further inflows. S&P highlighted the management team’s experience and well-constructed investment process.

Kerr says she is comfortable that retail investors are ready for such a sophisticated product.

“The vast majority of our distribution is through advisers, and we offer a huge amount of training both to our sales force and to advisers,” she says. “It is a reasonable product for investors, particularly now that there is plenty of value, but the markets remain volatile. Because it is more broadly diversified than other funds, we are confident that it will show its value over time – it may be down 5% over the last six months, but the average managed fund is down 23-24%.”

Some advisers will take more convincing than others, and Fearns says she is happy to sit on the sidelines at this stage. “Standard Life did speak to us about Gars earlier this year and I like what they are doing,” she says. “We want to make sure that the fund translates well from an institutional to a retail product, but I am hopeful that it will turn up on our panel.”

Fearns says she is assessing several absolute return products but adds that it is important for end investors to realise that such funds are not a panacea and can lose money in extreme conditions.

Overall, Kerr says she is happy with the performance of the SLI range and remains confident in the firm’s investment philosophy and investment process. However, she readily admits that her own £220m Dynamic Distribution fund has had a “torrid” time in recent months because of its focus on equities and property – the fund fell 27% over the past 12 months, compared with an average Cautious Managed sector decline of 19%. Kerr is running a property allocation of just 10-11% compared with 20% previously, although she expects to increase the weighting.

In terms of new retail money, Kerr says SLI is “ahead of the game” and has achieved inflows in recent months. However, she predicts continued volatility across global markets and challenging times for all asset managers.

“It will be a difficult three to six months ahead,” says Kerr. “But there is value emerging and investors are starting to move back in, slowly but surely. We are encouraging investors to take on risk selectively.”

The best and worst funds for each group profiled in the Focus are shown on a relative rather than absolute basis. Until recently, the best and worst funds were defined in absolute terms. But the percentile ranking of a group’s funds are now shown relative to their respective sectors.