Irish Pensions Magazine Spring 2015
12
Advertorial
Analysis
2
015 has already seen a series of market-moving
events ranging from bold if belated monetary
action in Europe, uncertainty caused by Greek
brinksmanship and the Swiss National Bank removal
of their currency peg to the US Fed’s more dovish
stance. Together these create a challenging landscape
for investors, particularly for those seeking stability
and consistency along with reliable returns. Many
fear that:
• bond markets appear to no longer offer a
combination of low risk and modest positive
returns
• developed equity markets too have reached
valuation levels that could appear rich, particularly
if interest rates were to move higher.
• emerging market assets could be threatened by a
repeat of the “Taper Tantrum” seen in 2013
• alternative assets like hedge funds and
infrastructure often appear costly and inaccessible
Where then for the European investor, now that
deposit rates are negligible or even negative?
Multi-Asset Absolute Return Investing could offer
a suitable answer for those who don’t require the
security offered by deposits. Some such funds, like
GARS (Global Absolute Return Strategies Fund)
from Standard Life Investments target a modest but
appealing return
1
, and seek to minimise the risk they
take to achieve it
2
. This markedly contrasts with the
other inhabitants of the Absolute Return universe
like hedge funds, that usually target a particular
level of risk-taking, and seek to maximise potential
return for that risk budget. While this focus on return
might initially appear appealing, the subtlety of
the Standard Life Investments approach is not lost
on its global investor base. For GARS, the focus is
on minimising unrewarded risk, then mitigating all
aspects of the risk that it does take to generate long
term returns:
• Investment risk – through extensive global
diversification, GARS mitigates the risk impact of
each of its carefully chosen investment positions.
Eachof its25 to35strategies is selectedon thebasis
that it is expected to generate a material reward
on a 3-year view and also offers diversification in
combination with other positions in the fund.
• Counterparty risk – by careful selection and broad
diversification across multiple counterparties, and
by daily collateralisation of positions to manage
fund risk against the failure of each one, Standard
Life Investments minimises and mitigates
exposure to other companies.
Problem: Low cash rates, highly uncertain environment
Answer: Multi-Asset Absolute Return
by Liam Stack
• People risk – through active career development,
careful succession planning and an established
team-based approach, GARS mitigates the risk
posed by staff turnover.
The resulting consistency means results can
compound through time, creating the potential for
genuinely impressive long term returns but, more
importantly, it means that irrespective which market
is the flavour of the month today, those selecting
GARS instead have the reassurance of a process that
has worked in many different economic environments
and is built to withstand market shocks.
For those reliant on their investments to generate or
supplement their income, volatility can be a particular
problem. Drawing an income from a portfolio that
is depleted following a market fall represents a
permanent loss of capital, making recovery all the
more challenging. While this is intuitively obvious it
is also challenging to evaluate in easy to understand
terms. To illustrate this we compare the likely number
of years an inflation linked income starting at 6% of
capital could be sustained, with 90% certainty. Our
model assumes:
1. Returns on average consistent with what
has been experienced in Global Equities
long-term
2. Differing levels of assumed portfolio
volatility
