Absolute return funds the US experience

Monksfield you are correct that the monthly correlation of GARS and the MSCI world index in euro is c0.55 however when you use the weekly correlation data the correlation falls to 0.33.

Rory, only time will tell if absolute return funds can generate long run equity returns. However over the last 6+ years it has. As you state the real return on equities over the long run is 5%. So if an absolute return fund can achieve cash +5% returns then that is the equivalent of this.
The key for GARS is that it is a diversified fund that is actively managed so it can benefit from returns from a number of strategies in bond markets, credit markets, currencies ad equity markets (including volatility of equities).
It is actually very easy to look under the bonnet of GARS as the manager is very transparent. Have you made an effort to look at this fund or any absolute fund in details?
 
No I have not examined the fund but I am looking at covering unit-linked funds in general on my website possibly before the end of the year.

My point is that there is no strategy yet uncovered that has been shown to deliver the same risk premium as equities. So whatever GARS is doing is either acting as a closet managed fund (that's grand) and in which case if bonds suffer a sell off to more normal yield levels we will see poor performance. It cannot be an equity fund as the returns are smooth. If it is using derivatives to smooth the returns, fine but that costs so in the medium term the fund will not match the 5% risk premium. Maybe its gearing or leverage. Timing the switch between asset classes perhaps? I doubt that. None of the recognised successful investors has claimed they got outperformance through trading markets (or asset classes).

So I come back to Marc's point - if it is indeed an absolute return fund, then it will not continue to deliver the returns of the past. That said, a 4-5% annual straight line return might be acceptable also. But that leaves little for marketing and distribution costs. Maybe it's a first class fund manager, and good luck to Standard Life if that is the case, and they deserve to trap the business.

Rory
 
Interestingly I have looked at the day by day movements of GARs since launch and a key day in it's history was the 20th October 2008.

Between the 20th and 25th Gars appreciated by more than 4% at the same time a comparable 40% risk portfolio declined by nearly 4%. This difference over just a few days explains much of the overall perfornance of GARS over it's entire life. (a cumulative difference of 8.39% since launch compared to the 40% risk strategy)

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It seems plausible that GARS was just lucky on these few days and bet the right way. The excess return of around 8% represents the full amount of excess return earned by GARS over the whole period of it's existence. Distinguishing luck from skill isn't easy, but surely if there was real skill at work here, we should have seen other examples subsequently - but we haven't.

This view is more credible when we look at the return over the period since the 1st December 2008 where no clear advantage has been demonstrated against the same strategy.

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I conclude that GARS had a lucky week or so in October 2008 and this hasn't been repeated since, yet the marketing materials continue to bang the same drum.

Think about this for a moment. How big was GARS in October 2008? How much money was invested then? (note in Jan 2009 it was €975M source Standard life) How big is it now? (€2.256BN source Standard Life as at the end of July 2012) How many people have bought in after October 2008 convinced that they are buying real skill? How few people really benefited from that good period?
 
Marc said:
I conclude that GARS had a lucky week or so in October 2008 and this hasn't been repeated since, yet the marketing materials continue to bang the same drum.
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Your conclusion is deeply flawed.

Take, for example, the 12 months to end July 2012, which had nothing to do with the few days in 2008 you've looked at above.

GARS performance: +9.79%
Six-month EURIBOR +1.64% (the GARS cash benchmark)
Average Irish Balanced Managed Fund: +9.6%

So in that year the GARS fund outperformed the average of the ten main Irish Balanced Managed Funds but with lower volatility.

Was that luck too?
 
Out of curiosity, which of the Goldcore target portfolios would you consider to be a suitable alternative for GARS?
 
Marc - are you allowing for the fact that unit prices on a given day may reflect prices from the day before?

While the pricing of unit-linked funds does not have the transparency we would all like I doubt that the GARS record in that week is anything other than a fair reflection of its performance. As for luck sometimes chunks of cash come into funds at fortuitous times and if one of those happened to a day or days of high volatility the element of luck could have played a part. However as Dave points out the fund has hit its performance target since so hats off to them.

As for the size the GARS strategy is running closer to €20 BILLION now.They now claim that they could run the strategy at several times the current size.
 
Marc the GARS fund has been available to retail investors in Ireland since September 2008 however it was available to institutional investors in May of that year. All this data is in FinEx. The fund was available to UK institutional investor in June of 2006, over 6 years worth of data.
 
Was that luck too?
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No that was risk. Let me explain.

Firstly, Gars uses 6 month Euribor as its benchmark. With current low interest rates this is like me saying I've done well because I beat leaving my cash in the attic. Equally short term Euribor is considerably less volatile than Gars. This is simply bad benchmarking on their part. I'd accept 5 years Gilts or similar as a relevant benchmark for GARs.

All that matters is how has it performed compared to a strategy which took a similar level of risk - like this comparison for example which looks pretty similar to me:

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Secondly, you compare with an average Balanced managed fund over 1 year. Again bad benchmarking. Despite the name, a typical balanced managed fund had 60 to 70% risk exposure whereas Gars is running at more like 40% net exposure.

Finally, you ask which strategy I would consider to be a suitable alternative to GARS and here you have really hit the nail on the head - exceptional work.

Unlike a single one size fits all strategy I believe that the role of a financial planner is to match an investor to the portfolio of investments that best meets their need, willingness and capacity for risk. I can create an infinite number of efficient portfolios for any particular need of any client and exactly match their requirements. GARS or any other packaged product picked off the financial services shelf cannot do that. That's the difference between selling products and matching investors to portfolios.
 
6 month Euribor is the benchmark as the fund is looking to get a positive return and beat inflation, however inflation is not priced daily, Euribor is. Cash should and will beat inflation in the long run. Interest rates are currently low but they won't be forever. 5 year gilts or bunds is not a good benchmark for this fund as they will not always be positive!
I think you are looking at GARS over far too short a time period on FinEx (only 4 years). The fund has been running for over 6 years in the UK and that takes in the good period of 2006 and 2007' as well as the equity market sell off fr summer of 2007 to March 2009 and the bull market to today. When taken in this context it has delivered on performance and very importantly kept the funds volatility to about a half to a third the vol of equity markets.
I agree with you on investors risk tolerance, this is where the regulator is moving advise to. GARS will not suit all investors but it suits most as it has shown that it can deliver equity like returns thru the most volatile of markets and keep volayility at c6%.
 
But 6 month Euribor doesn't have the same risk using your own target for volatility.

The mean annualised volatility of 6 month Euribor over the last decade has been 0.37% yet your target is 6%. This is an apples and oranges comparison which flatters the results for GARS.

Remember risk and expected returns are related. GARS took more risk and did better. But it is bad benchmarking to compare GARS to EURIBOR and claim a victory.

If you want to target beating inflation then why not just buy inflation linked gilts?

UK Institutional Class GARS vs Barclays UK Government Inflation Linked Gilts (5-15 years) July 2006 to August 2012.(source Bloomberg)

GARS Average annual return 7.94%pa
UK Inflation Linked Gilts 8.27%pa


You say
5 year gilts or bunds is not a good benchmark for this fund as they will not always be positive!
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But this suggests and implies that GARS is ALWAYS POSITIVE which just isn't true.

Worst 1 year return
GARS -7.83% (11/07 - 10/08)
GILTs -7.58% (12/07 - 11/08)

I can buy the inflation linked GILT strategy for 0.15%pa - why anyone would pay GARS fees is beyond me.
 
think the key to returns going forward will be what happens with inflation. Bond markets are suggesting that inflation is definitely not a problem but the classic policy response to a debt crisis is to engineer inflation.
 
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