After an early attempt to bring non-directional hedge-style alpha into the traditional retail fund sphere largely fizzled (who remembers BlackRock’s once white-hot UK Absolute Alpha? Not many, judging by its £204 million valuation), a second wave has recently offered more staying power.
The pioneer and undisputed champ remains Standard Life Investments’ all-conquering £26 billion behemoth Global Absolute Return Strategies (Gars) fund. It is hard to pull off that kind of success unnoticed however, and since 2013, some of the original architects of the strategy have been lured away to pastures new.First the team of David Millar (pictured), David Jubb and Richard Batty were poached by Invesco Perpetual in mid-2012. Then Euan Munro – often credited as the primary mastermind of Gars – headed to Aviva a year later.
The fund launched on the back of Munro’s hire, Aviva Investors Multi-Strategy Target Return, remains a relative sleeper hit, gathering assets of £1.17 billion since launch in July 2014.
Millar, Jubb and Batty produced the blockbuster sensation of 2015, however. Assets in their Invesco Perpetual Global Targeted Return (GTR) fund more than quadrupled last year to a total £4.25 billion, taking in more than £1 billion through August’s volatility alone.
This is all the more remarkable given the fund has not yet got the three-year track record normally needed to spark consultant interest.It is also worth noting that the market appears a long way from saturation, with all three funds adding significant assets in 2015.
Since launch in September 2013, GTR has narrowly beaten its older rival, returning 11.48% versus Gars’ 10.7%. Over the period since launch in July 2014, the Aviva fund has beaten both its rivals however, returning 8.53% versus Gars on 4.23% and GTR on 3.84%.
While hesitant to be drawn on the house forecast for the next 12 months, Millar said that the fund is broadly positioned for volatility, although he added that this is via specific strategic positions, such as holding US consumer staples versus consumer discretionary, rather than a more general overlay.
‘If you are wary of bonds in terms of their defensive value, what do you use instead, and how far off the beaten track do you go to find it?’ he said. ‘Consumer staples held against consumer discretionary [stocks] has bond-like characteristics. We also use variance futures and options, which potentially offer longer-term hedging characteristics [than the Vix].’
While the managers are sceptical about the risk diversification of richly valued credit, prices have moved far enough that they currently hold Citywire A-rated Paul Causer and Paul Read's Invesco Perpetual Corporate Bond mandate in order to pick up the yield.
Separately, the fund has exposure to Australian versus European fixed income in order to play global monetary policy divergences. This is in addition to holding European and Japanese equities outright in the expectation that the central banks will continue to support easy liquidity provision.
The team are not yet taking an explicitly directional view on commodity pricing, but Millar said the resultant collapse in commodity-related asset pricing has opened up a range of relative value opportunities.
‘We have paired off the Chilean peso against the Australian dollar – it’s a sort of good [emerging market] versus bad [developed market] play. Both are commodity-related currencies, but the peso has been devalued way past where the terms of trade would justify. The Australian terms of trade suggest the currency still has further room to fall.’
Unlike many other multi-asset houses, the team has chosen to retain its dollar exposure even after the hearty gains of 2015, holding it versus both the euro and the Canadian dollar. Millar added that the managers have modified the trade to make it less directional, although he declined to elaborate.