Much of the problems with GARS are specific to this fund – in particular its size. George Cadbury, managing director of strategic development at Gatemore Capital, says: “The GARS fund is a victim of its own success.”
When a fund reaches the size of GARS – which has £22.7bn under management – the pressure on performance becomes significant. “It’s so much harder to manage a fund this size than a smaller one as your spectrum of realistic investment opportunities is so limited compared to a smaller one,” says Cadbury.
Everything becomes harder when a fund reaches this size. Not only is the size of investment opportunities much smaller but much greater profits have to be made to maintain single digit performance levels.
GARS recent travails underlines one of the fundamental truths about active management – this is one of the few industries which suffers from diseconomies of scale. While it’s much cheaper for an asset manager to run a large rather than a small fund, it’s harder for that fund to be successful.
Smaller funds can be more nimble – they can make decisions more rapidly. They have a wider range of investment options to choose from because the sums they have to invest are much lower. They can retain a maverick identity and not become a moribund institution, overwhelmed with bureaucracy. And it is much easier to make 5% returns on a £10m fund than it is on one with assets of £10bn.
Size is not the only issue bedevilling GARS, however. Vickers says: “The merger with Aberdeen Asset Management and a number of high-profile defections over recent years are also playing a part. It’s a perfect storm.” A spokesperson for Aberdeen Standard Investments said: “At the start of 2016, global markets were challenging for GARS but from the second half of last year we have seen four consecutive quarters of positive performance sustained into 2017.”
While the GARS fund faces a number of individual problems, absolute return strategies remain popular with investors. Bunglawala says: “The assets under management in these strategies rose to just under $300bn by the end of the second quarter of 2017 from $180bn in 2014.”
But while the absolute return sector remains popular with investors, there are some issues which need to be addressed. Vickers says: “Institutional investors are making unrealistic demands of absolute return funds.” They expect these funds to have low correlation with equity and bond markets.
But that target has been more difficult to attain as there has been an increasing correlation between bond and equity markets in recent years, he adds. “It makes it very difficult for fund managers to achieve their low correlation with equity and bond markets, especially for those reliant on beta as a source of return,” says Vickers.
In addition, institutional investors have also expected absolute return funds to preserve capital. “That’s narrowed down the investment universe for absolute return managers as high equity and bond market valuations have made most concerned about drawdowns,” he adds.
Many absolute return managers’ hands are further tied by their inability to use leverage, which further reduces their potential to generate returns. Vickers says: “They have also lost their ability to generate some return from the cash used to support their derivative positions.”
In the current market conditions, these institutional investor demands are unrealistic. Vickers says: “Investors have asked for nirvana and fund managers have complied rather than pushing back.” In the past it was possible to comply with these investor demands because returns were higher in some of the low volatility asset classes, he adds. But this is no longer the case.
Absolute return managers need to take a step back and decide what is the best investment strategy for their fund.
Vickers says: “For some managers that will be a return to a more traditional absolute return strategy which does not have a capital preservation requirement and makes greater use of leverage.”
But other fund managers may well decide that they can comply with some investors’ more difficult demands to produce returns with low correlations to equity and bond markets over a defined time period, he adds.
