Living on planet GARS: Lessons in how (NOT) to invest
This fantastic article written by Abraham and originally published on finalytiq.co.uk is reproduced in essence here by his kind permission. We see one of our key roles as standing between you, our client, and the investment industry’s voracious appetite for creating investment funds that suck wealth from you. We’re not interested in what’s working now; we are only interested in what has always worked, owning the great companies of the world (equities) is the only way to capture the return from human ingenuity and provide an income to meet rising living costs in the long term.
A recent article in the Guardian is the latest indictment of the Standard Life GARS fund. The fund has underperformed on virtually all imaginable benchmarks over the last three and five years. It also makes a very interesting case study reinforcing the inherent risks of absolute return funds, it reinforces the robustness of our due diligence processes, and gives us a warm glow to know that we have never used GARS or any other fund in the Absolute Return sector.
It was not long ago that the fund was a top holding in many advisers portfolios. If you weren’t holding GARS, you weren’t cool. However, times have changed. Let’s take a forensic look at some of the reasons people invested in the fund.
If you weren’t holding GARS, you weren’t cool.
- Alternative to what?
GARS was often sought out under the banner of investing in ‘alternatives’. By its very definition, investing in alternatives is often a bet against the equity markets. So, if you invest in alternatives, you should expect them to underperform during a raging bull market. And if you’re lucky, they’ll provide some downside protection in a bear market.
The problem with GARS (and therefore for those who invested in the fund) is that it promised equity-return for taking a cash-like risk – the fund aimed to generate positive (cash plus 5%) return in all market conditions! It has failed miserably.
- Complexity breeds risk.
In retrospect we’re not sure anyone really undersood how GARS works! Veteran fund manager Alan Miller doesn’t. I certainly don’t. Many advisers who invested in GARS didn’t. This explains why it became harder and harder for them to turn the fund around once it started going south after the original team left.
Legendary investor Warren Buffet once admonished us to “never invest in a business you cannot understand.”
The investment industry loves complexity, driven by the strange belief that complexity should earn a higher fee! But complexity breeds risk. Complexity makes it harder for investment teams to explain their own strategy. It makes it harder for advisers to conduct adequate due-diligence on a product. And the investor is worse for it. It’s the classic lose-lose-lose.
- Manager risk.
Things really began to go south for GARS when its architect Euan Munro left SLI to run Aviva Investors, taking some of his team with him. One of Munro’s first acts at Aviva was to… you guessed it… launch new funds to rival GARS. He was swiftly followed by managers Richard Batty and Dave Jubb who were poached by Invesco to set up a rival fund. They have since attracted a whopping £10billion into their new funds, much of which came from GARS!
The lesson here is, investors who place their faith in active managers also bear the risk of any movements these managers may make during their careers. And unfortunately, the more complex the strategy, the harder it becomes to maintain consistent outcomes when the manager leaves. Anchoring your financial future on the career decisions of a manager seems like a bad strategy if you ask me.
- Success breeds failure.
One fundamental problem with asset management is diseconomy of scale; size tends to eventually hurt performance. This is particularly true for funds with complex strategies. In its glory days, GARS topped £26billion in size. This creates a problem of too much money chasing too few ideas. But it’s also against the interest of the fund houses to stop accepting money into a growing fund. This creates a conflict of interest between the fund and the investors.
While the fund continues to haemorrhage money, it’s fascinating that SL continues to feed it. GARS continues to be a top-three holding in SL’s MyFolio, MPS and 1825’s models! Some MyFolio funds allocate as much as 20% of the total holding to GARS alone!
This highlights inherent conflicts of interest in vertically-integrated models. If SL drops the funds from its portfolios, that could be seen by other investors as an admission of defeat by SL. So they keep piling investors’ money in.
Those advisers that did not recommend GARS are feeling vindicated, as they should. But sadly, clients rarely thank their advisers for avoiding the flavour of the month. They may ask why a particular fund that has performed rather well lately isn’t in their portfolio. I would always advise clients to find a planner they trust, and I would emphasise that the most successful and safe investment strategies involve playing the long game.
This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
In summary; it’s always worth remembering that risk and return are related – you cannot have one without the other. Anything that promises to suppress portfolio volatility is going to suppress return. You simply can’t have your cake and eat it. If it seems too good to be true, it probably is.