Over the weekend news broke that Standard Life and Aberdeen were in talks to merge the two businesses. Today the companies confirmed the historic deal to create a giant of active management. The deal will have important implications for Standard Life's restricted advice arm 1825. New Model Adviser® has discovered the business has already been coming under pressure from the recent under performance of Standard Life's Gars fund, with advisers leaving the business. While the long-term effects of the merger on 1825 are uncertain, the deal highlights how the direction of the advice business is likely to be influenced by growing pressure on funds.
Gars gives IFAs and 1825 advisers ‘serious concern’
Owing to its recent record, Standard Life’s absolute return flagship fund has created issues for advisers but these concerns are more acute for some advisers at its own restricted advice national 1825.
The poor performance of Standard Life’s Global Absolute Return Strategies (Gars) fund (see graph below), managed by a team headed by Guy Stern, has caused a flurry of advisers to shift their clients away from this fund. However, this exit option is not as simple for 1825 advisers who are bound by their shared ownership of Standard Life.
One former 1825 adviser said the complexity of the fund combined with its poor returns in recent months was a ‘serious concern’ and part of the reason why he left the restricted advice arm.
Launched in 2006, the Gars fund targets positive returns in all market conditions by using a combination of equities and bonds as well as ‘advanced derivative techniques’. Since its launch the fund has grown to somewhat of a giant, (as of January it is £25.1 billion) and speaking with IFAs using the Standard Life platform, a sizeable number of them have at least some clients invested in it.
However, despite its confident goals, the fund has encountered difficulties and is down 6% from April 2015. See Citywire’s head of US investment research Frank Talbot’s commentary below for reasons why.
And evidence of its weak performance was demonstrated by Surrey County Council pension scheme divesting £170.6 million from the fund last September, with some of this money moved to rival Aviva Investors Multi Strategy (Aims) fund, Citywire revealed last year.
Aims is run by Euan Munro (pictured below) who was the architect of the Gars fund but left Standard Life in 2013, after which he started Aims to compete against Standard Life’s absolute return proposition.
The 1825 effect
A survey of 169 advisers found that on average 9% of their portfolios consist of traditional multi-asset and multi-strategy multi-asset funds (see graph below). This shows that funds such as Gars form a relatively small percentage of your average adviser’s portfolio but are still commonplace for IFAs.
However among some 1825 model portfolios, this percentage can be much higher. For 1825’s risk portfolio 4 proposition, Gars makes up 11.7% of the funds, according to the advice firm’s own literature.
One former 1825 adviser, who did not wish to be named, said in some portfolios this percentage was even higher and Gars amounted to nearly 20% of the total funds - although this exposure has since been brought down, he said.
The ex-1825 adviser said before joining 1825 he never recommended Gars owing to its ‘lack of transparency and extreme complexity and the impossibility for anyone to understand how it operates’.
‘I have attended numerous sessions with SLI (Standard Life Investments) trying to explain this,’ he said. ‘Although I am sometimes better informed, I would never be able to explain its operation to a client.’
Discretionary fund manager (DFM) Standard Life Wealth was in control over how much the Gars fund was in each portfolio and advisers had no ‘discretion’, the adviser said.
He added the performance of the fund has been ‘masked’ in the 1825 portfolios by the strong performance of equities, but concern over its performance as well as its complexity was a ‘serious concern’ for the former 1825 adviser and contributed to his decision to leave the restricted firm.
In response to this a spokeswoman from Standard Life said advisers play an important role over 1825 investment propositions and are able to take clients outside the portfolios depending on the client.
‘Our advisers work out what is best for their client and we provide support for them to continue to manage existing client investment assets to ensure full choice. If there is a client need they can’t satisfy, they can look outside our solutions too,’ she said. ‘All our solutions are overseen by the 1825 investment committee and we have strong participation from our advisers on this committee.’
She added that Gars’ percentage in 1825 portfolios has reduced by around 9% on average owing to a need to diversify.
‘When we launched the portfolios in 2015, Gars was the single holding in the absolute return multi-asset segment and made up 15% of portfolios on average,’ she said. ‘Diversification has always been the aim of the portfolios and we have looked to add complementary funds with sound methodology and performance. The portfolios currently hold three funds in this sector and on average Gars makes up 6% of portfolio fund allocations.’
What do advisers think?
While 1825 advisers may not have the flexibility to easily divest clients from Gars, the rest of the advice community has more control over this, and Standard Life’s latest results suggest many of them are indeed moving away from the fund.
Gars gross inflows fell 40% over 2016, from £17 billion in 2015 to £10.2 billion in 2016, last month’s financial results for Standard Life showed. And its multi-asset arm, in which Gars sits, suffered a net outflow of £3.8 billion over the year.
Mark Rogers, wealth planner at Succession Group, said he has clients in the Gars fund but it is now ‘on our sell list’.
‘We have been in the fund since its inception so it is a difficult decision to make but you have to act in the client’s best interest and there are quite a few alternatives on the market now,’ he said.
Rogers was however sanguine about the fund’s performance and said if it does start to perform well again, he could move clients back into it.
He attributed the fund’s performance to ‘manager error’, but other advisers believe the issue is more deep-rooted and relates to absolute return funds as a whole.
One such IFA is Francis Klonowski (pictured above) director of Klonowski & Co, who said absolute return funds introduce complication which is not needed.
‘I don’t know why we take simple investment propositions and turn them into complicated [things] all the time,’ he said. ‘The history of the investment world is littered with complication that various people have introduced to it; once you start bringing in words like derivatives, I say “what do you actually mean by derivatives?”’
The concept of absolute return funds is just that – they will deliver returns even if the market crashes, therefore the product provides insurance for advisers. However Klonowski made pointed out that because clients’ portfolios are not wholly invested in equities, this means they already include safeguards.
‘If you are investing in equities and the market crashes then your fund crashes, and if it comes back up, your fund comes back up,’ he said. ‘But you will always have something alongside [equities] that won’t go down, like cash or bonds so in investment terms you are better off creating your own asset allocation which is your own method of generating absolute returns.’
Citywire view: Frank Talbot, head of investment research:
In many ways Gars has been a victim of its own success. The fund is less than 6% down from its peak in April 2015, but the run of performance that came about prior was exceptional; positive in each calendar year since launch with ultra-low volatility. Those kind of returns breed expectation; hype that it has not lived up to it over the past 18 months. It has not helped that competitors from Aviva and Invesco are 1% down and 1% up respectively over the same time frame.
The witch hunt was out in force when performance suffered. Some were pointing to the scale of the fund getting too large to effectively manage - it is absolutely colossal after all - others said that intellectual capital lost to its competitors was a detriment to performance. Given that there are more than 100 concurrent strategies at play you have to take the word of the management team when it comes to why it has not gone smoothly. Much of the blame has been levied against calling interest rate rises too soon and tilting the portfolio that way. Sure enough performance is on the up following the fourth quarter in which interest rate expectations rose sharply. The jury is out over the future of the fund, but performance since mid-2016 has been solid.
A Standard Life Investments spokeswoman said:
Gars has performed well for investors since its introduction in 2006. Since launch it has delivered its performance target of cash + 5% per annum gross of fees over a rolling three year period around 75% of the time and we are confident it will continue to do so.
Importantly, we seek to deliver this return with as little risk as possible so that clients experience a smoother, less volatile journey.
The negative returns in the first half of 2016 were due to some of our long-term investment views differing from the factors that drove markets in the period. Periods like this have occurred before in the history of Gars and by continuing to apply our process and philosophy, while adapting to changing underlying drivers, we were confident the fund would resume its upward path as it has done previously. The third and fourth quarters did deliver improved performance and several of the elements that did not perform earlier in the year proved to be rewarding.