Top trades powering SLI’s GARS fund in Q4

Standard Life Investments’ £8.7bn Global Absolute Return Strategies fund took profits in one of its major trades amid elevated market volatility over the summer.

Guy Stern, head of multi-asset investment at SLI, said the multi-asset team closed and took profits in its long European equity variance strategy, one of its most significant trades, after it contributed 1.9% of performance to the fund over the three months to 30 September.

"As markets sold off you got quite a violent jump in the value of price volatility and it went right through our price target," said Stern.

The team continue to employ many of the themes that have helped the fund outperform the IMA Absolute Return sector since launch but are now refining many of their core strategies.

"We have said for a long time that rates will be lower for longer. The fact is it has now been ‘longer', and now we have to think about the differential between rates around the world," Stern said.

The GARS portfolio includes relative value trades focusing on long Swedish/short German short-term rates and long Australian/short US short-term rates at the start of Q4. Its most significant rates strategy is a long Mexican rates/short euro position.

The team's negative stance on the single currency is also reflected through its long dollar/short euro forex position.

A pair trade that saw GARS go long the Norwegian krone and short the Swiss franc has also been adjusted in light of the Swiss National Bank's intervention to weaken its currency, with the euro again now the focus of the trade's short position.

"When the SNB intervened we realised our projected three year return on the short Swiss franc strategy literally in a day," Stern said.

Stern said the team has also augmented its large cap versus small cap equities position with a relative value trade emphasising US technology stocks versus US small caps.

"Companies with strong balance sheets will have to invest money to increase capacity, but they may not do so immediately by building big new factories. They are much more likely to invest in technology and look to increase productivity that way," he said.

But the team is more cautious on earnings as a whole, preferring exposure to corporate balance sheets through vehicles such as high yield bonds and corporate credit.

The team's preference for credit over equity is also present in more unloved areas.

"It is hard to argue financials, specifically European financials, are a strong sector right now, which is why we have sold financial sector equities versus the broader market, but financial sector credit will probably be a much more stable investment to make with lots of carry attached to it."

A focus on carry is also among the predominant themes being employed by GARS. "Most strategies we like looking at for the portfolio involve those that pay us to wait, and give us a running stream of income from holding those positions," Stern said.

"Investment grade credit, high yield or Mexican government credit -these are all the kinds of places where we expect to get paid while we are waiting for significant appreciation."