The four key trades to power SLI’s GARS fund in 2012

Standard Life Investments’ Euan Munro, head of multi-asset investing and fixed income, has outlined the key trades the group’s £8.8bn Global Absolute Return Strategies (GARS) fund is set to make next year.

The popular fund, which has pulled in £2.2bn in assets this year alone, has generated a positive return over the past year of extreme market volatility.

The fund has returned 0.7% over one year, according to Morningstar, with holdings in US government bonds a major driver of returns.

Here Munro outlines the major trades he expects should make money for the fund and its investors heading into 2012.

1. Shorting the euro

Central to the GARS investment strategy is the conviction the euro will survive, but Munro intends to continue shorting the currency.

Earlier this year the manager said he thought the future of the single currency was hanging in the balance but he has since revised his view.

"Our central view is that over the next year a couple of members may be ejected but the euro will ultimately survive," said Munro.

"I believe the currency is sustainable as Europe moves much closer to more of a fiscal union - with the euro being such an important project, I cannot envisage policymakers letting it break up."

However, he thinks its show of strength in the face of such major structural problems this year could unwind next year.

Munro has been placing shorts on the euro for the past year and will continue to initiate this trade in 2012, as he believes some form of eurobond will be needed on the Continent when the European Central Bank (ECB) wades in to tackle the debt crisis.

"To solve the European debt crisis, quantitative easing has to be implemented, and when the ECB unveils the stimulus the euro will be driven down and will lose a lot of ground against the US dollar," he said.

"To profit from this we will be retaining our euro short positions against the US dollar and Norwegian krone."

2. Backing financial sector credit

Munro takes the view financial sector credit will correct next year, with spreads narrowing as the eurozone moves to strengthen the Continent's debt stricken banks via refinancing.

"European credit spreads will come in substantially next year from their wide levels and I could see financial credit correcting by a couple of hundred basis points as equities stabilise when concrete proposals are announced to save European banks," Munro said.

"With interest rates not likely to see hikes anytime soon, the credit market is extremely cheap - all that it needs to be re-rated is for more stability on the risk-on side."