The technology sector meltdown that occurred more than six years ago may seem like ancient history to some — and it surely has been eclipsed by the recent financial crisis and recession. Yet it was a calamity in its own right, and marked a turning point for asset managers such as Standard Life Investments.
Chris Nichols, investment director at Standard Life, believes the earlier crisis led to new ideas about portfolio construction and risk. Up to that point, the prevailing wisdom held that portfolios should be constructed for the long term — periods of 20 years or even more. And while it might be true that the market would deliver the goods over that “exceedingly long” time frame, the ups and downs within that period could be uncertain and hazardous. “The new idea was to make sure that pension money was decoupled from the roller coaster ride,” Nichols said.
A new approach called Global Absolute Return Strategies (GARS) emerged from that crisis. Standard Life, based in Edinburgh, rolled out the GARS platform internally in late 2005 and opened it up to clients in 2006. Today, the strategy accounts for $11 billion of Standard Life’s $240 billion in assets under management.
GARS isn’t a single strategy, but a pool that employs more than 20 strategies at once. The management team uses a combination of quantitative tools and their own perspective to constantly evaluate and adjust the composition and weighting of the portfolio. The GARS fund uses relatively low levels of leverage — maybe 200 or 300 percent. And it sticks to relatively straightforward derivatives such as interest rate swaps, eschewing more complex and exotic instruments.
The result, Nichols says, is hedge fund like returns, with lower levels of risk and lower fees. The GARS strategy is up 8.2 percent since inception, beating the S&P 500, which is up 3.1 percent during the same period, according to Nichols. The strategy’s volatility of 6.3 percent is much lower than the S&P 500’s level of 17.2 percent, he says. “We are taking about one third the level of risk and actually out performing,” he says.
So given the risks that the market faces today — from rising interest rates and mounting inflation, to the catastrophe in Japan and the upheavals in the Middle East — where does the GARS strategy find value?
The strategy is leveraging the balance sheets of large companies. “Large cap is superior,” Nichols says. And “we think it’s a great idea to be paid to wait for nothing much to happen,” he says, with a nod toward investment grade and some high yield credits. The GARS strategy also is invested in financial credit in Europe, where Nichols says risks are mostly on the sovereign, not the corporate side.
“We want to make sure we are not materially exposed to any one risk. We know the future will be different than what we think it is, either by a little or a lot. Whatever version of the world that comes to pass, some strategies will do well and some won’t. But we want to make sure pension money is protected.”
