A lot of funds say they march to a different drummer without being really all that unique, but in the case of global absolute return funds, that description is quite accurate. Unlike traditional portfolio managers, who are bound by an investment style, predetermined mandate or universe of securities, absolute return managers are free to roam the investment universe and face few constraints on how they can invest. They can own traditional assets, such as stocks and bonds, but can also invest in commodities, currencies and derivatives. They can bet on the rise of some markets with long positions, and a fall in others with shorts.
Such funds are members of Morningstar’s increasingly popular multi-alternative category, a catchall that covers funds employing multiple investment strategies under one roof. In 2015, multi-alternatives experienced some of the strongest net flows of any fund category, and at year-end the 157 funds in the group held more than $55 billion in assets, when there had been only 25 funds holding $6.3 billion in assets in 2007.
At $9.3 billion in assets, the John Hancock Global Absolute Return Strategies Fund is by far the largest U.S. fund in this trendy category. Managed by Edinburgh, Scotland-based Standard Life Investments, which runs more than $75 billion in the strategy, it follows in the footsteps of its older and even bigger U.K. sibling, the $37 billion Standard Life Global Absolute Return Fund (GARS).
At the helm of this massive and complex ship is Guy Stern, an American transplant raised in New Jersey who left the U.S. in 1993 to join Deutsche Bank and has lived in Europe ever since. He served as chief investment officer at Credit Suisse Asset Management from 2002 to 2008 before joining Standard Life, where he is now head of multi-asset investing.
The 55-year-old manager, who has implemented global absolute return strategies for most of his career, believes they are “the most interesting and rewarding way to manage portfolios. I get to think about investing and take a world view that is much, much different from that of a traditional portfolio manager.”
The fund’s mission is to make money in any rolling 12-month period irrespective of market conditions, and to do so with about one-third to one-half the volatility of stocks and a low correlation to traditional investments. Stern shoots for returns of anywhere from cash plus 3% to cash plus 7.5% over a three-year period.
From its inception in December 2011 through the first quarter of 2016, the fund has met the lower range of that goal, with an average annual return of 3.54% over the period for institutional class shares. By comparison, the Bank of America Merrill Lynch U.S. Dollar one-month London Interbank Bid Rate, a measure of returns from cash investments, returned 0.11% over the period.
While the fund’s returns are modest compared with what investors could get from the U.S. stock market over the same period, Stern believes that a global multi-asset strategy speaks to what clients really want from their portfolios. “For a typical client, the desired outcome isn’t beating a benchmark by a certain number of basis points,” he says. “It’s earning a certain level of return regardless of what markets are doing.”
Standard Life learned the value of that philosophy in 2005, when a pension shortfall prompted the company to search for a more reliable way to match pension liabilities with portfolio returns. Today, the company has become a leader in the global absolute return strategy and runs it for mutual funds, pension plans, endowments and private wealth clients seeking greater predictability from their investments.
Along with this popularity comes increased scrutiny about how the vast amount of money Standard Life has under its GARS belt might affect management’s ability to stay competitive. In a Morningstar report issued earlier this year, analyst Jason Kephart noted that even though the Hancock fund trades in very liquid markets, “the sheer size could be an impediment to the team’s ability to generate alpha.” A few publications in the U.K. have voiced similar concerns about that country’s version of the fund.