GARS portfolio strategies

How the strategy works

Returns are earned by investing in assets that are expected to provide a long-term return that is superior to cash, e.g. equities, corporate bonds and property. The risk from holding these assets is that they can also give negative returns over significant time periods.

Sample strategy

From inception, GARS benefited from a significant investment in equity markets. In late 2007, we significantly cut this exposure. During the volatile markets of 2008, we further trimmed our equity market exposures to a low of 18%. We topped these up to 25% in October 2008 and again in February 2009, with GARS benefiting from strong market gains in 2009.

We have also employed three significant bond strategies, two in corporate bonds and one in inflation-linked bonds. These benefit from a combination of improvements in corporate bond markets, ongoing protection against inflation worries, and from our stock selection expertise in these strategies.

All of these investments were achieved by investing in our own range of mutual funds.

How the strategy works

These strategies, typically based on interest rate and currency views, are cyclical market opportunities, so may not offer a significant long-term reward for holding them continuously. On a two-to-five-year view, however, they can offer significant rewards that are often uncorrelated to long-term market returns.

Sample strategy

European interest rates. In 2008, we believed European shorter-term interest rates were too high and put in place strategies that would deliver returns as interest rates fell. As traditional asset classes collapsed in value in the second half of 2008, this strategy performed better than we expected, lending capital stability to the overall value of the Fund. Interest rate, or duration, positions, especially at longer maturities, can also provide diversification to our equity strategies, again benefiting the Fund’s risk-return characteristics.

How the strategy works

Highly correlated markets may behave significantly differently over extended periods. This can be as straightforward as the comparison of two equity markets. They may reach relative valuation levels that are unsustainable. These strategies can take advantage of the normalisation of markets without exposure to the underlying asset class. For example, we can implement a strategy that delivers returns if one stock market outperforms another irrespective of whether equity markets are going up or down. The strategies add further diversification.

Sample strategy

Financial vs corporate credit is a good example of these strategies. The credit rating of financial companies took a battering in 2008 as the financial system cracked and banks sought government support. In the midst of this financial crisis, investor aversion to financial bonds was reflected in their high yield. Our relative value strategy exploited the fact that financial companies have to vigorously defend their creditworthiness more than most in order to operate profitably. We expected to benefit from an improvement in the relative credit quality of financial companies versus the market as a whole, which was subsequently the case in 2009.

How the strategy works

This strategy exploits the stock selection expertise of a variety of traditional fund managers who are tasked with out-performing market benchmarks. Also known as alpha generation, we target a 1% per annum contribution to GARS overall from this source.

Sample strategy

We typically invest in a selected range of our mutual funds. These are primarily held for stock-selection alpha purposes. The market exposures created by investing in these funds are adjusted to the level we wish to keep. This is done mainly using short index futures. This reduces the investment risk of the GARS portfolio to traditional market return strategies. It then allows us to redeploy these investment risks more efficiently by implementing strategies in the other categories.