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GARS portfolio strategies
GARS derives returns principally from dynamically allocating to market return investment opportunities in traditional and advanced asset classes. It also independently exploits security selection expertise. GARS can use a variety of standard derivatives for investment and hedging purposes and may take positions that benefit investors in upward and downward markets. The strategies used can be divided into four main categories: market returns, directional, relative value and security selection.
Click on the links below for an outline of how each strategy is intended to work, with some examples of current (or recently exited) strategies.
Market returns
How the strategy works
Returns are earned by holding systematic risk in the portfolio. These are typically gained from assets that are expected to provide a long-term return that is superior to cash. The risk from holding these assets is that they can also give negative returns over significant time periods.
Sample strategy
In March 2011, we initiated a holding in Russian equities which traded at a discount to emerging market and global equities. In addition, we believed the political risk premium appeared too high given government initiatives to improve corporate governance.
Directional
How the strategy works
These are market opportunities that are cyclical, so may not offer a significant long-term reward for holding them continuously. On a 3-year view, however, they can offer significant rewards that are often uncorrelated to long-term market returns.
Sample strategy
European duration. In September 2009, analysis suggested that the European Central Bank would hold interest rates at historically low levels for longer than the market expected. We believed the economy would remain in a slow growth environment alongside lower inflation. As a result, we anticipated longer-term interest rates would remain low and then fall further, as inflation expectations declined. This strategy was implemented by holding 30-year German bund futures, which provided an attractive yield relative to cash and the potential for capital appreciation as yields fell.
Relative value
How the strategy works
Highly-correlated markets may behave significantly differently over extended periods. 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.
Sample strategy
In March 2010, we initiated a strategy favouring large companies in the US versus smaller companies. The rationale behind this was that since 2003 US small-cap stocks had broadly outperformed larger companies. As a result they had become significantly more expensive. Given the headwinds to domestic growth, coupled with larger companies benefiting from exports being driven by a relatively competitive US dollar, we believed this was unsustainable and set to unwind.
Security selection
How the strategy works
This strategy exploits the security selection expertise of a variety of traditional fund managers who are tasked with out-performing market benchmarks. This is a natural source of diversification, as our approach across our funds is to select a diverse range of securities on a bottom-up basis. Security selection does not aim to capture the performance of the market, just the relative performance of a selected group of securities compared to the market.
Sample strategy
We may invest in a UK equities portfolio to access the relative return potential. When we buy this portfolio we are also gaining exposure to the UK equities market, as normally represented by the FTSE 350 Index. If we do not want this market exposure, we can remove this by selling a combination of FTSE 100 and FTSE 250 futures. Using this method, we can select a portfolio we believe can deliver positive relative returns versus index benchmarks, irrespective of the underlying market exposure.
Next steps
