Targeted returns deliver diversified solution


By Elizabeth Somerville

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The desire to achieve a set level of returns that can withstand market movements has prompted Standard Life Investments to apply a three-pronged approach to its Global Focused Strategies Fund.

Speaking at an industry event hosted by the Association of Real Returns Investment Advisers in Sydney yesterday, Standard Life client director Bryan O’Carroll said the group had designed its absolute return process as a solution to the group’s own pension fund problem.

“We wanted to come up with a solution that was truly diversified,” O’Carroll said of the fund.

“The objective is a cap of 7.5 per cent returns per annum on a rolling three-year basis irrespective of market conditions.

“And we expect to do this with 6 to 12 per cent volatility.”

As the asset manager targeted a set level of returns and was not looking for anything above, it aimed to achieve that with as little risk as possible, which was an important dynamic of the fund, he said.

Although some volatility was expected over time, and was necessary to achieve the returns, that was limited as much as possible, he said.

“That changes the dynamic as it fosters collaboration and it means we don’t have a risk budget in the traditional sense,” he said.

“So we don’t try and maximise the risk budget all the time.

“It’s more qualitative on top of the quantitative process.”

Standard Life also applies the three tenets of breadth, balance and time frame to the fund to achieve these goals.

“If you want to actually have diversity and get paid for that diversity, you need to have a broader investment universe you can choose from, so we’ve actually opened up the constraints in these funds,” O’Carroll said.

Balance was the most important out of the three premises as the group tried to balance the fund in such a way to ensure its risk predictions captured every possible market scenario, he said.

“So portfolio construction is where we spend a lot of time trying to understand how the fund is performing,” he said.

“Time frame is very straightforward and our time frames show that over three years there’s more chance in being right over the market for that period.

“So that means as well the turnover within the fund is also extremely low – we see this as a core allocation.”

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