Standard Life Fund Counts on Weaker Euro After U.S. Bond Gains

Standard Life Investments, Edinburgh’s largest money manager, is counting on U.S. technology-related stocks, European bank bonds and a weaker euro to safeguard capital in its biggest fund for outside investors.

The 11.5 billion-pound ($18.3 billion) Global Absolute Return Strategies Fund is positioned for European financial company bonds to do better than the rest of the credit market, while investments in their stocks will underperform, Euan Munro, head of the firm’s multiasset team, said in an interview. The euro may weaken over the next two to three years as policy makers try to resolve the debt crisis, he said.

The fund is luring investors trying to reduce risk and protect their assets, as stock and bond markets give mixed signals over the state of the economy. The Standard & Poor’s 500 Index in the U.S. rose to a seven-month high this week, while yields on Treasuries are close to record lows. The fund has grown 12 times in size over the past three years.

“There is always something in the portfolio we are relying on to come and rescue us when bad things happen,” Munro said. “Some strategies will surprise us on the upside if economic growth surprises positively. If growth surprises negatively then some of our other positions will be the heroes of the hour.”

Last year, the fund benefited most from favoring 30-year U.S. government securities over 10-year bonds, helping it return 5.8 percent over the 12 months to Feb. 8, according to Morningstar Inc., a Chicago-based research firm. That compared with a 4.9 percent drop in the MSCI World Index over the period.

Worse Calls

Those returns compensated for other strategies not working as well, such as European and Russian stocks and high-yielding corporate bonds. Russian equities, which Standard Life bought for the fund during last year, fell in 2011, with the benchmark Micex index losing 17 percent. It’s up 10 percent this year.

“I certainly wouldn’t be drawing the conclusion at the end of 2011 that the Russian idea was a bad one and the rates idea was a good one,” Munro, 41, said on Jan. 26.

The fund is targeting large technology-related U.S. equities because Standard Life Investments regards them as better value than smaller companies.

Apple Inc., the world’s largest company by market value, is trading at 14 times earnings, in line with the average for the companies in the S&P 500 Index. The ratio is 32 times for the Russell 2000 Index of mid-cap companies and 23 times for the Nasdaq Composite Index, data compiled by Bloomberg show.

Reducing Risk

So the fund is betting the S&P 500 Index and the Nasdaq will outperform the Russell 2000 Index, Munro said.

“And if the market crashes the big ones tend to do better than the smaller ones,” he said.

The reason for the fund’s strategy toward the euro, European financial credit and European bank equities is they tend to offset each other and reduce volatility, said Munro, who also helps oversee about 69 billion pounds of fixed income assets as head of bonds at the Edinburgh money manager.

Standard Life has about 150 billion pounds of assets under management in total, according to its website.

Any long-term solution for the euro crisis will have to involve a weaker currency, he said. Any weakening will likely come through quantitative easing, or buying bonds to spur growth, which the banks are effectively doing after the European Central Bank provided lenders with 489 billion euros ($650 billion) of three-year loans on Dec. 21, he said.

Steady Returns

The aim of the fund is to produce steady returns, with a target of achieving 5 percent over the London Interbank Borrowing Rate, even when markets are volatile. The MSCI World Index slumped 23 percent between its peak in 2011 on May 2 and its trough on Oct. 4. The index has since rebounded 19 percent. During the decline the value of the fund fell 0.8 percent. Since then it has risen almost 7 percent.

“It is important to me that it went sideways during tumultuous markets,” Munro said. “We had an awful lot going on last year in terms of the volatility of equity markets.”

The fund was originally set up in 2005 as an internal fund to manage the staff pension plan before it then became available to outside investors through a U.K. mutual fund. Munro is planning to pull in more clients and designed the fund so it could have as much as 40 billion pounds of assets, he said.

Over the past three years the fund has returned 37.8 percent, ranking second of 19 similar U.K.-registered funds, which have returned an average of 14.3 percent, according to Morningstar. Its 12-month performance compared with an average loss of 0.8 percent of 27 similar funds.

The fund has about 30 percent of its assets in cash, which is invested in financial instruments such as derivatives and futures to let Munro’s team to adjust to market conditions, while specialist fund managers oversee the remaining assets.

“People often obsess about stock selection decisions,” Munro said. “What we are saying is that the big risks are how much equity exposure, how much credit exposure, how much currency exposure, how much interest rate exposure.”

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