In an interview on the firm’s website, Randal Goldsmith, senior manager research analyst said that, at around £40bn (€55bn) under management capacity is “potentially an issue” for the fund.
“I think it is having an impact in some areas, for example the alpha generation part of the portfolio, it is smaller now than the other strategies and it is smaller than it used to be. So, in that sense it is already having an impact I think that is the major thing to watch.”
He added: “Standard Life said they would review the growth in AUM when the strategy hit the £40bn asset level, which it is has now done… While the fund and its management team is in good shape, investors should keep a watchful eye on the level of inflows into the strategy and for signs that the managers are struggling to identify new ideas that they can invest in meaningfully.”
A Standard Life spokesperson, in response to the concerns, said: “GARS continues to successfully deliver its return and risk objectives for clients and we remain confident of our ability to manage its growth given its use of highly liquid investment strategies of a global nature, breadth and scale. We regularly monitor the portfolio and its structure and the results of our studies have consistently showed that GARS has available capacity well beyond the level it is today.”
While the fund has performed well since its inception in 2006, it has struggled in the second quarter, with the fund third quartile over one year and six months.
But, although Goldsmith is concerned about capacity, he said that investors have no need to worry about the short term underperformance of the fund.
“SLI doesn’t aim to generate consistently positive returns on the GARS fund, what it does intend is to generate LIBOR plus 5% over three years rolling. And, if you look at the portfolio construction approach, it is not designed to be market neutral. So in a difficult quarter, as the second quarter of this year was, it is not going to be totally independent of it.”
Morningstar’s concerns are not, however, the first flags to be raised about the fund. Ratings firm FundHouse gave the fund a negative Tier 3 rating at the end of last year.
While it said the fund was well resourced and had an experienced team, Fundhouse said it has a number of fundamental concerns about certain aspects of the fund.
Primary among these was the strong bias toward fixed income within its historic returns profile.
“We analysed all their current and historic strategies and found that the bulk added little value, with fixed income related strategies making up the majority of their historic return. Creating diversification (via their detailed risk modelling), without adding return, is a concern: besides fixed income type strategies, most other have broadly netted off.
“Should the historical primary return driver (income driven strategies) not deliver; there is little evidence of what alternatives the fund has to fall back on,” Fundhouse said.