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Analysis of factor techniques provides valuable inputs

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New York based analysts MPI has conducted a study, using the Standard Life Global Absolute Return Fund (SLI GARS) as an example, of how factor analysis techniques can provide valuable inputs into the overall fund selection and due diligence process. 

The firm writes that the GBP27 billion SLI GARS fund has been renowned as a leading absolute return UCITS/mutual fund since its inception in 2008.
 
However, recently its performance reversed from the peak reached in April 2015.
 
“With many investors concerned about GARS’ recent performance, we wanted to shed some light on the factors that might be contributing to the complex global ‘go anywhere’ fund’s performance results,” says Michael Markov, co-founder and Chairman, MPI.
 
He writes that digesting GARS’ dozens of strategies, and thousands of positions, from a ‘bottom up’ holdings perspective could be a daunting exercise. MPI took a ‘top down’ quantitative approach that distilled the fund’s performance history into a handful of well known, and easily understood, style/factor exposures.
 
Using its patented Dynamic Style Analysis (DSA) technique to capture SLI GARS’ time-varying factor exposures, MPI inferred that SLI GARS’ has shifted both its gross factor exposure and net factor positioning.
 
The firm writes that the analysis indicates that the primary reason for its recent underperformance appears to be that SLI GARS has missed out on most of the latest leg of the bond market rally.
 
“This is partly because its fixed income exposures appear to have been scaled back in mid-2015 and also due to short US interest rate duration exposure that has suffered as market expectations of Fed rate rises have been pushed further out. Apparent long exposure to European equities has also detracted from returns. On the other hand, long exposures to UK equities and US corporate bonds have contributed positively.
 
“SLI GARS reduction in fixed income exposure has markedly distinguished the strategy from those of its peers in the Morningstar global alternative multi-strategy category. The peer group are inferred to have maintained greater long exposure to US and Euro bonds, which have so far delivered positive performance in 2016.
 
“Going forward, SLI GARS appears to be positioned to profit from further Fed rate rises and an extension of the US dollar’s uptrend.”
 
 “We observed that the fund’s returns exhibit significant strategic factor bets. If for example, the US dollar strengthens and US interest rates rise, the fund may be able to recover some of the losses this year.” Markov says.
 

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