????When I asked Guy Stern, head of multi-asset investments at Standard Life Investments, how he managed to stay on top of price fluctuations and correlations of the many investments in the $15 billion Global Absolute Return Strategies fund, he answered with a bit of a mindbender.
????"It's important to remember that one of the least stable things in the investment world is volatility itself," he said "Take the equity market. Over the past five years, its volatility was 50 at one point and 15 at another. So you need to start with an understanding that those values are not stable."
????What has been pretty stable, though, is Stern's ability (along with a team of 25) to deliver on the GARS fund's aim of delivering a return of 5% more than you'd get in cash, with half the risk of an active equity portfolio. Over the past five years, the GARS has delivered 7.4% returns, almost exactly 5% more than the cash return of 2.2%. More specifically, the purpose of the portfolio is to protect investors from global economic turmoil by deploying up to 30 different strategies simultaneously.
????Fortune tracked him down to talk about the euro, the dollar, and why he loves Sweden so much.
????Your stated goal of equity-like returns with half the risk strikes me as a Utopian dream. How do you go about putting that strategy in place?
????The step you have to take is that while risk and return are positively correlated—if you want higher returns, you generally need to take on more risk—they are not linear. You don't have to accept the kind of risk you would get from global equities to get the same return.
????How do we create that? By seeking out ways to generate returns that are not merely based on equities rising or global economic growth. Your typical diversified growth fund has an array of options, from equities to investment grade bonds, private equity, property, even emerging market sovereign debt. But those are all growth assets. If there's no economic growth—if its flat—you don't get returns and correlations go to one.
????We have four categories of investments. The first is market type returns with a risk premium. The second is security selection, which isn't dependent on growth but good research. Third, direction strategies—by which I mean asset classes with no embedded risk premium, like currencies. And fourth, relative value. I'll give you an example of the last one. For several quarters, we have had the view in the portfolio that large cap stocks will outperform small cap, regardless of the direction of the market. They're cheaper, better financed, and they have better balance sheets. But we're not taking equity risk—we're buying the same amount of large cap as we are shorting small cap. We also like the Swiss over the German equity market.
