GARS update for investors 2018 performance review
Staying close to your investments We understand how important your investments are to you, and to your future. Together with your financial adviser, we re here to help you build your life savings and work towards your goals. We believe that you need straightforward and regular updates on your investments so that you always know where you stand. Staying up to date This document has been designed to keep you up to date on how GARS is performing and how the fund is positioned for the future. To get more details on your policy log in to MyStandardLife.ie You can also speak to your financial adviser for more information. 2 GARS update for investors
GARS fund aim Global Absolute Return Strategies (GARS) has a return target of cash* +5% per annum on average when measured over any three consecutive years (gross of charges). The fund is expected to show volatility of one-third to one-half of a long-term investment in global equities (volatility is a measure of how much an investment rises and falls). By investing across many different markets and different types of investments, the risk can be spread much further. Aberdeen Standard Investments purposefully select investments for GARS that are likely to respond differently to a given set of economic scenarios. Whilst not guaranteed, this means that losses from some should be offset by positive performance from others. * as measured by the six month European Interbank Offer Rate (EURIBOR). The views expressed in this document represent the opinions of Aberdeen Standard Investments and are not intended to be relied upon as a forecast or guarantee of future results. Aberdeen Standard Investments reserves the right to make changes and corrections to the opinions expressed in this document at any time. GARS update for investors 3
2018 performance review 2018 has been one of the worst years on record for financial markets. The proportion of global assets that lost value was the highest for over a century. GARS also produced a negative return (-6.5% gross and -7.8% net of fees.) However, it proved increasingly resilient to global turmoil as the year progressed. We believe the portfolio is strongly positioned for the year ahead. 2018 in perspective Despite a strong start, 2018 turned out to be a punishing year for investment returns, with most global asset classes losing value. This is in sharp contrast to 2017, when most global asset classes gained value. Equities had a particularly torrid time. In 2018, European equities lost 10.5%, while UK equities fell 9.5%. US equities closed 4.4% lower, after a turbulent fourth quarter wiped out all the gain made earlier in the year. Why was 2018 such a poor year for investors? There are many reasons why 2018 proved to be so difficult for markets. One reason is that we started 2018 with lofty valuations for many equity and fixed-income assets. Markets needed a stream of positive developments to propel them ever higher. Instead, as the year progressed, global economic activity started to slow from the peaks achieved earlier in the year. Investors grew increasingly nervous about the prospect of higher interest rates. Specifically, they worried about what would happen when central banks started withdrawing the support programmes they had put in place after the 2008 financial crisis. With borrowing costs set to rise, it seemed likely that consumer spending and business investment would suffer. Meanwhile, political instability remained a recurrent theme. The trade war between the US and China, disruption in the Eurozone and ongoing uncertainty over Brexit continued to weigh on investor sentiment. As a result, volatility returned to markets, spiking in the first quarter and then building up again as the year drew to a close. GARS performance in 2018 In this challenging environment, GARS delivered a negative return. However, the diverse mix of positions in the portfolio proved useful in smoothing out much of the volatility seen in markets. This was particularly true towards yearend, when equity market stress was most pronounced. Datastream. FTSE All-Share Index; FTSE Europe ex-uk Index; US S&P 500 Index. Local currency returns at 31 December 2018. 4 GARS update for investors
The principal drivers of GARS negative returns in 2018 were our emerging markets (EM) and European positions, especially during the first half of the year. Towards year-end, our long equity positions lost value as the market shake-out became more widespread. The portfolio s resilience at that time reflected positive performance from our interest rate and currency strategies. What didn t work? Emerging markets (EM) Throughout the year, we have held positions in EM equities and EM bonds. We still believe these will perform well over the longer term. However, they lost money during 2018 as investors became ever more nervous about slowing global growth. Additionally, investors worried about the impact on EM economies of higher US interest rates and a strong US dollar. Several EM economies have large US dollar debt burdens. A stronger dollar means the value of the debt in dollar terms increases. Similarly, rising US interest rates makes it more expensive to service this debt. In our view, these fears are overdone and the EM group of economies is much more resilient than in the past. For example, many are not shouldering the high debt burdens that we see in developed market economies. Moreover, most EMs have healthy trade balances. In that context, we believe EM assets such as Brazilian bonds offer very attractive investment opportunities. Europe At the start of 2018, we believed growth in Europe would remain sufficiently strong to prompt a rise in longer-term interest rates in the Eurozone. That view has proved incorrect. Europe has experienced weaker growth than expected. Mounting political risk, notably in Italy and France, also dented sentiment. As a result, investors shunned riskier assets, causing equity values to fall and bond markets to reprice. This penalised our holdings. What went well? At the end of summer, we made some changes to the portfolio to reflect our more cautious view of the global economy. All these changes contributed positively during the fourth-quarter market rout. We reduced our positions in equities to lower our exposure to the risk of slowing global growth. We increased our holding of government bonds, which are considered to be less risky assets than equities. We introduced some protective currency positions, notably positions favouring the Japanese yen and the US dollar. The yen and the dollar are considered safe-haven assets and therefore tend to perform well during times of market stress. We opened a relative-value equity strategy designed to profit if technology companies underperform the wider US equity market. In our view, technology shares looked expensive, given they face slowing demand, greater regulatory scrutiny and increasing competition. Source: Aberdeen Standard Investments, 2019 GARS update for investors 5
Long-term performance Since GARS launch in Ireland on 8 September 2008 it has returned: Since launch annualised GARS gross of annual management charge 4.9% GARS net of annual management charge 3.5% Source: Longboat Analytics, 31 December 2018 The following chart illustrates the performance of GARS since launch in Ireland in September 2008. Longboat Analytics Warning: If you invest in this fund you may lose some or all of the money you invest Warning: The value of your investment may go down as well as up Warning: Past performance is not a reliable guide to future performance Warning: This investment may be affected by changes in currency exchange rates 6 GARS update for investors
Aberdeen Standard Investments outlook and positioning In 2018, many asset valuations reached levels that couldn t be justified by fundamentals such as future earnings or sales prospects. As we step into 2019, there are signs that investors are starting to focus more on fundamental issues - for instance, scrutinising more closely factors like business trends and management credibility. There have been many periods in recent years when investors have ignored fundamentals, but history shows fundamentals ultimately win out. Given the emphasis our own approach places on economic fundamentals and valuation, this would create a much more favourable backdrop for our views. Through these, we look to exploit return opportunities across a broad range of asset classes and geographies. We seek to ensure the investments we have chosen cover a broad variety of economic and secular themes in the global financial marketplace. In this way, we aim for GARS to deliver a relatively stable return in a wide range of market conditions. Note, there will be periods when GARS delivers more or less than the target, and the portfolio may even lose money - GARS is not a capital-protected portfolio. Summary We believe strongly that GARS can perform well in the upcoming economic and market conditions. We have positioned the portfolio to capture returns in what may continue to be a difficult environment for many asset classes. In our view, there has never been a stronger rationale for choosing a highly diversified portfolio to navigate the uncertainties of the coming year. GARS is a portfolio of carefully selected longer-term diverse investment strategies. Typically, we hold around 25 to 35 strategies in the portfolio. Source: Aberdeen Standard Investments, 2019 GARS update for investors 7
A decision to invest should not be based on the information in this document. Please talk to your financial adviser for more information, or if you need an explanation of the terms used. For fund factsheets, performance and other information, visit our Fund Centre: www.standardlife.ie/funds Warning: Past performance is not a reliable guide to future performance. Warning: The value of your investment may go down as well as up. Warning: This fund may be affected by changes in currency exchange rates. Standard Life Assurance Limited is authorised by the Prudential Regulation Authority in the UK and is regulated by the Central Bank of Ireland for conduct of business rules. Standard Life Assurance Limited is registered in Dublin, Ireland (905495) at 90 St Stephen s Green, Dublin 2 and Edinburgh, Scotland (SC286833) at Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH. GARSQIU V02 0119 2019 Standard Life Aberdeen, reproduced under licence. All rights reserved.