Absolute Return Global Bond Strategies Trust

The recent rise in government bond yields and increased volatility in global fixed income markets have brought interest rate risk — and the potential for negative returns from bonds associated with it — back to the forefront of investor thinking.

As investors seek effective ways to help them navigate a rising rate environment, Standard Life Investments offers a range of innovative product solutions. One of these is our Absolute Return Global Bond Strategies Trust (ARGBS). Within a diversified fixed income allocation, absolute return bond solutions traditionally play an important role in reducing volatility and delivering more predictable returns from the bond universe. They focus on generating positive performance regardless of the market environment (rising or falling rates), providing strong diversification benefits in the context of a broad fixed income investment programme.

Through ARGBS, we aim to deliver a return over cash* of 3% per annum over rolling three-year periods with as little volatility as possible (normally within a range of 1.5% to 3% p.a.). Targeting this return, we invest in an unconstrained fixed income investment universe. This allows us to identify and exploit the most compelling macro investment opportunities and bring them together in a diversified portfolio.

Since ARGBS launched over four years ago, bond markets have experienced large swings in the level of volatility; the ‘taper tantrum’ of 2013 and the aggressive bund market sell-off in the spring of 2015 being two high profile examples. However, despite these events, the Trust has proven resilient, with an annualised return of 4.73% and volatility of 2.06% since inception** (as of 30 June 2015).

Furthermore, over the full 17 quarters since inception, and in a variety of market conditions, ARGBS posted negative returns in only three (see Chart 1).

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Central to delivering these stable returns has been the genuine diversification of risks and sources of return within the Trust. Diversification is a key element of the portfolio construction process. In order to build a genuinely diversified portfolio, we divide all of our investment positions into the following seven groups: credit, duration, cross-market, yield curve, inflation, FX and volatility. This helps to ensure that we are not inherently biased toward any specific type of risk, particularly interest rate

or credit risk, and can produce returns from a wide range of sources. Chart 2 shows how

diversification manifests itself in the attribution of the Trust’s performance; since inception, every single type of market risk in the Trust has added value.

These stable returns and rigorous diversification result in another key characteristic of ARGBS: low correlation with traditional bond (and equity) indices (see Table 1).

From an investor’s perspective, this low correlation with other fixed income asset classes means that investing in ARGBS will often result in increased levels of portfolio diversification and hence improved stability of returns across their overall fixed income allocation. This assumed lower volatility can result in freeing up an investor’s risk budget which can then be used in the search for additional return (for example, a multi-asset credit product). In our view, low correlation is an essential attribute of a genuine absolute return bond strategy and should be a key consideration when assessing them, something which we think gives ARGBS a strong competitive edge.

Recent developments in Greece are just another reminder that volatility in bond markets is unlikely to abate in the short term; something that will sustain interest in alternative fixed income solutions and absolute return bond strategies in particular. The Standard Life Investments ARGBS Trust has a proven track record of delivering on its stated aim of stable absolute returns with low volatility. Because of this, we believe it offers a compelling solution in the current environment and deserves a place within investors’ fixed income allocations.

Important information

*Cash is defined as the Bloomberg AusBond Bank Bill Index

**Inception 30 Mar 2011

***The SLI Absolute Return Global Bond Strategies Trust (ARSN 125 896 988) commenced on 2 June 2014. For information purposes, we show the historical performance of the underlying master fund, the SICAV Absolute Return Global Bond Strategies Fund (in GBP share class converted from sterling to Australian dollar from inception (29 March 2011) to 18 October 2012; then Australian dollar share class from 18 October 2012 to 2 June 2014). Past performance is not necessarily indicative of future performance.

Equity Trustees Limited (EQT) ABN 46 004 031 298, AFSL No. 240975, is the Responsible Entity for Standard Life Standard Life Investment’s Absolute Return Global Bond Strategies Trust ASRN: 125896988. Standard Life Investments (SLI) has prepared this material for information purposes only. It does not contain investment recommendations nor provide investment advice. Neither SLI or Equity Trustees Limited nor its related entities, directors or officers guarantees the performance of, or the repayment of capital or income invested in the Fund. Past performance is not necessarily indicative of future performance. Professional investment advice can help you determine your tolerance to risk as well as your need to attain a particular return on your investment. You should not act in reliance on the information contained in this material. We strongly encourage you to obtain detailed professional advice and to read the relevant product disclosure statement in full before making an investment decision. Applications for an investment can only be made on an application form accompanying a current product disclosure statement (PDS) which can be obtained by contacting SLI.

Standard Life Investments Limited (ABN 36 142 665 227) is incorporated in Scotland (No. SC123321) and is exempt from the requirement to hold an Australian financial services licence under paragraph 911A(2)(l) of the Corporations Act 2001 (Cth) (the ‘Act’) in respect of the provision of financial services as defined in Schedule A of the relief instrument no.10/0264 dated 9 April 2010 issued to Standard Life Investments Limited by the Australian Securities and Investments Commission. These financial services are provided only to wholesale clients as defined in subsection 761G(7) of the Act. Standard Life Investments Limited is authorised and regulated in the United Kingdom by the Financial Conduct Authority under the laws of the United Kingdom, which differ from Australian laws.