Morningstar, widely used by investment advisors and investors to help decide which funds to invest in, said on Thursday Standard Life's Global Absolute Return Strategies fund is facing "capacity issues" that are impacting its ability to generate outperformance from individual securities.

Analyst Randal Goldsmith at Morningstar said GARS, which has assets of some 44 billion pounds ($68 billion), was in good shape, but investors needed to keep an eye on fund flows and returns.

A spokeswoman for Standard Life Investments, part of insurer Standard Life, said GARS continued to perform well and the firm was confident it could manage the fund's growth, given its focus on highly liquid and globally broad investments.

"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," the spokeswoman said.

Since launching in 2006, GARS, which has six portfolio managers including head of multi asset and macro investing Guy Stern and which invests across asset classes, had consistently delivered its performance target of cash plus 5 percent gross over a rolling three-year period, she said.

Morningstar's Goldsmith said that while the fund's trades in liquid markets such as currencies and government debt were likely to continue to do well as the fund grows, bets on less liquid individual stocks and bonds could struggle to be as profitable.

"With this stretched capacity, we are already seeing changes to the fund and in particular have seen a reduction in the fund's ability to produce alpha (outperformance) from stock selection," Goldsmith said.

The Standard Life Investments Global Absolute Return Strategies Retail Acc, a share class for retail investors, lost 1.55 percent in the June quarter net of fees, its first quarterly loss in two years, data from Morningstar showed.

(Reporting by Simon Jessop, Carolyn Cohn and Nishant Kumar; Editing by David Holmes)