In the three years since Euan Munro left the giant GARS fund at Standard Life to become boss of Aviva Investors, he has certainly delivered for the business. Its new(ish) absolute return funds have seen money pour in. But over the past year investment performance has sadly not matched the flows.
Aviva has shot to number four in net fund flows, from a position of net outflows. There is now £90bn in its multi-asset funds, or nearly a third of Aviva’s £320bn under management. Some of that is internal money, and some is via the acquisition of Friends Life. But half has come from external flows.
But last year was a “tricky market” says Munro. “Investment performance was not as good as we would like, but flow was brilliant,” he says.
Over one year, the £4bn Aviva Multi Strategy Target Return fund, which aims for a 5 per cent a year return (or 4 per cent income on the income version) is down 0.3 per cent compared with the average gain in the absolute return sector of 3.6 per cent. It ranks a lowly 56 out of 71 funds. And it must hurt that the rival £26bn GARS fund is showing a gain of 3.3 per cent after a ropy period itself.
To be fair to Aviva, the discrete rolling averages show it made a positive gain of 2.1 per cent in the 12-24 month period, when the average target return fund was losing money. And there are some very peculiar funds in this sector.
7IM’s “Unconstrained” fund has made 26 per cent over the past year and Polar Capital UK Absolute Equity 23.1 per cent. At the other end of the table, Argonaut Absolute Return has lost 17.6 per cent, and Odey Absolute Return is down 14.9 per cent.
Peter Fitzgerald, the lead manager of the fund – although Munro clearly has a close watching brief – says: “We look at performance numbers over a rolling three-year period, with a target of 5 per cent [annual] growth, but it will oscillate around that.
“In the 12-month period, there were a number of core views that we did not get right. Simply buying the market has been a fabulous strategy…. The big dividend payers were baled out by the currency,” he says, referencing Rio Tinto, Glaxo and BT. “But since inception we have had a really good first 18 months.”
The 30-year bull run in interest rates, Fitzgerald reckons, has resulted in a slow transfer of wealth to borrowers who have over-extended themselves. But now the “market is at an inflection point”. He believes traditional income-producing assets need to be complemented by things such as infrastructure. “And our portfolios are less risky than what some regard as ‘balanced’ funds. They may have twice as much risk as our funds.”
What irks both Munro and Fitzgerald is that retail investors struggle to understand the trade-off between return and volatility. “If someone does 12 per cent but with twice as much volatility as someone who is up 10 per cent, they don’t seem to care.” It’s a deep frustration – and one that Fitzgerald thinks advisers need to better explain to clients. “Our own risk-adjusted returns are ahead of our competitors,” he says. Volatility in equities has been 12 per cent at a time when in his fund it has been 4 per cent.
But what really goes on under the bonnet? When GARS first launched, I was there as Munro tried his best to explain how it worked. I confess I struggled to understand.
Fitzgerald and Munro both acknowledge the fund is complex. Rather than talk about how it works, they point to the processes that bring themselves to stock positions. On arrival at Aviva, Munro brought in a far more disciplined house-view approach. Sure, Aviva had one before, but no one took much notice of it, he says. One wonders just how common that is across the fund management industry.
“There is no place here for prima donnas who think it’s all about them. They are not going to thrive in our culture,” says Munro. He set about building a proper house view, fuelled by bottom-up views, while taking in industry and sector ideas. He gives, as an example, the Amazon effect. This is where the company enters a new product or geographical market and as a result the incumbents are destroyed. It does not mean you own Amazon – but it gives you plenty of pointers about what should be shorted.
Where is their house view now? Fitzgerald says they are probably furthest away from consensus when it comes to emerging markets. “There is this perception that Trump will be bad for emerging markets and great for America. But American equities are already quite expensive, and Trump may not be able to talk down the dollar. Then if you impose tariffs, you have an inflation effect.”
Manufactured goods coming in from emerging markets may be hit, but that is principally China, and a lot of emerging markets produce raw materials rather than manufactures. “For emerging markets specialising in primary goods, Trump is not such a big risk,” says Fitzgerald.
Fourteen months ago Fitzgerald started buying emerging market debt and has more recently rotated into emerging market equities. And he gleefully points out that despite everybody thinking US equities are the only place to be, emerging market equities have actually outperformed US equities so far in 2017. “You want to invest in what no one else is talking about,” he says.
£4bn Assets in the Aviva Multi Strategy Target Return fund
-0.3% Returns from the fund over the last year
5% Returns the Multi Strategy Target Return fund aims for
4% Current volatility in the fund compared to 12 per cent in equities
As an alternative to GARS, this fund is obviously a sensible choice. And clearly advisers believe the story, given the amounts of money pouring in. What we need to see over the next couple of years is that promise of 4-5 per cent steady low-volatility returns to come true.
Munro was the architect of Standard Life Investments flagship Global Absolute Return Strategies fund and his departure in 2013 was seen as a major blow. He is chief executive at Aviva Investors, where he is also a strategic adviser for the multi-strategy portfolios.
Graduating from Trinity College Dublin, Fitzgerald began his career at Old Mutual in 1995 before joining BNP Wealth Management’s multi-asset team. Over his career he has worked in Asia, Latin America and Europe. He joined Aviva Investors in 2011.