Aegon completes its equity jigsaw

Aegon Asset Management could easily be described as the Jekyll and Hyde of the fund management industry. On its good side is its fixed income range, where five of its six funds are top-quartile over the last 12 months to March 1, according to Standard & Poor’s, with the sixth being second quartile. However, its bad side emerges when the equity fund range is examined. All five of its equity-orientated funds are ranked third or fourth quartile over the past 12 months, and over the last three years only its Ethical fund breaks into the top half of performing funds.

Jon Bennett, director of third-party business at Aegon, argues that the bursting of the technology bubble in 2000 and the departures of three key equity fund managers are largely responsible for this poor record. At the end of 2000, Neil Smeaton, manager of the Standard & Poor’s AAA-rated American fund, left to set up a hedge fund boutique. Soon after, Aegon’s two star technology managers – Paul Kleiser and Stuart O’Gorman – left to join Hendersons.

Aegon started life as Scottish Equitable Asset Management. In 1999 it was separated from the Scottish Equitable life office and in 2001 it was rebranded as Aegon Asset Management. The company is a subsidiary of a Dutch financial group.

Bennett says: “In the early days, when we were branded Scottish Equitable Asset Management, all we talked about was our equity funds. Our bond funds were good, but they just reinforced our life office roots. Most of our efforts went into promoting our American and technology funds. We did have Japan and Asian funds, but these were quite small and intermediaries tended to buy only one Japan/Asian fund for their clients’ portfolios.”

At its peak, Smeaton’s American fund reached £200m in funds under management, while the technology fund (now Aegon Technology Tactical) took in £300m. Then the technology bubble burst. Bennett says: “When Smeaton and the tech team left, the whole basis we had built our equity business on went. The investing environment then changed and performance has suffered since.”

Bennett says that the company reinvented itself as a specialist fixed interest house after the departures of its three key equity managers. As part of its drive to increase its funds under management, it was rebranded as Aegon at the start of 2001. Key to Aegon’s investment philosophy, says Bennett, was not to build the business around star fund managers and past performance: “Unlike others, we have never had a large pot of money to advertise our funds. For us, the most important thing is to be transparent with our investors so they feel comfortable with our products. As such, our strategy has been to focus on the top end of the intermediary market who understand what they are buying, meaning they are more likely to stick with the funds when they underperform.”

The problem for Aegon is that not many have stuck with its equity funds. Darius McDermott, managing director of Chelsea Financial Services, says: “During the tech years, its tech fund did make our buy list, but that is the only equity fund of Aegon’s that we have ever promoted. We do, however, have buy ratings on all its bond funds, and its Extra Income fund is on our recommended buy list panel.”

The Extra Income fund, run by David Roberts, is the group’s corporate bond fund. Roberts, formerly head of credit at Britannic Asset Management, took over the fund last March when the fund’s former manager Stephen Snowden left Aegon to join Old Mutual. Roberts is head of retail fixed income and also runs the Global Income fund, which Snowden also used to manage.

According to Bennett, Aegon now has close to a 8% market share of all intermediary sales of corporate bonds and a 5% share of global bond funds. In an effort to improve its fixed interest performance further, at the start of last year the group announced that three of its funds – Global Income, Optimum Income and European Bond – were to use more of Aegon’s global expertise.

Bennett says: “The three funds forged more links with our colleagues in America and Europe, so they can share research and ideas. This gave our UK team an extra dimension and the performance numbers of all the funds since reflects this.”

The area Bennett says Aegon is now concentrating on is the high-yield sector, where at present it has only a 1% share of the market. At the start of 2004, the group altered the mandate of its Optimum Income fund to make it more high-yield orientated. The fund, managed by Philip Milburn, invests in both high-yield and investment-grade bonds, both sterling and dollar-denominated.

McDermott, a holder of the fund before Snowden left, says Chelsea took the Optimum Income fund off its recommended list following its move to a high-yield approach. “The performance of the fund has not been bad since its change – indeed, we still recommend it as a buy – it is just that we have a preference for another high-yield fund on our recommended panel of funds.”

Bambos Hambi, head of multi-manager at Gartmore, is another fan of Aegon’s fixed interest team. However, such is Hambi’s asset allocation at present, with an underweight position in bonds, that he does not hold any of Aegon’s funds: “The risks are asymmetric. At present in the fixed interest area, you are not rewarded for the risk you take. That is, the potential downside is greater than the potential upside. As a result, we hold only four bond funds across our fund of funds portfolios, none of which is Aegon’s.”

But, he adds, this is not a reflection of Aegon’s capabilities: “The fixed interest team there is very good. It is very strong on the corporate bond side and has a strong resource in America to use. When I was at Rothschild, we held the Extra Income fund and the fund remains on our reserve list here.”

However, like McDermott, Hambi says Aegon’s biggest weakness has been on the equity front. While he acknowledges that it has made several moves to improve its equity offering, only time will tell if these will be successful in turning around its performance.

The first major move by Aegon to improve its equity fortunes was taken last March when it restructured its equity proposition. To do this, it split its equity team into four new teams, each of which was focused on specific elements. From this point, all its range of funds were characterised as either mainstream or tactical, UK or international, and then managed by the appropriate team.

Bennett explains that all the mainstream funds were the institutional-style, benchmark-driven funds, which aimed for index-plus returns. The more aggressively run retail products fell into the tactical camp: “Since March last year, we have spent time streamlining our equity process. Before, we operated separate research and fund management operations and invested along global sectoral themes. However, it became obvious this was not working and that to exploit opportunities we needed to be more nimble.”

To help with this, last June the group hired William Dinning, UBS’s former head of global strategy, as head of strategy. It also recruited Simon Carter, a former global portfolio manager at JP Morgan Fleming, in December as head of international tactical equities. Carter has begun running the group’s American and Worldwide Tactical funds, replacing former manager Elaine Crichton, who is now focusing on managing Aegon’s mainstream funds.

In January this year, Bennett says Aegon completed its equity jigsaw when it hired Andrew Fleming as its new chief investment officer. The former chief investment officer and global head of portfolio management at ABN Amro, and deputy CIO at Gartmore, replaced Wendy Hay, who had left Aegon the previous September for personal reasons.

As part of the restructure, 12 people were made redundant, including Jackie Bowie, manager of the Technology Tactical fund. Chris Ford, the fund’s former number two, has replaced her.

Since the days of being managed by Kleiser and O’Gorman, investors in the tech fund have had a tough time. The fund is ranked fourth-quartile in the IMA Technology & Telecoms sector over the past three years to March 1, 2005. Indeed, even with a change of manager 12 months ago, the fund is still ranked third-quartile over the past year. Bennett says: “Performance of the fund has been mixed since Chris took over. We are trying to find a more appropriate benchmark for the fund to be run along.”

Hambi says: “Aegon has brought in good people to try to turn its equity performance round, but it is now a case of waiting to see the numbers come through. If this starts to happen, we will start doing more qualitative research into its equity funds.”

Aegon has also rationalised its range of retail funds. Over the course of the last two years, Bennett says it has reduced the number of funds from 24 to 11. Funds that have closed include its old Latin American and Japan portfolios.

“Our core strategy now is to focus on what investors want. We don’t subscribe to the argument that to be successful you either have to be niche boutique or a large fund manager. For us, it is all about having an appropriate size of assets for the size of the overall group. Our focus will always be on the mainstream; we won’t be launching niche funds.”

As a result, Bennett is ruling out any launch of property funds. Nor, he says, will it go along the route of launching the absolute return, Libor-plus bond funds, which have proved popular since the advent of Ucits III.

Indeed, in terms of innovation, Bennett does not anticipate the launch of any new retail funds this year: “We are considering our options on the institutional side of our business, such as liability-driven investment. However, in terms of equities, our focus is on fixing what we have, not launching new products.”

Like Dr Jekyll, Aegon has put some effort into trying to overcome its bad side. Despite the exemplary performance of its bond funds, Aegon has been blighted by poor equity performance over the past three years. The group has spent the last year restructuring in an attempt to find the answer and no doubt hopes these changes have the desired effect.

Aegon Asset Management is part of the Aegon UK group of companies. It is one of three major investment centres within the global Aegon group alongside those in the Hague (Netherlands) and Cedar Rapids (Iowa, America). Aegon Asset Management UK manages about £35bn on behalf of institutional, insured and retail fund clients. It employs over 250 people at its Edinburgh head office.