Underdog strives to become top dog

Aegon Asset Management was beset by poor equity performance until a managerial change began to show results, says Jon Bennett, director of third-party business. Adam Lewis reports.

When Fund Strategy last focused on Aegon Asset Management in March 2005, the group was referred to as “the Jekyll and Hyde” of the fund management industry. The literary reference referred to the huge divergence between the group’s strongly performing fixed income funds and its weakly performing equity funds.

Some 13 months on and the fruits of Aegon’s efforts to overcome the bad side of its personality are beginning to show through. Whereas over one year to February 28, 2005, the Aegon UK Equity fund was ranked third-quartile in the IMA All Companies sector, over one year to April 3, 2006, it is ranked first-quartile, according to Standard & Poor’s.

Indeed, of the 11 retail funds run by Aegon, seven are ranked either first or second quartile in their respective peer groups over 12 months. Of these seven funds, four are fixed interest-oriented and three are equity mandates. The last time Fund Strategy reviewed Aegon, only its Ethical Equity fund was ranked in the top half of its sector.

Jon Bennett, director of third-party business at Aegon, says much of the change in its equity fortunes is down to Andrew Fleming, who joined the group at the end of January 2005 as chief investment officer. In addition to his CIO role, Fleming, former CIO and global head of portfolio management at ABN Amro, was appointed managing director of Aegon last November. He assumed the role from former MD Colin McLatchie, who left the group following the poor performance of its equity funds.

Fleming says: “When I joined as CIO in February last year this was not an investment-led organisation. The fund managers were very down, morale was poor and the relationship we had with our shareholders was not good. The thing about fund management is that you have to strike the right balance of being tough and vigorous with your fund managers, while at the same time being supportive and provide coaching and mentoring.”

As a result, Fleming says he has focused on the basics of trying to change the investment culture at Aegon. “It is all about improving the communications between the different equity teams and making us more of a risk aware group, rather being risk averse,” he says. “Before I came in this was a business-led organisation; what we need to be is an investment-led organisation.

“We live or die on investment performance and before I joined people had not really grasped this. They did not have the basics of investment management and as a group we did not have the proper incentive packages for our managers. Myself and Otto Thoresen [chief executive officer] have spent a lot of time rebuilding our fractured relationships with shareholders and have put in place a better incentive system for our fund managers.”

The establishment of a proper bonus system and competitive remuneration structure, which did not exist before, is critical in allowing the group to compete at a global level, he adds.

“Before I become MD in November, the company was run by people who had never run money themselves,” Fleming says. “What I try to do is lead by example and I have taken responsibility for asset allocation with Bill Dinning [head of strategy] as well as the position of co-manager on our Global Equity retail fund. This has definitely helped in terms of people responding to me, as they see me putting my own head on the block.”

He adds that people have also been let go from the group. “Those who work here now know that mediocrity will not be tolerated,” he says. “Over the past 12 months we have just one fund ranked fourth-quartile, which is a big change from a year to 18 months ago.”

Indeed, in March 2005 Aegon had three of its 11 funds ranked fourth-quartile over a 12-month period, while five out of its nine funds with a three-year track record were ranked third or fourth-quartile. The picture has not changed hugely over three years, with five out of 10 funds being ranked in the bottom half of their peer groups to April 3, 2006.

Following the improvement of the UK Equity fund, managed by Stephen Adams, Bennett says that for the first time since Aegon was separated from Scottish Equitable in 1999, the group is going to start marketing it to intermediaries. He says: “There are two key areas you want to get right when selling funds to a British audience: UK equities and fixed income. These two areas account for 50% of all IFA sales. As a result, we are confident we now have a good story.”

Mark Dampier, head of research at Hargreaves Lansdown, says while it is early days, any improvement on Aegon’s equity funds is welcomed. “I don’t like seeing any active fund managers sitting close to the bottom of their peer groups and the group has the global resources at its disposal to do as well in equities as it has done on fixed income,” he says.

However, he adds that the progress made is still small and so far Aegon has made no contact with Hargreaves Lansdown. “We have supported the group in a large way on its bond funds, but if it feels it has a story to tell on equities, it has to come and see us,” he says.

Indeed, while noting the improvement in its equity funds, Bennett admits given its long spell of underperformance the group still has some way to go to convince the market this is not just a short-term blip of outperformance. He says: “The mass IFA market may well see this improvement as just a flash in the pan, but we can only be judged on our numbers, process and resources to understand the reasons for the change.”

Bennett concedes the group does have to broaden its appeal to the wider IFA market, to get the message out about the improvement on the UK Equity fund. However, for the time being, fixed interest remains its core proposition to the retail market.

In terms of mainstream IFA sales of UK corporate bond funds, Bennett says its Sterling Corporate Bond fund, run by David Roberts, and Ethical Corporate Bond, run by Philip Milburn, take a 10% share of the market. Both funds are ranked first-quartile in the IMA UK Corporate Bond sector over one and three years.

In addition to its corporate bond offerings, in December 2003 the group launched a Global Income fund – now branded Global Bond. Run by Roberts, Bennett says the fund has seen its assets grow from £65m at the end of December 2005 to £109m now.

In terms of branding, at the start of this year Aegon changed the name of eight of its 11 funds to simplify their meanings. Bennett says: “We needed a more ‘plain English’ approach to our marketing as many investors did not understand what Extra Income or Optimum Income funds were. So we rebranded them the Sterling Corporate Bond and High Yield Bond funds, which sets out their objectives much more clearly. We also dropped the Tactical tag off our Worldwide and Technology funds, which were legacies from past fund range consolidations.”

The former Worldwide Tactical fund is now the Aegon Global Equity fund.

Bennett says: “In 2005, we finished an exercise of consolidating our fund range, so we are now focused entirely on what we think people want to buy. We now have just 11 funds and we want these to attract 80-90% of what all advisers are looking for. We used to run a Latin America fund, but for us it is now all about appealing to those areas where we have capability and where we think people will buy things.”

One such area in which the group says it has capability is UK smaller companies. Owing to its “dark green” investment process, the Ethical Equity fund the group manages invests the bias of its portfolio in small and medium-cap companies. Fleming says: “One of Aegon’s dirty little secrets is our strong small and mid-cap team. However, as they have never run their own specialist retail fund, their performance has not been picked up. On the back of this, in the next two months we plan to launch a UK Smaller Companies retail fund for them to run.”

Behind the UK Equity and Ethical Equity funds, the UK smaller companies fund would be the group’s third UK fund offering and Fleming says its launch is important. “It gives the sense to the organisation and those who look at us from the outside that we are no longer a group on the defensive. Instead, after years of closing funds, we are once again confident in what we do and are more on the offensive. This is hugely important psychologically.”

Another shift taking place, says Fleming, is that the equity funds are beginning to share some research with Aegon’s global partners in the Netherlands and America. This is commonplace with its fixed interest funds but up until now theequity funds have not been able to access these resources. “We are in the early stage of sharing quantitative and US equity research,” he notes.

Any sharing of knowledge would be of help to the American Equity fund. As a portfolio it has yet to catch on to any improvements, sitting fourth-quartile over one and three years, just as it did in March 2005. Fleming says: “We rebuilt the US team over the past 18 months and there have been some signs of progress but the numbers are not yet there to back this up. However, the team is working better and is more stable and we are absolutely committed to running a strong US product going forward.”

Dean Cheeseman, head of UK business at rating agency Forsyth Partners, says it is looking Fleming’s impact on Aegon’s equity funds and how he has restructured the team. While he notes the turnaround in performance of the UK Equity fund, he says he wants to see more of track record before rating the fund.

“We are spending time looking at Fleming’s own Global Equity fund as this not only shows us how he backs his own judgement but also how he leverages off the skills of his colleagues. While we have not yet rated any of Aegon’s funds, the performance of its UK Equity fund means we are now having further dialogue.”

Conversely Aegon’s Sterling Corporate Bond, Ethical Corporate Bond, Global Bond and High Yield Bond funds are all AA-rated by Forsyth.

Indeed, in addition to sorting out the group’s long running equity problems, Fleming says his priority is to maintain the group’s strong fixed interest position. “There is always a risk of becoming complacent,” he says. “We have to be competitive to retain our market-leading position and I do spend a lot of time with our bond team, who are the best fixed interest team I have ever worked with.”

Fleming is well aware that there will be a lot of scepticism surrounding any turnaround in its equity funds, given “the lousy job done for most of the time”. However, he argues: “Those who know me know that I am committed to turning this around and becoming successful. I don’t actually mind the cynicism. I like being the underdog as it means we can start to surprise people. There is a buzz here now that has not been here for a long time.”

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 £40bn on behalf of institutional, insured and retail fund clients. It employs more than 180 people at its Edinburgh head office.