Big fish gets in the swim on equities

Norwich Union is determined to reverse a tepid performance in its equities range and destroy the perception that it is too big for sustained success in this asset class. Frances Hughes reports.

Norwich Union is best known as a manager of fixed-income funds and property. Its equity range is often not held in as high regard by intermediaries but this is something the group is determined to change.

Over the past 18 months to two years the group has tried to turn round the performance of its UK equity range. New managers came in under the leadership of David Lis, head of UK equities, who has encouraged them to show conviction.

Norwich Union is part of the Aviva group, which was created after the merger of CGU and Norwich Union in May 2000. Most of its funds are managed by Morley, also an Aviva company.

However, Norwich Union makes all the product development decisions, including pricing, distribution channels, managing investor inflows and outflows and marketing of investments.

At the end of December Norwich Union’s collective investment business had £10.8 billion funds under management and 41 funds open to retail investors.

“UK equities is an incredibly important area for investors,” says James Dalby, head of fund proposition. Dalby joined Norwich Union in 2006 from Bates Investments Services, where he was head of research. “Morley’s UK equity team has been significantly strengthened over the last two years and the tide is certainly turning for us in the UK equity space,” he says. “It’s a key focus. We want to make sure we deliver good performance.

“Historically, IFAs viewed Norwich Union as being very strong in fixed-interest [and property funds, but] less so for equity funds. We are taking action to change this. We want to offer a strong range of funds across all asset classes.

“There are certain specialist funds we are not going to get into at this stage. We need to do a really good job on the core areas.”

Of the core UK equity funds in Norwich Union’s range, the UK Equity Income fund is by far the largest, standing at £671.9m at November 30. Managed by Dan Roberts since August 2005, it is ranked second quartile over both one and three years, according to Morningstar.

However, Dalby highlights the UK Equity fund, managed by Chris Murphy since July 2006, as one of the best in terms of performance turnaround.

Over 18 months to February 4 the UK Equity fund is ranked 77 out of 299 funds in the IMA UK All Companies sector. It returned 9.39% compared with a sector average of 5.88%, according to Morningstar.

There are two funds within the Norwich Union UK equity range not managed by Morley. They are the UK Growth and Value and UK Special Situations, which were outsourced in 2006 to JP Morgan and Schroders respectively.

Dalby says this was not a bad move in terms of improving performance. “At the time we identified some gaps in the range and needed to improve performance,” he explains. “Morley saw we could outsource mandates if we wanted to, and to be fair they’ve really improved their performance since we did that.”

Another area Norwich Union is well known for, apart from fixed interest, is property. “That’s been a key area for us over the years,” says Dalby. “It’s a very important asset class. In the UK it’s having a tough time. But professional investors are on the sidelines waiting for stability and we’re confident we’ll be beneficiaries of that.”

Shane Balkan, investment manager at Bates Investment Services, has held the Norwich Union Property trust for several years. “It’s still on our buy list as a good property fund,” he says.

Ben Yearsley, investment manager at Hargreaves Lansdown, has also held the Norwich Union Property Trust in the past. Yearsley says property and bonds are what Norwich Union is known for.

“They are associated with two things, bonds and property, not equities,” he says. “There’s nothing wrong with that. I wonder [sometimes] why some groups try to be all things to all people.

“We had the Property trust on our list for a while and a couple of their bond funds. Property and bonds is their forte.”

Looking at Norwich Union’s equity range, Yearsley says he rates Mervyn Douglas and David Lis as good managers.

“Mervyn and David especially have turned performance around,” he says. “But is it enough?”

One area outside property and fixed interest in which Norwich Union has much experience is ethical and socially responsible investing.

“They are very committed to that area,” says Yearsley. “We have considered them, but they have not made it on to our list.”

The Norwich Union Ethical fund was launched in 1999. Dalby says that for this reason the group cannot be accused of “jumping on the bandwagon”.

Indeed, he says, the promotion of its ethical funds is a focus for 2008. “I think this year we could see these funds moving into the mainstream. Socially responsible investing is important to us. We are making this one of the two key areas we are going to focus on in the Isa season. The other is UK equities.”

Can Norwich Union change people’s perceptions of its UK equity range? Yearsley and Balkan say the group has a fight on its hands.

“They need to do something striking to grab the attention because of so many years of lacklustre performance,” says Yearsley.

Balkan says the group’s sheer size is part of the problem. “Five years ago, being a large institution would be seen as an advantage,” he says. “But now it’s detrimental to them.

“A lot of insurance companies are pushing their UK equity funds now. But the average IFA sees them as a provider of products rather than the manager of funds. If they could create a separate entity, that would help. But I think it will be a long uphill battle for them.”

Mark Harris, head of funds of funds at New Star, agrees with Balkan that Norwich Union has had problems with its image and size. “They’re one of the biggest institutions in the UK,” he says, “and they’ve had issues around it. I know they’re making an effort, but they need to go further.”

Harris has held the Norwich Union Fixed Interest Corporate Bond fund in the past. “All the fixed income team have always been pretty good,” he says. “But the equities have been pretty disappointing over a long period of time.

“The life-cycle of a big institution is that changes work for a short while, but you get back to pedestrian returns again. I wouldn’t say that of the fixed interest team.”

As for the Norwich Union property team, Harris says he has never looked at them.

However, Dalby is adamant that the equities team at Norwich Union has a culture that is not typical of a big institution. He says each manager has the freedom to back his ideas and is held individually accountable for them.

“While there are some suggested buys, they have flexibility to decide what they want to do with their individual funds,” he says. “They can deviate from what the manager next to them is doing if they have the conviction, [for example] a differentiation in what they prioritise and the weightings they give to a stock.

“It’s quite a healthy environment. It enables them to compete with some of the smaller groups. Historically you might expect a big company to have a ‘one size fits all’ approach.”

NORWICH UNION is part of the Aviva group, which was created after the merger of CGU and Norwich Union in May 2000. The group was called CGNU until its rebranding as Aviva in July 2002. Aviva’s main activities are long-term savings, fund management and general insurance. At the end of December Norwich Union’s collective investment business had £10.8 billion funds under management and 41 funds open to retail investors.