S PON SOR ED FEATU R E April 2016
Helping clients to achieve an attractive and sustainable level of investment income is a key challenge for advisers. Multi-Strategy funds provide a new solution for this new age argues Aviva Investors
In association with Aviva Investors
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Multi-Strategy Funds
S PON SOR ED FEATU R E April 2016
Welcome to the new world of multi-strategy funds, says Aviva Investors In today’s world, obtaining an attractive and sustainable level of income is challenging. Bond yields and annuity rates are at, or near, record lows while equities are potentially more risky than usual given the recent high levels of volatility. The new generation of over55 investors, who may be looking to secure income in the short or medium term, have been particularly hard hit. In addition, radical changes to pensions and the introduction of pension freedoms have shifted the responsibility of funding retirement on to the individual – and, by extension, to their advisers. Recent research by Aviva Investors highlights investors’ concerns. Around 52 per cent of pre-retired investors are worried that they may not have saved enough for retirement. Meanwhile, 32 per cent of those investors who have already retired are concerned about the sustainability of their income. Indeed, individual investors regard the ability to offer a sustainable, regular income as being the single most
Multi-Strategy Funds
important responsibility of an investment provider.
from government bonds and savings accounts.”
A perfect storm Annuities were formerly the automatic choice for the newly retired. However, James Tothill, Head of Third Party Sales at Aviva Investors, says that this is no longer the case. “Low interest rates have driven annuity rates to very low levels and there are too many complex products. In addition, people are living longer, and they are not convinced that the state will fund pensions forever. These factors combined with persistently low interest rates and the new pension freedoms are putting the onus on the individual to ensure that they have sufficient income to last through their retirement.” Nor is the situation likely to change in the foreseeable future “Given the lack of inflation and the high levels of debt burdening the global economy, interest rates are likely to go up gradually and peak at much lower levels than in the past,” says Tothill. “That means annuity rates will likely remain low, and the same applies to income
Four per cent is the new five per cent This economic backdrop has shifted the expectations for income generation “An annual return of five per cent was once a realistic return, now it is four per cent. When you consider that the 10-year gilts yield is under 1.7 per cent (as at 25 January 2016), four percent is a pretty decent income,” Tothill points out. He is not alone in holding this view. A large majority (84 per cent) of advisers and a significant majority of investors (60 per cent), told Aviva Investors that they believe an annual yield above four per cent is unlikely to be sustainable. A new solution for a new age Aviva Investors has devised a new solution for those seeking income: the Aviva Investors Multi-Strategy (AIMS) Target Income Fund, the second fund in their AIMS range Jerome Nunan, investment director of multi-assets, at
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Aviva Investors, says the AIMS range of funds is built on the simple idea of investing from the clients’ perspective. “As an industry,” he says, “we are investment-led, and have perhaps lost touch with the world in which our investors live. If you think about what clients want, you find that their desires are simple.” According to Nunan, “investors have four simple needs: achieving consistent capital growth; securing a reliable income; obtaining a return that exceeds inflation; or meeting a future liability such as university fees. Our ambition in creating the AIMS range was to build portfolios that meet the specific outcomes that matter most to today’s investor.” The AIMS range currently consists of the AIMS Target Income Fund, which aims to generate a stable and regular income, while seeking to preserve capital, and the AIMS Target Return Fund, which is designed to meet the needs of clients who are looking for capital growth over the medium to long term. The reassurance of an absolute income The AIMS Target Income Fund, Nunan says, is an absolute income fund - which he describes as “a unique proposition, because instead of just a yield, we target the Bank of England base rate plus four per cent before corporation tax on the fund”. “If the base rate rises, then the amount we have to
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deliver each year also goes up. Investors should draw a lot of comfort from that.” Nunan is emphatic that the AIMS Target Income Fund focuses on producing a “natural income”, whereby capital is not eroded in order to pay out income. “The objective, then, is to deliver stable, sustainable income…month after month, says Nunan.” Multi-strategy funds are a natural evolution from multi-asset funds Multi-strategy and multiasset funds invest across a diverse range of asset classes, including equities, fixed income, property and alternatives such as commodities. By spreading their risk, both types of fund seek to offer investors more attractive risk-adjusted returns than are available by investing in single asset classes alone. Although they differ in important respects, we believe they should be seen as complementary strategies with both having a role to play in meeting investors’ needs. However, there are key differences. Multi-asset funds are ‘long-only’ funds. “They vary the amount invested in each asset class. For example, they may look to raise exposure to US equities, while simultaneously reducing their position in US treasuries”, explains James. “But the important point is that they can’t profit from a decline in prices. The aim of multi-strategy funds is to
perform well in all kinds of market environments. In order to do this, their managers tend to employ a wider investment universe than is available to managers of traditional multi-asset portfolios. They can take ‘short’ as well as ‘long’ positions.” Furthermore, managers of multi-strategy funds tend to invest in a more precise fashion. For example, a multi-strategy fund manager may look to invest in a particular segment of the stock market rather than the market as a whole. They may also target debt of a specific maturity or attempt to exploit perceived anomalies in the relative valuations of two similar, but different, assets or to profit from a change in market volatility. Overcoming the correlation challenge Multi-strategy funds have one further key advantage over multi-assets funds. Returns tend to be lowly correlated to equities, bonds and other traditional asset classes. “This is an important factor given that in recent years, swings in asset prices have been far more correlated than was previously the case,” says Tothill. Historically, rising equity prices, for example, were associated with falling bond prices and vice versa. Stronger economic growth would boost corporate earnings and hence share prices, whilst causing interest rates to rise, undermining the appeal
Multi-Strategy Funds
S PON SOR ED FEATU R E April 2016
of bonds. Thus, the risk of investing in equities could be offset to some degree by allocating part of the fund to bonds. A new world order? However, the aggressive monetary policy adopted by central banks around the world in response to the global financial crisis of 2008 has boosted asset prices simultaneously in recent years, argues Tothill. “Equity and bond prices have risen in tandem, while commercial property has also risen strongly in many markets. Thus, investing in a mix of assets will reduce a fund’s risk by less than previously.” Consequently, the traditional approach of targeting equities for capital growth, bonds for income and as a safe haven in times of trouble, and alternatives for extra diversification, no longer appears as valid. Advisers clearly understand the appeal of multi-strategy funds. According to the Aviva Investors’ survey, 75 per cent rated multi-strategy funds as an attractive proposition. Five diverse sources of income Building a portfolio that aims to meet clients’ income goals is complicated, not least because the income generated by individual asset classes can fluctuate and be irregular. The AIMS Target Income Fund invests in a diverse
Multi-Strategy Funds
range of income-producing assets, meaning that the level of income generated is for the most part fairly predictable. Distributions are paid from income receipts alone and not out of the fund’s capital. The fund generates its income from five main sources: • Equity dividends • Government bond coupons • Corporate bond coupons • Real-estate investment trust (REIT) dividends • Option premia Individually, these financial instruments can produce irregular, and sometimes volatile, streams of income. The balance between risk and reward also varies across these investments. The relatively high income generated by equities, for example, has to be offset against the greater volatility of this asset class and the income it generates. Government bonds, by contrast, currently generate relatively low amounts of income, however they do so at reasonably regular intervals. By gaining exposure to all these instruments the fund can build a balanced portfolio that looks to maximise income while also seeking to preserve capital. Generating absolute income “The income generated from each source is combined and smoothed with the aim of delivering consistent
monthly income payments”, according to Nunan. “One of the criteria we apply to the income-producing strategies that we select to include in the fund is that they produce natural income. Managing risk Investors and advisers also need to be reassured that they can receive a sustainable level of income without being exposed to excessively high levels of risk. This is a critical consideration given that according to the Aviva Investors’ survey, 60 per cent of investors say they are not prepared to accept more risk in order to achieve their income requirements. The way the strategies in a multi-strategy fund are expected to interact across a range of market conditions is crucial to managing a fund’s risk exposure and delivering the performance investors expect. “Our multi-strategy portfolios consist of three types of strategies: market, opportunistic and riskreducing,” explains Jerome. Coping strategies for an income hungry world The `market` strategies seek to generate returns when markets perform as we expect. This group of strategies essentially performs the role that equities have traditionally played in multi-asset funds. For example, we are long global equities, a position
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S PON SOR ED FEATU R E April 2016
designed to deliver income from the dividends received. The strategy also t exposure to equity risk. `Opportunistic’ strategies strive to exploit opportunities arising because not all market participants seek to maximise profits. Examples of this are pricing anomalies that result from the actions of central banks, pension funds or structured product providers. These strategies can be implemented in ways that either deliver income, or help to protect capital against market downturns. For example, we have adopted a short Japanese yen position. This is based on our belief that the Bank of Japan will undertake further quantitative easing to try to boost economic growth. That should lead to a drop in the yen’s value. This position is implemented via currency options. “That means that we can generate income from our view that the Japanese authorities are unlikely to allow the yen to strengthen above certain levels,” says Nunan. In this way, we deliver income to the fund from our currency views – an asset class that is
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unlikely to find a place in conventional multi-asset income funds. `Risk-reducing` strategies are designed to cushion performance when markets behave unexpectedly. Their aim is to provide protection against market turbulence, by offsetting the losses that might be sustained in periods of market stress by the incomegenerating market strategies. Strategies can be added or removed from the funds to refine risk exposures and ensure the fund is appropriately positioned as the outlook for economies and markets changes. As an example we are seeking to exploit our view that the market is mispricing the relative volatility of the US and Korean stock markets. Korea’s economy tends to be more cyclical, and hence its stock market more volatile. “This position should help in preserving capital, notably in periods of market stress”, says Tothill. “We are confident that these factors – diverse and interactive strategies, flexibility and the use of strategies that benefit from falling markets – will enable
our multi-strategy funds to be successful in their pursuit of specific targets – whether it be capital appreciation or consistent, sustainable income – for today’s investor.” Supplementary information The fund’s income target is based on the daily value of the fund and is measured from 1 April to 31 March each year. Corporation tax (currently 20%) is payable on some of the fund’s income. As a result, the income received by investors may be up to 20% less than that generated by the fund. Although corporation tax paid by the fund cannot be claimed back by investors, distributions from the fund will carry a tax credit which may reduce their overall tax liability. The Aviva Investors MultiStrategy Target Income Fund is a sub-fund of the Aviva Investors Funds ICVC. For further information please read the latest Key Investor Information Document and Supplementary Information Document. Copies of these documents and the Prospectus are available in English free of charge on request or on our website. www.avivainvestors.com
Multi-Strategy Funds
AV I VA I N V E S TO R S For all market conditions
AIMS TARGET RETURN FUND The Aviva Investors Multi-Strategy (AIMS) Target Return Fund offers a compelling investment opportunity for investors looking for capital growth in today’s uncertain world: – it targets long-term capital growth in all market conditions – targets an average annual return of 5% above the Bank of England base rate before charges over any three-year period – combines diverse long-term strategies with the flexibility to adjust the portfolio if the outlook for markets or economies shifts – actively manages portfolio risk aiming for less than half the volatility of global equities over any three-year period. To find out more about the AIMS Target Return Fund call 0800 015 4773* or visit avivainvestors.com
AIMS Target Return
Sustainable Income | Capital Growth | Beating Inflation | Meeting Liabilities
For today’s investor
For professional clients and advisers only. Not to be distributed to or relied on by retail clients. The value of an investment and any income from it can go down as well as up and outcomes are not guaranteed. Investors may receive less than the original amount invested. Ratings as at 1 February 2016. Ratings are not a guarantee of future performance and can change. The Aviva Investors Multi-Strategy Target Return Fund is a sub-fund of the Aviva Investors Investment Funds ICVC. For further information please read the latest Key Investor Information Document and Supplementary Information Document. Copies of these documents and the Prospectus are available in English free of charge on request or on our website. Issued by Aviva Investors UK Fund Services Limited, the Authorised Fund Manager. Registered in England No. 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119310. Registered address: No. 1 Poultry, London EC2R 8EJ. An Aviva company. www.avivainvestors.com. *Telephone calls may be recorded for training and monitoring purposes. Calls are free from UK landlines and mobiles. CI063669 02/2016