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Description:
Risk Target & Perform – How MAF does it. Presented by Nick Samouilhan, Fund Manager, Risk Target Multi Asset Funds.
Bookmarks:
56|Agenda
134|Progress
201|Changes in value
258|Clients
410|Multi-asset Funds Concept
494|Suitability
735|Investment process
866|Asset allocation
1103|Relative downside
1161|Fund performance
1264|Long term otlook
1399|Short term outlook
1542|Position Launch
1630|Position End of May 2013
2338|In summary
2451|Q&A
Duration:
00:50:36
Recorded Date:
11 June 2013
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Transcript:
Fergus Ryan: Good morning and welcome to the sixth Aviva Investors webinar of 2013. Now, we’ll be looking at the multi asset funds and we’ll be giving you a review and outlook on our two year anniversary or just past our two year anniversary. Fergus Ryan is my name. I’m Business Development Manager for Aviva Investors in Ireland and I’m joined in the Asset TV studio by Nick Samouilhan who you probably all well know is the Lead Fund Manager for the Irish Risk Targeted Multi Asset Funds. The webinars, just as an aside to that, they’ve been very successful for us for two reasons. Mainly for the reach; it gets us around the country in a very efficient manner, and secondly it’s very convenient obviously for you as a listener that you can do it in your office or at your desk while you’re having a cup of coffee.
You’ll see there the agenda that we’re going to go through. Briefly we’re going to talk about the progress of sales across the three funds. We’ll have a very brief refresher on the concept and the process of the funds themselves. Obviously we’re going to spend more time looking at performance and the investment outlook and we’ll do a summary at the end, and there will be time for questions and answers at the end. But what I’d encourage you to do is use the questions box that you can see in front of you because that’ll just prevent us having a logjam of questions at the end.
Before we move into the presentation proper, I just want to address one thing that you’ve probably seen on websites or on some of the newswires and that of course is that Justin Onuekwusi has left the multi asset fund team at Aviva Investors. While we’d like to wish Justin the best and he’s taken a great opportunity with another company, we would remind you that these funds are very much process driven and not people driven. I’m also delighted to say that replacing Justin will be Peter Fitzgerald who’s a graduate of UCC and Trinity College, he’s a Waterford man, and selfishly I think Fitzgerald is an awful lot easier to pronounce than Onuekwusi. Samouilhan is no walk in the park but certainly Fitzgerald should be easier to roll off an Irish tongue.
So, if we move into the presentation now we’re just going to have a look at the assets under management and how the funds have progressed from a sales point of view. So, on this chart what you’re seeing here is obviously the big line, the largest line, the red line is the total sales of the three funds and then underneath that you have the individual sales. Obviously the line has got a whole lot steeper towards the end, we’re going to look at that in a second and that’s basically just as the concept has been adopted by brokers across the country it’s obviously been sold more so we’re delighted about that, and we’d just like to thank every single broker who’s supported the funds so far.
Under that you’ll notice the three funds; we’ve got the Cautious, Strategic and Multi Asset Funds. Over 100 million in the Cautious and Strategic and you’ll note that most recently or in the last couple of months the Strategic Fund has been the big seller for us. Obviously the Cautious Fund was very suitable for people who were quite risk averse, as they were back in 2011 when we launched the funds, but I think people have gotten more comfortable with the process, how we do things and also the success of the funds in terms of keeping the risk where it’s supposed to be and generating a reasonable performance, and I think that’s why they’ve relaxed and allowed a little bit more risk creep in through the Strategic Multi Asset Fund.
If you look at the monthly changes in values what you’ll note is about, say, October last year, around pension season in 2012, interest in the funds really sparked to life. Since then we’ve had a dramatic increase in the monthly inflow into the funds, so since the funds were launched in June 2011 we’ve averaged about 10 million a month into the funds but if you look at just the last nine months it’s averaged nearly about 20 million, so again, as I said, I think this is just as the funds have been more accepted by the broker community around Ireland people are now a lot more comfortable with them. They’ve seen the results from the point of view of the risk targeting and the performance, then obviously the risk is one thing but generating a performance for that amount of risk is crucial for clients as well and those results have come through.
So, what I just want to spend a brief minute talking about is who uses the funds and why they use them. So if you look at the three funds, we’ve got Cautious, Strategic and Dynamic, low, medium and high risk funds. Cautious is obviously the least risky, volatility between 2 and 5% and these are naturally for clients who are risk averse in nature. Now, what we’re actually seeing is that as our Fixed Term Deposit Fund rates have dropped off in the last number of months, the interest in the Cautious has actually gathered a bit of pace. There was always a lot of interest in the Cautious but we’re seeing a natural replacement for the Fixed Term Deposit Fund being the Cautious Multi Asset Fund, so we’ll look forward to that continuing on into the future as those deposit rates continue to drop.
Strategic Multi Asset Fund, as I said, has been the big seller for the last six months and this is particularly popular with the post-retirement people, the ARF people looking to beat imputed distribution of 5%. So what we’re seeing is the risk or the volatility has to stay between 5 and 10%, and a reasonable return to expect over the long term for that amount of risk is 5 to 6% and we’ve certainly done that since launch, and what we’re seeing is that post retirement people will take that because you’ll get your imputed distribution over the longer term and you may actually add a little bit to the bottom line to the capital as well underneath it, so that’s the area that those funds are selling particularly well in.
Not so much flowing into the Dynamic Fund and, if I’m being honest, I probably think this is a victim of the success of maybe some of our other high risk funds like the High Yield Equity Fund which you’re probably most familiar with, and I’d say a lot of the money is flowing through the lifestyle option in the group pension scheme arrangement. However, having said that, if you are of a high risk disposition and you like the idea of having just more than equities, you want to spread across the four assets, a volatility range of 10 to 15 will provide you a return of about 7 to 8% over the longer term and will get you spread across the four assets. So, you will be high risk but you’ll also be spread multi asset as the name suggests.
So, that’s just a flavour of the funds, how they’ve been used in Ireland or case studies of how we’ve seen them being used, and I’ll just remind you that we will invite questions throughout the presentation and what I’d like to do now is hand over to Nick who’s going to take you through a bit of process but mainly performance and outlook.
Nick Samouilhan: Thank you, Fergus, and good morning everyone. Before I start just again to reiterate, Justin was a big loss in terms of the company and to the funds but these are process funds, they’re not personality funds. In terms of going forward there are two ways, two important aspects of running a multi asset fund, there’s asset allocation and then once you’ve decided on that asset allocation how do you implement that, what do you choose to invest say US equities and do you buy an ETF or an active fund.
My particular background, my speciality is asset allocation, Justin was manager selection, Peter’s coming across from the man team to fill that role, we’ll make sure we bring him around to see everyone soon, for those who are concerned to have someone Irish at the heart of power, hopefully we can address those concerns going forward. So, what I’m going to go through today is partly the performance of the funds. I’m going to, in particular I guess, my main message today I want to get across is the difference between the funds at launch and the way the funds are positioned now. It’s been two years since they launched, times have changed and the funds have changed with them and if I can get across the message today about how they’ve changed and why they’ve changed then we’ve got that.
So, beforehand let me just start off with just some, before we get into the performance just what the funds are to remind everyone and why. So, as Fergus said there are three funds; Cautious, Strategic and Dynamic. Their main focus is not on a particular benchmark or a peer group, it’s on delivering long term returns within very clear and set risk bands aligned to future regulation. So those are the funds. In terms of why we built them that comes down to threefold. The first reason we built them was for clients. At the end of the day we wanted to build something that was suitable for a range of clients across Ireland. These are very much Irish funds built for the Irish markets. We completely understand there’ll be default options for many and hence take that into account and what we try to do is build a level of sophistication and international diversification of these funds which are seldom seen in the retail market outside of high net worth individuals.
The second reason we built them was for people like yourselves, going forward the regulatory impact particularly on how portfolios are constructed is going to become increasingly heavy and what we built here is an outsource solution where we would take ownership of building the portfolio, making sure it stays aligned to particular risk bands and delivers returns over time. And the third reason we built them is for the future, going forward the regulatory environment both in Ireland and across Europe and in the UK is clear, risk is at the heart of that, you have to build funds from scratch with risk at the heart of these. These are the funds we built for that.
Fergus Ryan: If I could just pause you there Nick. We’re getting some questions in, which is great, thanks very much. First question from Alan Jones who just is wondering, are these not managed funds under a different name. I suppose I’ll have a go at this first Nick, you might add in if I miss anything, but why they’re not managed funds, the big differences are, number one, these funds are unconstrained in their asset mix. We’ll have a look at that later on when we’re talking about the make-up of the funds, but there’s no minimum, maximum, must be close to an average on these funds. The second thing I’d say about them as well is these are really regulatory driven and inspired by regulation if you like. We’d love to say that Aviva Investors invented these funds but we didn’t. All we’re being is early adopters of regulation and what that says to me is that they won’t be a fad, that this is something, this is actually an industry driven thing and therefore they’ll be around a lot longer. So, while maybe other types of funds are more point in time or to meet a sales objective, these are actually regulation driven and therefore should last an awful lot longer. Do you want to add anything to that?
Nick Samouilhan: It’s just on the third point, the industry of course is rife with these things. If you think through the evolution of multi asset funds in Ireland and across Europe and in the UK, if you just take the last ten years what’s happened is there were old balanced type funds which were very popular with many clients. They in time became peer group benchmark funds. The industry response in the late ‘90s and early 2000s was to add to those some alternatives, up to a third of the portfolios and we call those diversified growth funds and they usually had a target return. The next generation driven primarily by client experience and by regulation is to move it, instead of trying to beat a benchmark, to build funds around risk. So, these aren’t managed funds. They might at times look like managed funds because they have some large exposure to equities and bonds, but the point is over time a managed fund will be buffeted around by markets, these funds will be risk controlled throughout that and have a much broader investment palette to take advantage of.
Fergus Ryan: And just one more question then from Shane Brennan at CFS. Thanks Shane. Can you confirm the TERs on these funds? Unfortunately we can’t and it’s not because we don’t want to, it’s just because there’s no standardised approach to TERs in Ireland. We’re not afraid of them. We’d actually welcome a standardised process so we can reveal that number. Why we think we have an advantage or why we think we’d look good in the TER world is a lot or nearly all of our funds are managed from within Aviva Investors, we have the scale and expertise to deal with it and that’s why the fund management charge is probably an awful lot lower than similar funds in the Irish market. So, unfortunately Shane, I can’t answer your question but I can say that you’re getting exceptional value within these funds. Sorry Nick.
Nick Samouilhan: Thank you, Fergus. So, moving on just to recap in terms of where we are. The fund processes on slide 13, and I’m sure many of you have seen me present this – sorry, slide 11, and it’s the same process we follow across all the funds. We can now say that it’s the same process we’ve followed in these funds for the last two years. As always we start off by saying; what do clients actually want? These funds start off by saying what particular risk band do you want to go into. We then most importantly build funds using the strategic asset allocation for the long term, that’s always the anchor to the portfolios. We then change the portfolios for short term adjustments. We go through that in a very unique way, we approach the short term uncertainty through the use of scenarios, so some other funds out there have a very simple, we should be overweight or underweight risk assets right now, we should buy more or less equities. What we try and do is build portfolios for the long term, the strategic side, and then manage the client experience in the short term using the scenarios, and in particular when I get to the end I’ll talk through how the funds have changed from launch to now based on a change in our short term and long term outlook. That’s the process.
In terms of the fund in review if you go on just one more you can get to slide 13 finally, and slide 13 is the funds since launch, this is from an Irish perspective. What you’re looking at here in black that is if you invested in global equities, it’s the proxy for investing internationally from an Irish investor, that’s the black line experience. And the main point I want to get across here is that you can now see, when we say we manage the volatility, you can see what happens to the respective three funds during periods of stress. Look in particular at the period of just after launch and the period quite recently, the black line, global equities, that has a volatility of about 17 to 22%. The ESMA 3 fund, the Cautious Fund, there’s a volatility of 2 to 5%; you can see the very different degrees of volatility. It’s a similar path but we’re just managing the volatility within the path. We do that using two ways. One is the BarraOne risk system. The second way is that we use the short term scenarios to make adjustments where needed to the portfolios.
And if we go on one more slide you can see what I’ve just done here is I’ve used the Strategic Fund, the middle fund, as the main fund to explain how that works. Again as before, the dotted blue line is global equities, again from an Irish perspective, the red line is the Strategic Fund, this is the middle range fund. At the top we have flagged, wherever we have rerun the entire portfolio optimisation from a starting blank page, so what should we hold right now to generate long term returns. That’s at the top. I’ve also at the bottom there put down where we’ve made some relatively large changes to the portfolios and these are always driven either by a change in the strategic asset allocation look or a change in the scenarios. It’s how we run these portfolios. So, for instance if I take you right to launch to the far left, when the funds were launched we went around Ireland and we were asked lots of questions about why we hold such substantial holdings in government bonds.
The reason we kept saying is that our short term scenarios are quite binary. We have one scenario where markets do very well. We have another one, a financial crisis, where markets sell off quite heavily, we need to hold government bonds for that particular scenario, we understand they’re not going to give you a long term return that’s worthwhile, but in the short term they’re very good to hold for that particular scenario. You can see what happens subsequently, markets sell off a few months later. All the funds protect value during that period particularly the Strategic and Cautious Fund where we hold substantial government bonds on that scenario.
Fergus Ryan: Just one thing before we move off that slide Nick. If you look at the equity performance there over this period, the two year period, so it’s returned about 20% over that two year period and is it fair to say Nick that volatility normally runs in equity markets at around 20%?
Nick Samouilhan: Absolutely.
Fergus Ryan: So that would have them at an ESMA 6 rating whereas if you look at the Strategic Fund it’s an ESMA 4 which is volatility 5 to 10 and I think the run rate has been around 7% for the Strategic Fund. So, you’re actually getting half the return for about a third of the volatility. So, if you like the fund is punching above its weight in performance terms while not betting the farm on the risk side of things.
Nick Samouilhan: Absolutely and we try and manage that path through that. The point I like to make on this is that people have stopped looking at factsheets and saying, the return number here is 5% and the other fund over here is 7%, that’s better. People are now looking at funds and saying well, how are they performing each and every day or each and every month, and the worst thing you can do if you’re planning for retirement is to take your money out when you’ve lost a substantial amount of money, you’ll miss the pullback. What we try and do is manage the path through that and hence the volatility path, it’s about managing the journey to retirement through that.
But the other two points that I want to point out to you, and I’m happy to take any questions on that, a third through - so in February 2012 the short term scenarios changed and the chance of a financial crisis increased. What we did is we took down the equity component across the funds. You can see that scenario breaks in late March/April, the funds, for instance the Cautious Fund went from 20% equity down to 10% and we’ve protected some value there and then if you go right to the far right hand side, those who see our updates will note that our strategists increased the outlook, particularly the good outlook, to 70%. They in particular came up with a scenario that said the underlying macroeconomic picture would steadily improve but there’d be too much liquidity from the central banks. They called that liquidity abounds and what you’d see during that particular scenario is a slight increase in government bond yields but in particular a huge increase in equities, and you can see that we increase equities twice during that period to take advantage of that, the one in September 2012 and the other one in February of this year, both based on the idea that the scenarios have increased into a more propitious way.
That’s the journey. If you go on, what I’ve just done here is focused a bit more, we often get asked questions about drawdown and I understand the rationale for this; if clients come in and go out at the worst possible time, what would happen to their portfolios. What you’re seeing in front of you is the two big drawdowns over this two year period; the July to August 2011 and the March to May 2012 period and you can see in yellow, global equities, so the drawdown if you were investing in global equities and then the drawdowns from the three other funds. Note in particular the Cautious Fund. We understand someone going into the Cautious Fund doesn’t want to blow the lights out, they’re up for cash plus returns, but what they will be doing is picking up the phone to people like yourselves and saying, I’ve lost 5% of the portfolio, can I take it out? We try and manage that downside and you can see we’ve done that during those two periods of stress.
That’s the downside, the drawdowns, the next slide just goes through the performance since inception. The Cautious Fund is 3.2, Strategic is 5, Dynamic is 7. In terms of last year...
Fergus Ryan: Sorry, I should say just in case it’s not clear on that slide they’re annualised numbers since so they’re a two year annualised number.
Nick Samouilhan: Thanks Fergus. And last year we had what I believe was a particularly good year in terms of returns. Markets went in our favour, all markets essentially went up and that gave us returns above average and this year so far we’re tracking slightly below average particularly in the fixed income space and we’re looking to make some changes to that to increase the returns, but so far we’re quite happy with the returns and in terms of the way the process is working we think we’ve managed to both manage the volatility, manage the journey and give reasonable returns within that. So, that’s the returns.
Fergus Ryan: And again just before we move off that slide, what we would have said when launching the funds round the country is that for, say, for the Cautious Fund, for a volatility of between 2 and 5 you could expect a return of 3 to 4% per annum over the longer term, so we’re certainly hitting that. Strategic then for the 5 to 10% volatility, 5 to 6% return which again we’re hitting that, and Dynamic for the 10 to 15% volatility, a 7 to 8% return. So, we’re bang on line with what we would have said when launching the funds on what to expect for return.
Nick Samouilhan: Thank you Fergus, and just in terms of, I’m now going to cover our outlook and positioning, and my main message I want to get across in this section is how the funds have changed from launch to now in response to changes in either our long term outlook or our short term outlook. So, in terms of our long term outlook the next slide on shows you our usual strategic long term outlook. Again, what you’re looking at here are different asset classes from an Irish perspective in euro terms, and along the horizontal is the expected volatility on average over 7 to 10 years, and the vertical is the return you expect to get on average.
There are two points I want to make from this chart. The first is trying to get across the idea of what we mean by a Cautious Fund, Strategic Fund and Dynamic Fund. If I can draw your attention to the very far left, the very far left at the bottom you’ll see a volatility of 0 to 5%, it’s the very first section, that section there are the asset classes that give you an ESMA 3 rating, so a cautious 2 to 5% volatility. If you look in that there is almost nothing other than euro cash that gives you a volatility of that particular band. All other asset classes give you volatility outside of 2 to 5%. The reason we’re able to build multi asset funds that stay within that particular band is through diversification, which means even in the Cautious Fund you will see things like European equities and emerging market equities, which on the far right hand side multiples of higher volatility, but because of diversification we can build portfolios, but it gives you an idea of where we are fishing for opportunities given how underlying asset classes react.
The second point I want to get from here is if I showed you this particular graph two years ago what you would see is every single one of those dots, every single asset class would be higher up. Every single asset class, particularly equities, would have given you a higher return over the outlook. The reason is very clear; equities have rallied in the last two years, equities are now more expensive than they were two years ago and hence the subsequent return you can get on an ongoing basis is lower. That’s also true for government bonds which were expensive two years ago; they’re now even more expensive. You can see the sustainable return for government bonds is around 1 to 2%, quite low for them, and that I want you to keep in mind from when we go through the positioning change of the funds.
The next slide on gives you the short term scenarios. As always we understand that the short term is pervaded with uncertainty. We try and avoid saying that this will happen and have a single all on red, all on black approach. What we try and do is look at the positioning of the portfolios and then say here’s our short term outlook on the different scenarios, how will the portfolios do under each scenario and does that align with what the clients want. What you’re looking at right now is our current outlook. As always the ones on the left are the most likely, good times and liquidity abounds, together 70% chance we think, so more than likely the next few months will be described by those two scenarios. The only difference between the two of them; in both of them equity markets do quite well. Under good times you have macroeconomics doing okay and you have markets doing about 5 to 10%. Under liquidity abounds we think that policymakers, particularly central banks, put in too much liquidity and what you’ll see is an uptake both in equities, so equities will give you substantially high returns and you’ll see bonds slightly sell off too, some of them might sell off quite a lot and I’ll explain how we’re addressing that in the funds.
On the right hand side the two negative scenarios. The growth stall that used to be a 1 in 4 chance, a 25% chance, it’s now down to 1 in 5. This is the idea that the global economy particularly driven by the US slips back into recession. On the basis of better than expected numbers our economists have downgraded that to 1 in 5; still substantial. What that means if that wasn’t there we wouldn’t be holding as many government bonds. That’s there for the government bonds. And lastly the financial crisis, if the growth stall is macroeconomic in nature, the last one, the financial crisis is political in nature, what you’ll see there is a 10% chance it’s largely unchanged, it’s on the basis that the political situation in Europe is still unable to, when there are particular periods of stress it cannot efficiently react to that, and what you’ll see is localised financial and liquidity issues mutating into solvency issues and we arguably saw that in the past. It still remains an issue. That’s the outlook right now.
If I can take you to the next slide, I think the most interesting part of the presentation. What you’re seeing here is how the funds looked at launch and I’ll go through soon how they look now. Before we get that I want you to note two things about the allocation. Note in particular the equity allocation, Cautious 21%, Strategic 51.5%, so quite high equity component. The reason for that, two years ago our expectations on a risk return basis for equities substantially higher than they are now. The other thing is if you look down at the government bonds on there, government bonds 38%, 20%, quite high. The reason we had them there partly because the returns were higher than they are now but mostly because back then the short term scenario had a larger probability assigned to a financial crisis in which case government bonds would provide protection. They did that but that’s why they were in there. If you then take one final look at the bottom there, you’ll see a line that says absolute return. Because we knew we could get quite good returns from equities and from government bonds we didn’t need to allocate to absolute return funds which can get returns regardless of those, so that’s why it’s quite low. Then that’s the outlook. At launch the outlook was equities and bonds, reasonable long term returns, short term binary output very good or very bad, hence a large holding in government bonds.
If you flip on you can now see, sorry, if you go back one, we now see the positioning at the end of May. Here we have the funds as they’re currently positioned based on the current long term outlook and the current short term outlook. The current long term outlook has equities less than they were two years ago. You can see the equity component has declined on the back of that. If you then go down to government bonds, the government bond component has declined as well, it comes down to 30% and 12%. Again strategic, long term we think government bonds have less return a few years ago and in the short term our scenarios are now far more positive than they were, hence we don’t need to have as much in the past. Take your eyes down to the last line there where it says absolute return, sorry, under alternatives. At launch we were half a percent on them, we got our returns from equities and bonds. Because the return output for them has declined we now increase that to 5%, a tenfold increase to grind out returns from that and we’ve also increased things like property.
Fergus Ryan: Can I just ask you Nick, the absolute return portion, what is that exactly?
Nick Samouilhan: So that is, it’s called a Global Credit Absolute Return Fund. It is a hedge fund which generates returns operating within the fixed income and credit markets. The idea right now is that within that particular market the underlying security, so issuance by BP, issuance by a bank, those are, there’s some dislocation in that market. If you’re able to take advantage of that you can generate absolute returns without having any link to the equities or fixed income markets and that fund has generated substantial returns over the past completely irrespective of markets. So, I don’t see that increasing from that. I think 5% is right now a very comfortable place to be but it does help us to grind out returns regardless of what happens to markets.
Fergus Ryan: And it does, I suppose it sits well with the bond allocation, I suppose you’ve exited through, you’ve exited the direct European government bonds, you were more into global government bonds for much of last year and you’re now 25% say in the Cautious Fund in global corporate bonds, so it probably sits nicely with that.
Nick Samouilhan: It does sit nicely into that. In terms of, there’s obviously there’s an outlook and then there’s themes we’re worried about. One of the themes we’re worried about is duration risk and that’s government bonds selling off, so what we’ve done is we have moved out of government bonds into corporate credit and in particular, it’s a very good point Fergus, if you look under, if you’ve got that fixed income you’ll notice a new position we’ve just initiated. It’s called loans and these are, it’s a fund we bought, we’re happy to provide details, it’s an external fund we bought and that particular fund, it’s an open ended fund, it provides loans. Those loans give you the same yield effectively as corporate bonds, much lower default risk and no link to government bonds, so there’s no duration risk and we’re looking to increase that over time.
Fergus Ryan: Okay. Another question has come in, thanks for your question, Karen. She’s just wondering, why your property allocation has risen so much since launch.
Nick Samouilhan: It’s twofold. One is that the underlying property market has turned around, so from a position of weakness we now see if not spectacular growth, at least reasonable capital preservation and it’s also there because in this very low yield environment you need to spread your yield around. Property is providing quite a reasonable tick along in terms of the yield, so that’s increased. I fully accept there are liquidity issues with that. The way we access that fund there isn’t any liquidity issues, so we were able to take advantage of that. In the past, if you look two years ago the outlook for property wasn’t, particularly in the short term, as good as it is now, and the yield on other asset classes was higher than you would get on that, so we’ve moved that around.
Fergus Ryan: Okay, and just as a sideline question to that then I do remember there was Asian property in the fund for a time as well and you’ve exited that position.
Nick Samouilhan: The Asian property, the reason for that is if you’re an Irish investor and you invest in euro based property what you’re picking up there is capital appreciation, any kind of loss on that and the yield. If you invest in non-euro property, in Asian property for instance, you are doing all of that and you’re taking up the currency risk. What we did at launch we were able to hedge that quite efficiently and we hedged out that risk. Given where we are now and you might have read in the newspapers about these currency wars, you might have seen what’s happened to the yen in particular. That’s becoming quite hard to manage. We thought it wasn’t on a risk adjusted basis worth our clients’ time, particularly on the yield basis, so we’ve exited that possibly tactically in order to do that.
Fergus Ryan: And it’s actually a good demonstration of the diversification we can get through the fund and also highlights the point that we were mentioning, I think it was the first question asked that there’s no mandate, there’s no minimum, maximums to what we can hold, we can go wherever we like so long as the risk allows it. Okay, a couple more questions coming in now. One from Eugene Doyle; where are the main property markets, so what property can you cover in this fund if you like?
Nick Samouilhan: It’s not an Irish based property fund, it is a Pan- Europe property fund, so it’s all over and there is a lot of German property in there. It’s commercial only property across Europe, they are steadily increasing their Irish property allocation in time but it is very much a Pan-European exposure to property.
Fergus Ryan: Yes, so knowing the funds that invest in it, it’s got French, German, Finland, Luxembourg; it’s a well-diversified European property fund. Next question coming in is from Liam Doyle, thanks Liam. He’s asking can we explain the difference between this fund and the Standard Life GARS and MyFolio strategies. I’ll have a crack at this first, Nick. Taking them, both of those funds are very different to each other. GARS is obviously an absolute return fund so therefore the focus is on achieving a set level of return and taking risk as a consequence to achieve that, whereas our multi asset risk targeted funds keep the risk constant and we’ll accept the return as a consequence of that, so they’re almost polar opposites to each other. Why we would favour the risk targeting approach is it keeps a consistent investment experience for the investors, so if they sign up as low risk we keep the fund low risk and they’ll generate low risk type returns, whereas an absolute return fund pitches at a certain level of return and it may be low risk to achieve that in some years, it may be medium or high risk to achieve it in other years.
So, that’s the difference between absolute return and risk targeted. Not so much of a difference between the MyFolio and our multi asset funds because they’re both risk targeted but within that the differences centre around the risk targets. We’ve obviously adopted the ESMA approach. MyFolio have used, I’m not sure if it’s a Standard Life or an FSA created risk profiles, but they’re certainly different to ours. You might have a little bit more info on that Nick.
Nick Samouilhan: Other than, not really, just in terms of these funds are not similar in any way to GARS but they are very similar to MyFolio and we were very happy to have discussions with clients finally when two years ago we went around, we started talking about risk target, it was a very new concept.
Fergus Ryan: And there were no other funds to compare it to.
Nick Samouilhan: There were no other funds. And now it’s becoming more and more like the UK where we say, well, here are our funds versus other funds and these are the differences, and we are hoping to move away from things like, well, how have you performed versus that fund and into things like, which fund is better suited for my particular clients. Some, there are fee issues between different funds, not just our funds and MyFolio, but in general, there are different approaches, and in particular I think one of the big differences between us and some of the other competitors, it’s conceptually how you run the asset allocation. Ourselves and some of the other competitors, what we do is we say, the overall portfolio allocation encompasses both a long term outlook with short term adjustments, whereas some other competitors what they do is they have a purely long term asset allocation and then they encompass these short term adjustments within a sub fund within that which does the tactical adjustments within that short term. I stand to be corrected here, I believe MyFolio are of that approach; there are many others that do the same approach. It comes under conceptually what you would like to see your clients in.
Fergus Ryan: Okay, and just finally on that, I suppose I do have to bring up the cost of our funds, just following on from Shane’s question earlier. Our funds are certainly a lot cheaper than, or let’s call it better value rather than cheaper, than the GARS or MyFolio funds. And lastly, if you look at the breakdown of the MyFolio portfolio, so there’s five risk targeted funds, all of them contain a portion of GARS and the least risk MyFolio, so MyFolio 1 has about 5% exposure to GARS whereas MyFolio 5, the highest risk one has a 20% exposure to GARS. So indirectly I think, or maybe even directly, what Standard Life seem to be saying is risk targeted funds are a core consideration for clients whereas absolute return funds should only ever be a satellite and certainly only a small portion for a lower risk fund, so hopefully that answers the question on the difference between the two.
Nick Samouilhan: And one final point, this is not with regards to MyFolio, it’s a general point that we’d strongly encourage and we’re trying to move to a point where we can show people the TERs and the reason for that is these funds, one of the competitive advantages both in the Irish based versions and the UK based versions is that they are cost effective in terms of TERs, so once there is a uniform way of doing that we’re happy to then go out there and say, one of our competitive advantages is that we are much cheaper particularly over the long term, where if you’re investing for 15, 20 years that matters. So, we’re hoping to address that I think in time.
Fergus Ryan: Very good, and just another question from Paula McLaughlin, thanks Paula. The exposure to the European equities seems overweight versus UK and US in the Dynamic Fund. Would you care to comment on that Nick? So, I think, yeah if you look at the Dynamic Fund it’s got about 31% in European equities at the moment whereas North America is 9 and UK are 10, so.
Nick Samouilhan: And so that’s slightly been adjusted in the last day or two. The main reason is that what you’re seeing with European equities is purely a play on whether European policymakers come to the table and fix things. If you look beneath European equities, I tend to spend my life just thinking about equities as indices, but if you go and speak to the underlying managers that beneath those indices there are companies and in Europe in particular that is principally a financial based market, so your big banks dominate the volatility and the returns in European equities.
The reason we went overweight, if you go back to the scenarios, so that decision was not based on the long term outlook, if you look at the long term outlook European equities are not as attractive as other asset classes. It was purely short term, we thought that the short term scenarios are very positive, we thought that there’d be at least not a deterioration in the policy framework in Europe and as such we thought because of that European equities would rally on the back of that and we increased that going into things. We’ve slightly moderated that. I’m happy to provide details on how we’ve done that, but there’s a slight decrease in the last day or two just on the back of just some concerns coming out, but that was the basis. Short term outlook we thought things were more attractive and one of the best ways to play that was European equities and beneath that the European financial system.
Fergus Ryan: Okay, great, keep the questions coming in. What I’m going to do is push on now into the summary so we’ll get to the end of that, we’ll finish the presentation formally but myself and Nick will stay online just to wrap up if there’s any further questions you have, so keep them coming in by all means.
So, in summary Aviva - and I mean this from the point of view of Life and Pensions and Investors - would consider the Multi Asset Fund launch two years ago one of the big successes we’ve had in a long time in Aviva. And it’s twofold really; it’s a great concept and it’s regulation friendly, but also the support we’ve received from brokers in Ireland has been phenomenal and we certainly wouldn’t have got to the €240 million we have today across the three funds if you hadn’t adopted it and embraced the funds as well as you have, so a massive thanks to all who’ve supported the funds. And anyone who has any additional questions or more questions or hasn’t yet got into the nuts and bolts of the fund please contact your broker consultant and we’ll arrange a meeting to get into that.
One of the big positives we have or we bring to the whole area of risk targeting funds is the size, scale and expertise that we have under the roof in Aviva Investors and that’s not just the roof in London it’s across the world, because these funds genuinely are a global integrated fund solution in that the assets are managed from all over the world and not just from one location.
We think the results from the funds have been pretty impressive. Obviously the sales, again beyond our expectations, massive thanks again, but the results have been good for clients and most importantly the results have been in line with what we said we would do both from the point of view of risk targeting and the performance then that we’ve generated off that. So lastly, it just leaves me to say that thanks again for your support. If you’d like further information on MAF or any other funds, what I’d ask you to do is check out avivabroker.ie in the first instance, there’s plenty of information there, and secondly if you’ve any additional questions beyond that contact your broker consultant directly and we’re more than happy to schedule a follow up meeting with myself and Brian Ó Nualláin as well who’s the Business Development Manager for Ireland, and we look forward to meeting you in the future. So, thanks again and we’ll be online for another couple of minutes if there’s any further questions.
So just, actually Nick one of the things you brought up during the presentation was Japan and the yen, any thoughts on what direction that might take in the future?
Nick Samouilhan: What you’re seeing here is the culmination of finally Japan sort of gets it, so Japan for many years has been living far beyond its means and I’m sure many people are aware of the demographic issues going on there.
Fergus Ryan: It’s quite an aging population.
Nick Samouilhan: Very much so, and because of the social welfare there you somehow need to generate public spending to pay for that, and if you’ve got a ratio like they do which is increasing the number of pensioners versus workers you need to do something about that. The only way they were able to address that, we all knew this, was to substantially weaken the yen and therefore allow themselves to compete on the export side, because the domestic market is shrinking, you have to somehow grow the export market. The only way you can do that because you can’t compete with the cheap labour elsewhere, particularly in the Japan context, you have to do that by weakening the yen. The only way you can do that is through a liquidity driven push. The problem has always been that the Central Bank in Japan has tried to be as independent as it possibly could from politicians. What you saw last year was a politician being elected under the premise of saying I am going to force the Central Bank to do this and he was elected, he immediately replaced the Governor of the Central Bank and what you saw is the yen substantially weaken on the back of that.
The numbers of substantial amount of money that’s been placed into the system that feeds through everything into both the yen, it also feeds through into the Japanese market. It also weirdly enough feeds through into things like Brazilian bank deposits where the money flows into the banking system and then goes outside of the country into what they consider safe assets, so there’s been this huge push. On the back of that what we did in the funds, if you look at the funds positioning all through to the end of May, from the start of the year the Japanese holding is substantially higher than what you would normally expect it to be and that’s versus say something like the MSCI weighting, the reason being is that we thought that would happen. What we have done though is that Japanese holding is entirely hedged. So, if you just bought Japanese equities, you’ve won on the equities but lost on the currency effect, you had to have hedged that. We hedged that and one of our biggest contributors to returns over the last few months has been that particular play. It remains to be seen whether they’re continuous, if you’ve seen the market recently that hasn’t, we’re asking questions about will there now be another impact by the Central Bank to push that or will markets just think, they’ve tried and they’ve failed this before, it’s another time, we’ve seen this before, we’re going to walk away.
Fergus Ryan: Right, so whatever, 23, 24 years after the first crash we’re still not convinced that Japan is a good bet for the long term or?
Nick Samouilhan: Japan is long term uninterestingly and episodically very interesting, so you just need to wait for those times, hold on and then get out, so we’re looking at that.
Fergus Ryan: Okay, and then just one thing I want to ask you about is the emerging market exposure, obviously we have it through equities and bonds. That’s obviously been a massive talking point in investment markets from the point of view of the rising emerging consumer and then obviously the assets and how they’re going to benefit from that, so do you see emerging markets having an increasing role in the funds going forward or?
Nick Samouilhan: They’ve been a bit, so with that, again the demographic argument is there, the growth argument is there. Unfortunately they’ve lagged so far this year other markets and our feeling right now is that as the global economy improves that will feed through, it will propagate into these markets and we’ll hopefully see that improve. You’ve seen across the board emerging market currencies depreciate quite substantially. That should have a good effect on their underlying equity markets, so we did discuss last month decreasing the emerging market exposure. Right now we’re very comfortable. I think the next step on from that then actually will probably be an increase in the equity side.
On the fixed income side there are two ways of investing in government bonds with the emerging markets. You can either lend the money to Brazil, South Africa, Russia, and so on, in dollars so you don’t take the currency effect or you can lend it to them in their own currency. What happened last year is that a whole bunch of pension funds including Aviva’s - sorry, this is the broader with profits fund - we needed yield and because of that we went into emerging market hard currency, the dollar version. The yield on those things compressed heavily to the point that they’re just not attractive. In these funds we used to have the hard currency, we no longer do, we only have the local currency, so I think that will be the only one we look to increase going forward.
Fergus Ryan: Okay. One more question has come in from Brendan Daley, thanks Brendan. How can you target returns when there’s always risk of another black swan event? That’s a great question but we actually target risk, so it’s really a question for an absolute return fund manager who’s obviously targeting returns. What we do is we keep the risk constant and therefore we accept the return as a consequence, so in the event of a black swan, we’re not saying we can accurately predict these but because we’re managing the risks we’ll therefore limit the downside effect of a black swan event because we’re targeting the volatility. So a natural consequence of a black swan event is volatility starts to spike. Because we’re targeting the volatility, again we can’t forecast these things but we’ll certainly take a lot of the spike out of that event. So, it’s a good question, it’s probably more angled at an absolute return fund rather than a risk targeted fund. Have you anything you’d like to add there Nick?
Nick Samouilhan: Just two points, so to use a horrible phase, there are known unknowns and there are unknown unknowns. So, the known unknowns we try and capture within these scenarios. I think what’s being spoken about here is the black swan is an unknown unknown. By definition we can’t plan for that. What we can do though is build a very well-diversified fund, which under a particular, in any reasonable scenario you wouldn’t see a substantial loss versus say an equity mandate. So, in particular the Cautious Fund, given it doesn’t have a huge exposure to equity risk, under black swan events you’ll see the drawdown being quite low, and everyone talks about 2008 being the big black swan event; that was true. The reason many funds, particularly managed funds in Ireland and balanced managed funds in the UK lost so much money is because what everyone was doing was either increasing their equity component going into that or they were hiding the fact that within their fixed income component they were buying things which had heavy exposure to equities, so lots of credit, lots of listed trust funds in that and we don’t do that, we build diversified portfolios. In 2008 the Cautious Fund would have done okay under that scenario because of the government bond exposure.
Fergus Ryan: Right, and I suppose one of our pet topics myself and Brian like to talk about is the BarraOne system where you can actually, you can input scenarios that almost create a black swan, even though it hasn’t happened, or you might not even be forecasting that but it will allow the portfolios to play out through that black swan that you put it through, and Brendan we’d be happy to share, to take you through how the BarraOne system works if you like and show you some of the simulations we’ve run across the three portfolios.
Nick Samouilhan: And what’s great about, so we use it as a portfolio management tool in two ways; one is to monitor the risk, the other one is to see what would happen to the portfolios under different scenarios. What we also occasionally do is we get comments and queries from people like yourself Brendan, and they say, well, what happens if x, y and z happens and unlike most places where they’ll say, well, we think so and so would happen. If you say, well, what happened if European equities lost 30%, we’ll say, well, based on historic correlations during times of stress and based on your 20% assumption of a fall this would happen to the portfolios, we can give you the actual answer under that.
Fergus Ryan: Now, we’ve been going for just over 50 minutes so we’ll give it another minute or two for questions, Nick. In terms of the assets under management, the €240 million we’ve received into Ireland, that compares favourably with the UK’s risk targeted funds who I think are on the way to €400 million, the equivalent, so the combined funds have gone through the €500 million, well, the sterling mark maybe a month or so ago and certainly through the €500 million mark a long time ago. How has the progress of the funds been greeted from the point of view of assets under management within Aviva?
Nick Samouilhan: Oh, very favourably, so these are by far the main focus of Aviva into the retail market. I personally have been moved across to focus almost exclusively on risk targeted funds and will be exclusively focused going forward given the rise in AUM and given the dedicated resources to that and hence why Peter is coming across to join me on those.
Fergus Ryan: Okay, that’s great, Nick. We have an hour’s CPD so I think it’s only fair that we let people out after 50 minutes to give them the ten minutes for free. So, thanks a million Nick Samouilhan for taking the time out to talk to Irish brokers this morning. Again, I’d like to thank everyone for their support for the three funds so far and again what I’d say is avivabroker.ie for any initial information queries you might have, but by all means contact your broker consultant to set up a follow up meeting if there’s anything you’ve heard this morning that you’d like to discuss further. So, thanks a million folks and we’ll talk to you soon.
Nick Samouilhan: Thank you.
This document is intended for institutional or professional investors and experienced advisors only. Private investors and scheme members should seek professional advice before making an investment decision.
The information provided in this document and any appendix is confidential and should only be used for the purposes requested.
Except where stated as otherwise, the source of all information is Aviva Investors as at 31 December 2011
Any future returns and opinions expressed are based on the internal forecasts of Aviva Investors and should not be relied upon as indicating any guarantee of return from an investment managed by Aviva Investors. No part of this document is intended to constitute advice or recommendations of any nature.
Where performance has been illustrated it is not intended to be a guide to the future. Performance figures sourced from Lipper Hindsight. Other information sourced from Aviva Investors. The value of an investment in the fund can go down as well as up and can fluctuate in response to changes in exchange rates. Past performance is not a guide to the future.
Full terms and conditions of the Aviva Investors products and services are available on request.
Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: No. 1 Poultry, London EC2R 8EJ. Authorised and regulated in the UK by the Financial Services Authority and a member of the Investment Management Association.
Contact us at Aviva Investors Global Services Limited, No. 1 Poultry, London EC2R 8EJ.
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