Since their launch in 2014, the two Aviva Investors Multi-Strategy (Aims) funds, Target Return and Target Income, have together amassed almost £12 billion in assets under management globally. This is particularly impressive given the competition they face from rival multi-strategy offerings Standard Life Global Absolute Return Strategies (Gars) and Invesco Perpetual Global Targeted Returns (GTR).
Gars was the first of these funds to launch in the UK, back in 2008. GTR was launched in 2013, after manager David Millar moved from Standard Life Investments to Invesco Perpetual. Aims did so after Euan Munro moved from Standard Life to Aviva.
Darius McDermott, managing director of Chelsea Financial Services, said: ‘Gars, Invesco Targeted Returns and Aims are constructed similarly as they are created by people from the same team. All three are multi-asset multi-strategy; they try to put a basket of trades together to give uncorrelated, lower risk returns.’
Every one of these funds targets 5% returns above the Bank of England base rate or the London Inter-bank Offered Rate (Libor), before charges. In effect, they all broadly target 4% returns above bank rates.
They all also aim to achieve this return over rolling three-year periods. And they seek to do so with less than half the volatility of global equities. All try to achieve positive annual returns under all market conditions.
Aims Target Return seeks capital growth. But Aims Target Income seeks 4% income above base rate, although this is before corporation tax of 20% on some of the income. Income is distributed monthly and the aim is to offset charges through capital appreciation.
All these funds invest by strategy, rather than by simple stock selection. The Aims funds use three types of strategies: market strategies, opportunistic strategies and risk-reducing strategies.
The fund brochure on Aims Target Return for retail investors said: ‘Market strategies are normally based on our “house view”. This brings together the opinions of all our experts to create an overall perspective on the prospects for markets and economies.’
One such strategy mentioned in the brochure, and valid at 31 May 2017, reflected managers’ positive view of the eurozone economy. It involved buying a call option giving the fund the right to buy shares in the Euro Stoxx 50 index at a point in the future for a pre-agreed price.
The brochure added: ‘Opportunistic strategies focus on assets that we believe have become incorrectly priced following a reaction to something that happens within the market – or to the actions of governments and central banks.’
As at 31 May 2017, the managers thought global growth was strengthening and inflation picking up, an environment in which markets could well demand a greater premium for longer term lending. According to the brochure: ‘We made investments that would benefit if the cost (“yield”) of longer-term borrowing rose more than the cost of shorter-term borrowing.’
It went on: ‘Risk-reducing strategies aim for positive returns in difficult times, when our market strategies may struggle, or in situations when our house view isn’t correct.’ An example from the brochure, again correct at 31 May 2017, is based on the fact that, in times of market stress, share prices of smaller US companies fall further and faster than larger US companies.
The Aims Total Return fund sought to position itself for this by going short smaller US companies (to benefit if their share prices fell) and long larger US companies. The brochure said: ‘While this long position will result in losses if the larger companies’ share prices fall, we expect the fall and associated losses to be less than the returns we make from our short position in smaller companies. This creates positive performance overall.’
Range of strategies
The Aims funds hold around 30 strategies at any one time. An Aviva spokesperson said: ‘We believe 25 to 30 strategies provide sufficient diversification.’
The brochure said the managers aim for these strategies to work well together, no matter whether markets are rising, falling or flat. The goal is to produce positive returns irrespective of market performance.
The brochure added: ‘Two or more of our holdings can perform differently in response to the same event. In this way, they are linked together, so they effectively “balance” each other – at least to some extent. This can reduce the effect of any bad news on our portfolio.’
These strategies, individually and in combination, can be complex for investors to understand. But the spokesperson said: ‘The objective of the Aims funds is simpler than most traditional funds. We are looking to generate a positive return for clients or a certain level of income. For many this is easier to understand than the relative return objectives of many funds.’
The risk-reducing strategies can offset the market and opportunistic strategies. But there is still the chance of negative overall returns.
This kind of situation happened with Standard Life Gars, which suffered losses of 6.7% between 31 May 2015 and 30 June 2016. As Citywire head of research Frank Talbot said in a New Model Adviser® article from 6 March 2017, ‘Much of the blame has been levied against calling interest rate rises too soon and tilting the portfolio that way.’
The risk for Aims is that the macro outlook or house view of the manager may be significantly wrong. Similarly, the macroeconomy may not perform in line with any of the scenarios posited in the Aims managers’ scenario analysis.
Indeed the Aims Target Return performance and strategy update, November review, said: ‘The fund had a number of positively and negatively performing strategies in November, with the balance resulting in a modest overall decline on the month.’
However, a spokesperson for Aviva said any investment product is subject to the risk the manager gets their core views wrong. They said Aviva mitigates this by incorporating a range of risk scenarios into its house view. In this way, it provides a framework that allows managers to assess whether strategies are likely to perform positively in the central house view scenario, or whether they will deliver returns in alternative scenarios.
The spokesperson said: ‘Both Aims Target Return and Target Income have been run with less than a third of the volatility of global equities since inception. This demonstrates the funds’ ability to manage downside risk, smooth returns and protect investors’ capital.’
A further risk is from derivatives. The November performance and strategy update has the following stark comment: ‘These can be complex and highly volatile. This means in unusual market conditions the Fund may suffer significant losses.’
But the Aviva spokesperson said, in contrast to the popular perception about derivatives, these allow the managers to reduce the overall level of portfolio risk. So currency risk, for example, can be hedged by investing in non-sterling assets.
Derivatives also give exposure to assets that can’t be held in non-derivative (or ‘physical’) form, such as volatility, and these can diversify portfolio risk. The spokesperson said: ‘Our use of derivatives to mitigate risk has been central to managing volatility.’
Regarding charges, as the Aims Target Return brochure says of multi-strategy investing, ‘It tends to cost a little more than multi-asset investing.’ So share class 2 of the Aims Target Return and Target Income funds has annual ongoing charges figures (OCFs) of 0.85%, but the minimum investment is £500,000.
By contrast, share class 6 for these funds has a more accessible minimum investment, of £1,000. But the OCF is higher, at 1.1%, and there is a maximum entry charge of 5%.
Abraham Okusanya, director of research consultancy FinalytiQ, said: ‘It looks like it’s at the lower end of the cost range for multi-strategy funds, if you buy through the Aviva platform. Here you can get it for 70 basis points, which is a good thing.’
How they performed
What matters perhaps more than costs, though, is performance. And, as the table below shows, the two Aims funds have had a mixed performance against their targets in their first three years.
Both funds significantly outperformed the target in the first year, and underperformed it in the second and third years. (For simplicity’s sake we have ignored the effect of compounding on the target return for the Aims Target Return fund.)
But the Aims Target Income fund achieved an income of 4% in 2015, 4.4% in 2016, and 4.2% in 2017. This was very much in line with its 4% annual income target, although the fund suffered capital losses in 2016 and 2017.
Charts 1 and 2 (below) show clearly the funds had initial bursts in terms of total returns, followed by relatively flat performances.
Peter Fitzgerald, global head of multi-assets at Aviva Investors, said this was against a tough market backdrop. ‘Investors forget there were some substantial market corrections,’ he said. ‘There was volatility around Brexit and, in 2016, fears over China, with the market falling more than 20% in the first weeks of 2016.’
In addition, Fitzgerald said the Aims funds lost money on inflation positions in 2017. ‘The markets effectively expected inflation to continue to fall, but we disagreed,’ he said.
These positions went against the fund, but the managers responded by increasing the size of the positions. ‘They made more money in the first six weeks of this year than they lost in the whole of 2017,’ said Fitzgerald.
He said short positions in UK government bonds cost the fund a lot last year. ‘But we increased the positions and this year they have made back the losses of 2017 plus a bit more.’
But Okusanya does not think the Aims funds have delivered against expectations. ‘The portfolio had a substantial holding of alternative strategies, but equity returns were exceptional over the three years. So, judged from performance alone, I don’t think the Aims funds worked out as Aviva would have liked.’
In contrast Graham Bentley, managing director of consultants gbi2, pointed out since 12 January the Target Return fund was up 0.35%, while the FTSE All Share fell 6% on a total returns basis. ‘Nervous investors would probably be pleased with what’s happened to their money over the past month,’ he said.
Bentley added: ‘I find it difficult to criticise funds like this if they do what they said they’d do, i.e. 5% before charges plus base rate over a rolling three years. The thing with these funds is the volatility is relatively low but you’re getting limited returns.’
Even so, McDermott said it would be hard for multi-strategy funds to deliver over every rolling three-year period. ‘We need to see a 4% to 6% a year total return over the medium-to-long term. These products, apart from Standard Life Gars, aren’t old enough to have that track record, so it’s hard to pick a winner from them.’
But he said he believes in them as a core of low-risk, relatively stable assets. ‘But I wouldn’t have all eggs in this basket.’
Darren Cooke, director of Derbyshire-based Red Circle Financial Planning, was less sanguine. ‘My experience of these alternative assets/absolute returns-type funds is they get a good start and then collapse horribly under the weight of their own success,’ he said.
He said: ‘There’s only so much diversification you can get with alternative asset funds. And they generally work best when they’re small and nimble. Funds that have huge inflows find it hard to maintain performance and find investment opportunities for all the new cash. And they can, in effect, lose the original mandate.’
But Aviva’s spokesperson said achieving diversification is not related to being small and nimble. They said: ‘Diversification is achieved by taking long, short and relative value positions across a range of asset classes, including non-traditional ones such as volatility.’
They added there has been a rise in correlation between asset classes in recent years and a traditional approach, of holding equities for growth and fixed income for diversification and portfolio protection, is unlikely to be as compelling.
‘An approach encompassing a wider tool set, with more precise implementation of investment strategies, is better able to deliver returns that are less correlated to mainstream assets,’ they said.
Furthermore, the spokesperson said Aviva manages the Aims funds under the assumption they would be considerably larger than they are currently. ‘A guiding principle since launch is no strategy is implemented unless it could also occur if the funds were at capacity.
‘This is to ensure the integrity of the track record over time, which is crucial to delivering long-term successful outcomes for investors.’