A more attractive option in a tough environment

Justin Onuekwusi, a multi-asset fund manager with Aviva Investors, believes that such decisions must only be made after a thorough examination of the experience, size, resources and long-term track records of individual product providers has been carried out.

“The inflows tell us that clients are increasingly looking at multi-asset funds and a lot of products have come to market to meet that demand,” he says. “As well as the resources, we’ve been involved in this area for a quarter of a century and that puts us in a strong position.”

Its experience in the market has also reaffirmed its belief that a multi-asset approach can be hugely beneficial to investors in terms of providing a smoother performance – and potentially less downside risk than would be the case if all hopes were being pinned on just one area.

“There are three main benefits of multi-asset investing and the first one is diversification,” says Mr Onuekwusi. “This is often underplayed but such a fund is essentially trying to put different asset classes together to provide a smoother performance than a single asset class would provide.”

The second is asset allocation.

“Asset allocation tends to add more value than stock selection in a multi-asset framework as it is a key driver of risk and return,” he adds. “The last benefit is governance. With more regulation coming in, such as RDR you’re going to see more focus on what advisers tell clients and multi-asset funds can help to solve this problem.”

It’s also important to have long term time horizon if you want to make money from multi-asset funds, he maintains. “Too many investors get caught up in the short-term, whereas to maximise risk adjusted returns you really need a medium to long-term time horizon.”

The experience and knowledge built up over the past 25 years by Aviva, which currently manages £70bn in multi-asset portfolios, has all gone into the company’s Multi Asset range of funds, three of which were launched in November 2010 and a further two added in February, to target different risk appetites.

Named Multi-Asset I through to Multi-Asset V, the portfolios are run by the specialist Multi-asset team and offer access to a range of funds that invest in a global blend of assets such as equities, bonds, commodities, cash and property.

Each of the five funds will suit a different attitude to risk and it is up to the aforementioned Multi-asset team to identify which assets to invest in, and when to adjust the blend of assets in order to maximise the growth potential.

“They might be relatively new funds but our multi-asset capability is long established,” points out Mr Onuekwusi. “The company has a very long term track record and that puts us in a good position in terms of our capabilities, while one of the other benefits of Aviva is its scale and resources.”

Although it would be possible for Onuekwusi and the team to decide on the stocks and do the asset allocation themselves, they have taken the decision to use a combination of internal and external fund managers, as well as getting inputs from its strategy team for asset allocation, so as not to be a jack-of-all-trades, master of none.

“Combining long-term allocation with short-term calls and stock selection is the best way to achieve diversification and manage your asset allocation,” he adds. “It’s also important that the multi-assst fund manager has overall accountability for the performance of both the strategy and individual asset classes.”

The five funds are risk-rated with volatility boundaries set for each. Moving from Multi-Asset I through to Multi-Asset V, will see investors accepting more risk. “We have created five solutions that we feel are a one-stop-shop approach for everyone from the most defensive investor to the more adventurous,” explains Mr Onuekwusi. “Our funds aim to cover the entire risk spectrum.”

The investment process starts with the pre-set volatility boundaries for each fund. The strategy team will help to decide the asset allocation based on a long-term approach, classed in this instance as a seven to 10 year time horizon.

“They come back with an asset allocation based on the universe that we give them and we will then decide if it makes sense for what our clients are trying to achieve,” he says. “We then populate each of the asset classes with funds and this is generally 70-30 per cent in favour of passively managed funds.”

The allocation will subsequently be adjusted if there’s deemed to be anything over a shorter time horizon that may either cause significant concern or provide major opportunities. However, it’s important to note that the 70-30 split is by no means set in stone.

“From the start I’ve been adamant about having the flexibility to increase active management as and when we see fit. This blend is really important in order to deliver the best risk-adjusted returns.”

It’s also worth remembering that not every asset class can be accessed on a passive basis. “Some examples are property, emerging market inflation linked debt, and absolute return,” he says. “All of these asset classes should be managed on an active basis.”

Sometimes active and passive approaches can be used to access the same areas. For example, while the majority of US equity exposure is in passives, the funds do have a satellite holding in the shape of the Aviva Investors US Equity Income fund, which has a mid-cap bias.

Also of note is the fact that funds reside in IMA Specialist rather than the new Mixed Investment sectors. “We wanted them to be totally unconstrained so managers weren’t constantly looking over their shoulders to see what their peers were doing,” he explains. “By unconstraining your universe you can get better diversification and have more levers to play with from an asset allocation view.”

As far as themes are concerned, recent changes include reducing the allocation to gilts, which are seen as being quite expensive in yield terms, and replacing them with absolute return bond funds that can add value in both rising and falling markets.

“We have also tried to diversify away from the UK, which has seen us increase our exposure to global bonds, and reduced our UK property allocation as this had a very strong 2011,” he adds. “On the plus side we have very slightly increased our European equity weighting as the ECB appears to have drawn a line under any risk of a credit crunch in the short term by providing liquidity to banks.”

Of the potential downsides, the fact that US data has been so strong in the last few months could mean there’s the looming possibility that it may disappoint, while the prospect of an increasing oil price is seen as bad news because it’s effectively a tax on growth.

“Although we are pretty comfortable with the outlook we remain wary of those tail risks,” he concedes. “Therefore, while we are not hugely positive on gilts over the long run, we keep them in the portfolio to provide a bit of protection and diversification.”

Looking to the future, Mr Onuekwusi believes it’s essential that advisers have a thorough understanding of what an individual manager is trying to achieve before they invest in any multi-asset fund. At the very least it should have a diversified, flexible, and unconstrained approach.

“They need to look under the bonnet and understand if the fund in question really meets the needs of their clients,” he says. “From our perspective we think we have developed a transparent, simple, effective suite of solutions covering the risk spectrum.”

Opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from any investment managed by Aviva Investors nor as advice of any nature. The value of your client’s investment can go down as well as up. Your client may not get back the full value of their initial investment. Aviva Investors is a business name of Aviva Investors UK Fund Services Limited. Registered in England No. 1973412 respectively. Authorised and regulated in the UK by the Financial Services Authority. FSA Registered No. 119310. Registered address: No 1 Poultry, London EC2R 8EJ. An Aviva company. www.avivainvestors.co.uk CI062110 03/2013.