This £321.2m fund has been co-managed by Henry Sanders and Thomas Forsha since its launch in July 2011.
They are part of River Road Asset Management, which runs the fund on behalf of Aviva Investors. Mr Sanders says: “The aim of the fund is to outperform the index by 200-400 basis points (bps) per annum across the cycle, while delivering a yield of 150bps above the benchmark, and to do so with lower volatility than the index. The universe comprises US-listed securities with a yield greater than 2 per cent at the time of initial investment, and a market cap of at least $1bn (£594m).”
The manager reveals that the investment process is based on bottom-up fundamental valuation and portfolio construction, with the size and shape of the portfolio a reflection of their conviction in the individual investments. There are currently 52 positions held in the portfolio.
Companies must meet six criteria to make it into the portfolio: a high and growing dividend, a strong balance sheet, priced at a discount to absolute value, an attractive business model, shareholder-orientated management and being undiscovered or misunderstood. The fund sits at the riskier end of the risk-reward profile at level six, with an ongoing charge of 1.65 per cent.
Mr Sanders acknowledges that macroeconomic factors can influence stock selection and weightings. “Inevitably, we need to have a view on the oil price in order to make a judgement on opportunities in the energy sector, or on interest rates to assess the viability of many banks,” he says. “These views can also impact the absolute value calculation for these companies. However, we do not incorporate macroeconomic considerations as a top-down input into the portfolio construction process.”
He highlights some recent changes: “In the second quarter we have eliminated positions in Avista Corp after it hit our price target, and Coach and Staples in accordance with our sell discipline on losses. By contrast, we have added National Oilwell Varco to the portfolio.”
For the three years to August 6 2014, the fund has underperformed the IMA North America sector with a return of 48.69 per cent, against the sector average of 55.02 per cent, according to FE Analytics data. Mr Sanders admits that the fund has underperformed its benchmark, the Russell 3000 Value Index, in the year to date with a loss of 3.64 per cent, saying the majority of the underperformance came in the first quarter of this year.
He says: “The positioning of the fund was impacted by the rally in Treasuries that occurred at the start of the year. This resulted in a strong performance from some of the more rate-sensitive sectors and industries, such as utilities and real estate investment trusts, in which we are underweight.”
The fund’s performance has picked up in the six months to August 6, though, with a top quartile return of 4.69 per cent, slightly above the 4.64 per cent average for the sector.
Says Mr Sanders: “The sector that has delivered the strongest performance relative to the benchmark during the first half of the year is consumer staples, which has seen robust returns from individual stocks such as Molson Coors Brewing, up 33 per cent, and Dr Pepper Snapple Group, up 22 per cent. An underweight in financials, combined with impressive rises in some of our key holdings in the sector such as PNC Financial Services, up 16 per cent, meant that this was the sector that produced the second-strongest relative returns.”
In his outlook for the rest of the year, Mr Sanders takes into consideration the US Federal Reserve’s “lingering concerns” about the economy, the end of quantitative easing and the potential for a rate rise in 2015. He cautions: “We have concerns about general market valuations; the 2013 rally was driven by multiple expansions and an expectation that this would be supported in 2014 by improved earnings. The extent to which companies can navigate this environment successfully and deliver earnings growth will determine whether valuations really are underpinned. However, the evidence of past monetary cycles suggests that expectations of rising interest rates can spark short-term corrections.”
Expert view
Juliet Schooling Latter, Research director, Chelsea Financial Services
Verdict
This fund was soft-closed two years after its launch to try to maintain performance and another, very similar, fund launched for new investors. I fully agree with the managers’ positioning of the fund towards companies that should do well if economic expansion continues, the consumer strengthens further and interest rates rise, but performance has been pretty average. Aviva has just announced it is selling River Road, although the managers will continue to run the fund. I don’t think this uncertainty will help matters in the short term.
