Aviva’s Aylward turns to alternatives

The Aviva Investors multi-manager range, which consists of the £152m 20-60% Shares, the £142m 40-85% Shares and the £58m Flexible funds, remains overweight equities, but Mr Aylward has begun to gradually increase his alternatives and absolute return weightings.

In the most cautious 20-60% Shares vehicle, the absolute return weighting has reached around 5 per cent, while alternatives make up 9 per cent. Equities, meanwhile, comprise 55 per cent and fixed income is 30 per cent.

Mr Aylward, who works on the range with manager Peter Fitzgerald, said: “Our alternatives bucket is increasing. We remain overweight equities but we have had six years of a bull market.

“We also don’t like government bonds.”

As part of this move, he has added to his exposure to the Marshall Wace Tops fund, a vehicle he has held for around three years, which Mr Aylward says “takes the best ideas from sell-side brokers”.

In other changes made since the beginning of October, Mr Aylward has added local currency emerging market debt (EMD) to the range for the first time since 2013 on the back of “much more attractive valuations” in the wake of recent market stress.

He said: “Valuations have become much more attractive after quite a sell-off in that space. With local currency EMD, we expect movements to go in our favour.”

The move was funded by “banking some of the gains” made in Japanese equities, which remains an overweight position for the range.

Meanwhile, he has sold a three-year holding, Insight Investment’s Libor Plus fund, which invests in a combination of asset-backed securities (ABS) and corporate floating-rate notes, and recycled the gains into Fraser Lundie’s Hermes Global High Yield Bond fund.

“We like [ABS] because there’s no interest rate risk. We thought there was a pricing disconnect. That has paid out – we made some good gains,” he said.

“We [now] want another part of fixed income rather than just Libor-plus.”

He believes the high-yield space is “beaten up” because of its exposure to the troubled US energy sector, but expects some bonds to perform well in spite of this.

He said: “There’s little correlation with government bonds because there is not much duration on high yield. It’s quite a beaten-up space because of the energy exposure that drags it down.

“We are not particularly optimistic about US energy and we think contagion has spilled over into high yield.”

Mr Aylward has also replaced some of his passive US exposure with active funds after finding vehicles he believes could perform well against the market.

“We replaced a passive with the Wellington US Research Equity fund. It’s sector-neutral and uses analysts’ best views,” he said.