Benefits of a global approach are now clear for investors

That’s the view of Justin Onuekwusi, a multi-asset fund manager with Aviva Investors, who maintains that the way to achieve the very best risk-adjusted returns is to invest in a globally unconstrained way that combines areas as varied as equities, bonds, real estate and commodities.

“Investors should always take a global approach – but an issue has been that a lot of the asset classes you see nowadays simply weren’t investable 10 to 15 years ago therefore the universe of asset classes was much smaller,” he says. “Now as it is easier for investors to access asset classes such as commodities or global convertibles it’s something they should consider.”

The principle benefit is diversification. Although the business cycles of various countries are becoming more harmonised, blending asset classes from different regions can provide much needed exposure to a very different sort of risk and return profile.

Balance sheets in the west are bloated because everyone has borrowed too much, according to Mr Onuekwusi, but within the emerging markets, many governments are in much better shape. To benefit from this scenario, an investor will need to take an international approach.

“Having a larger, more global universe means you can spread your risk over a number of asset classes and have more levers to pull in order to help achieve the objectives for your clients,” he explains. “It just makes the job a bit easier and should give investors a smoother ride.”

Another trend that has helped people take a global approach has been passive investment. “You can get an Exchange Traded Fund on almost any regional equity index in the world these days – and if you can’t then one can be created for you,” he says. “This liquidity and availability has made it so much easier to access various markets quickly and efficiently.”

Aviva Investors takes a very long-term approach to investing and provides access to more than 100 asset classes. For prospective investors the benefits it provides include scale – it manages in the region of £70bn in multi-asset funds – and its focus on utilising the skills of specialists.

“It’s very important to have people on the ground if you’re going to run truly global portfolios, while scale also makes a difference,” says Mr Onuekwusi.

The best example of this working is within the Aviva Investors Multi-Asset fund range, which was launched in November 2010 and targets different risk appetites. The portfolios offer access to funds that invest in a global blend of assets, such as equities, bonds, commodities, property and absolute return strategies.

While most multi-asset fund managers decide on the individual stocks and do the asset allocation themselves, Aviva Investors has taken the decision to employ a combination of internal and external fund managers, as well as getting inputs from its strategy team, so as not to be a jack-of-all-trades, master of none. Aviva Investors multi-asset fund managers benefit from the inputs of specialist asset allocation strategies and security selector experts under each asset class.

Also of note is that the funds reside in IMA Specialist rather than the new Mixed Investment sectors. This means they are freed from constant comparisons with their so-called peers, and can have an asset allocation that’s not unduly influenced by external forces.

“We wanted the funds to be totally unconstrained so we are not constantly looking over our shoulders to see what the peers are doing,” he explains. “By having an unconstrained universe you can get better diversification and have more tools in the box from an asset allocation view.”

This means that the funds do not have the domestic bias that is seen in the traditional IMA Mixed Investment sectors.

Within currencies, the view is to hedge the currency risk on less volatile asset classes, such as fixed income, whereas the more unpredictable assets will be left unhedged. “For example, we’ll tend to leave equity currency exposure unhedged unless we have a particularly strong view on it,” he explains. “However, we would look to use hedging when it comes to asset classes such as European property because we believe that the volatility of currency moves will dominate the returns of this asset class.”

From a multi-asset perspective, therefore, the more levers you have the better. “We truly believe in global dynamic asset allocation, which involves moving to the areas we think will generate the best returns for our clients and investors,” says Onuekwusi.

As far as current global themes are concerned, arguably the over-riding one has been the expansion of the emerging markets. It’s a trend he expects to continue, given the presence of the growing middle class and the positive demographics of Asia.

“One of the ways we play that is through Asian property because there is definitely a wealth effect to be seen as the labour force and middle classes grow,” he says. “Emerging market local currency debt is another strong focus for us at the moment, especially given the bloated balance sheets of the west and quantitative easing, which should create downward pressure on western currencies.”

Another area he likes is absolute return fixed income.

“Yields on US Treasuries and UK Gilts are very low and as we feel that even if yields remain at these levels, which in the long-term is unlikely, returns are likely to be lower than what has been experienced historically. Therefore, we need a vehicle that can generate decent returns in such conditions,” he explains. “We are moving some of our safety assets into the absolute return fixed income space in order to give us some protection in both rising and falling yield environments.”

For advisers and investors that buy into the global argument and are looking for an investment house to lead them in the right direction, Aviva Investors is definitely worthy of consideration because it has been running multi-asset funds for many years and has a very good track record.

“We have always been very global in our multi-asset construction so this isn’t a new area for us,” he says. “It’s also worth remembering that we have significant scale and global resources, as well as a focus on tapping into the expertise of specialists that look at these asset classes across the world on a daily basis.”

In terms of global allocation, the economy and global growth are still going to be the main drivers over the medium term. However, monetary policy is still expansive and one of the difficulties at the moment is that fundamentals aren’t driving asset classes.

“You’re seeing politicians and central banks driving asset classes and in that environment it does become challenging to accurately asset allocate across the regions,” he says. “However, in general we are still quite positive on both the economy and growth.”

As far as global risks are concerned, Mr Onuekwusi is concerned about the oil price, which he believes could have an impact on the positive momentum we are seeing in US economic data. The deleveraging issues, he adds, will also continue to make their mark.

“The Sovereign risk in Europe still remains and that will affect the Eurozone more than other regions,” he adds. “Overall, when you take into account all the issues surrounding markets and the risks in the economy, they will direct you towards taking more of a global approach.”

Looking to the future, Mr Onuekwusi and Aviva Investors maintain that the aforementioned unconstrained, global approach will continue to be the best way for advisers to deliver the risk adjusted returns that their clients desire in all environments.

“Our key message is that to achieve true diversification you need to asset allocate globally and dynamically,” he adds. “Such an approach plays into the hands of an established investment house such as Aviva Investors which has a global multi-asset philosophy and an approach that everyone can believe in.”

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 CI062118 03/2012