Fund Review: Aviva Investors Distribution fund

Cash generative mid caps are behind the long-term outperformance of the £106.2m Aviva Investors Distribution fund, along with fixed income overweight allocations to subordinated banks and subordinated insurance companies.

While allocations to the latter may make some investors nervous, co-managers James Vokins (pictured) and Chris Murphy insist that keeping it simple is a key focus, with bottom-up stock selection the main driver for both the equity and bond portions of the portfolio.

The fund is a traditional distribution asset mix, investing primarily in UK equities and investment-grade corporate bonds with a long-term focus.

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Mr Vokins adds: “It’s cautiously managed in terms of the stock selection and we like to think we have an amalgamation of the best ideas across both the UK equities and the UK investment-grade credit teams. It is also a concentrated fund in terms of the holdings and securities that we own.”

The process looks to exploit inefficiencies in the markets of both asset classes through bottom-up fundamental analysis. But Mr Murphy explains: “It’s really about keeping it very simple. Simple for the client, simple for us to run, we don’t like to do anything fancy. It’s a very plain vanilla fund and it is about doing what it says on the tin, and also importantly it is quite tax efficient for the client as well in that it is an interest distribution fund rather than a dividend distribution fund.”

There is a strong team approach to the fund, with the equity and fixed income teams including both analysts and fund managers who actively engage in the selection of the securities.

Mr Murphy adds: “Both teams sit close together and at least once a day we have an informal meeting in terms of what newsflow there is. Then it is for us [Mr Murphy and Mr Vokins] to manage the individual portions of the portfolio and then just to monitor that we are comfortable [with our exposure]. It is leveraging off the scale of Aviva and it’s an important part of our research and investment process.”

Meanwhile Mr Vokins notes that while the primary focus is on bottom-up research, the macro situation is taken into account. “From a macro point of view, we have to think about what our allocation needs to be from an asset allocation point of view, but also within the asset classes themselves and what allocations we need to be making into sectors. For example, if we were predicting an upturn in the UK from a consumer point of view then there is obviously opportunity in the consumer cyclical sectors where we would exploit opportunities,” he says.

The fund has outperformed its IMA Mixed Investment 20-60% Shares sector consistently over one-, three- and five-year time periods. For the five years to November 18 2013, the fund has returned 77.18 per cent compared with the sector average of 56.14 per cent.

On the fixed income side, Mr Vokins notes the fund has benefited from an overweight to the collateralised or asset-backed securities sector, which offers extra assurance to the investor. Although he also points out the improved balance sheet and risk metrics of banks and insurance companies have offered some good opportunities, with the fund overweight subordinated banks and subordinated insurance companies “purely on a valuation basis as they’ve offered us the best returns for the risk given”.