Aviva Investors’ Tom Wells has shifted his multi-manger range’s focus to include small- and mid-cap strategies from boutique fund houses as he added managers capable of picking up long-term inefficiencies in crowded stockmarkets.
To this end, he has bought into the $120m (£97m) Pinebridge Asian ex-Japan Small Cap, which complemented a position in the $670m T Rowe Price Asia ex-Japan Equity vehicle. However, the former’s inclusion spelled bad news for Schroders’ Matthew Dobbs, with Aviva selling out of his £573m Asian Alpha Plus fund.
Mr Wells said small-cap exposure through a boutique fund house added greater diversity to his £392m range – which is made of three multi-asset vehicles split by 20-60 per cent in equities, 40-85 per cent and a flexible investment strategy.
“We felt it was more appropriate blending the T Rowe Price fund with a small-cap manager. Being long term means you can benefit from the liquidity premium in small caps and also means you are more able to withstand volatility.”
Mr Wells said that he is also looking to introduce a US small to mid cap manager to the range, also preferably from a boutique house.
“[We] can benefit from the information inefficiencies that you get in the small-cap space, or mid-cap space in the US, and therefore it seems sensible to have an allocation within our portfolios to those areas.”
In line with current rhetoric, the manager was also cautious of valuation in fixed income markets, in particular UK gilts, where Mr Wells said potential downside risk and compensatory yields no longer matched. However, he made an exception for Australian government bonds, using them for real yield and as a hedge against shockwave effects from a “blow-up situation” in China.
“Australian government bonds have a positive real yield, which UK gilts don’t, and from an insurance perspective they protect the portfolio from a China blow-up situation, which UK gilts wouldn’t.”
Mr Wells said a Chinese slowdown was “one of the clear risks to the portfolio”. Despite the two economies being increasingly linked to one another as respective exporters and importers of commodities, an allocation to a ‘safe’ Australian asset class would help shield the funds, Mr Wells said.
“When China has problems Australia often suffers, so we own Australian government bonds to protect us,” he added. “We believe a Chinese slowdown would weaken the Australian economy, meaning that Australian interest rates should remain lower than the market is currently pricing in and boosting the [value] of government bonds.”
The range allocated more to Australian government bonds over the summer, along with US Treasuries, as part of an effort to scale back the risk.
“From a top-level risk perspective we wanted to dial it back marginally and so we took money out of the growth bucket, which meant it was a broad reduction across all of the asset classes within equities and high-risk fixed income.”
The £166m Aviva Multi-Manager 20-60 per cent Shares fund returned 21.5 per cent over three years while the IA Mixed Investment 20-60 per cent Shares sector returned 18.2 per cent over the same period, according to FE Analytics.