Riding out the volatility with multi-strategy investments

Studying where the market is going is better than timing the market, says Aviva Investors' Asia-Pac chief exec

In our monthly series featuring leading financial experts and fund managers, Mr Kevin Talbot, Aviva Investors' Asia-Pacific chief executive officer, explains how multi-strategy funds can help investors rest a little easier in times of volatility.

Mr Talbot believes portfolios with diverse strategies are most able to ride out stressed market conditions. "As equity volatility ramps up and bond yields are set to rise, we believe multi-strategy investments have a role to play in protecting returns by providing strategy diversification rather than asset- class diversification," he says.

"This is about reducing volatility, so investors get a much smoother ride. We are hoping it helps you to sleep at night because it has been professionally managed as a 'best ideas type' portfolio, which hopefully gives investors the peace of mind to sleep at night."

As at July 29, assets under management at the Aviva Investors Multi-Strategy (Aims) Target Return fund were valued at £5.01 billion (S$8.7 billion), while assets under management at the Aims Target Income fund were £1.63 billion. Both have been available to retail investors in Singapore since February.

As at the end of last month, the Aims Target Return fund delivered a net annualised return of 2.51 per cent since its inception in July 2014, while the Target Income fund delivered a net cumulative total return of 1.32 per cent since its inception in September last year.


Mr Talbot believes multi-strategy investments have a role to play in protecting returns by providing strategy diversification rather than asset-class diversification. PHOTO: DIOS VINCOY JR FOR THE STRAITS TIMES

Q What is the difference between multi-asset and multi-strategy fund?

A Multi-asset investing is about trying to be in the right sector at the right time. Most of the time, you'd have a balance of different asset classes in each sector. What you usually do is to be underweight and overweight in different asset segments.

This is not a multi-asset fund; it's a multi-strategy fund - it's about the best ideas. To do this, you need a depth of investment resources. We've got 330 investment specialists globally in different geographic areas and asset classes. We get the investment specialists every month to present the best ideas from each asset class globally to the strategic investment group. Only about two or three are accepted as suitable for the portfolio, and they will be modelled to see whether they add value to the existing portfolio.

Asset-allocation funds are about being in the right sector at the right time. Multi-strategy funds are about having the best ideas that create a diversified portfolio, which is risk-tested each day. It's not about market timing. It's not about being in the right asset class at the right time. It's about having the best ideas from our global investment team.

Q What are the key benefits of adopting multi-strategy investment?

A If you go back to last year and look at what the consensus was - the US had put up its rates for the first time in several years, so expectations were that in 2016, the Federal Reserve would put up rates again three or four times, and continue with that in 2017. Expectations were that US interest rates would be going up. Europe, the United States were picking up - the US dollar was strong, bonds were going up, equities were supposed to go up.

The complete opposite occurred - the first six weeks of this year was the worst start to equity markets on record. The absolute opposite in every asset class occurred... We are all professional investors but we still can't predict the future.

So we've tried to come up with a best-ideas portfolio but it's not dependent on us being in the right asset-class fund. If you were in a multi-asset fund last year, you would have been overweight equities, underweight interest rates and overweight the US dollar. You would have got everything wrong. We've created a portfolio not dependent on market timing, and purely on market direction.

It is worth noting that going into the UK referendum vote, the Aims funds were well diversified and had no exposure to sterling assets. Aims is constructed in a way that does not require tinkering of positions during stressed market conditions. We made one portfolio change on the day of the Brexit results, where we initiated a short British-pounds- versus-US-dollars position in order to benefit from any further potential weakening in sterling. This position has positively contributed to performance so far.

Q What is the fund's view on Asia, and what kind of strategies are you looking into?

A The challenge for China remains significant. Overcapacity and a growing non-performing loan issue for the banks make us cautious regarding the medium-term outlook. However, it is important to remember that the Chinese authorities exercise significant control over their economy.

In Japan, Abenomics is still struggling to achieve tangible results. Growth continues to languish despite the first quarter's rebound, while inflation has dipped back into negative territory. The absence of a pick-up in wage growth is especially concerning. We believe the Bank of Japan will continue to use unconventional monetary policy to reflate the economy and weaken the currency, and hence are long on Japanese equities and long on Japanese yen against the US dollar volatility.

For the Aims Target Return fund, we are also long on emerging markets in the small-cap sector, with a bias towards Asian shares as we believe they are materially undervalued compared with emerging markets, large cap and developed markets, small cap if growth is taken into consideration.

Q Would you say that the multi-strategy fund is for investors with a lower risk appetite?

A This method of managing money is done because it has lower volatility. It's not necessarily about just wanting to reduce risk, or not having that risk appetite.

What we try to position with both our life insurance, institutional clients and retail investors is that this strategy should form a core part of your portfolio. For institutional investors, if 5 per cent is the risk premium for global equities on an ongoing basis, then why wouldn't you have a component of your global equity portfolio in here? Because you would be expecting the same returns over a three-year period that you would get out of global equities, but with much less volatility.

In a capital-constrained environment, that's become very important. We are working with the regulators in the UK and elsewhere that say that because of the reduced volatility in these portfolios - we are hoping that they will say that as an institution, we do not need to hold as much capital supporting this type of product - we are hoping that this will be considered closer to bond-type volatility.

Q What strategies and views does Aims take post-Brexit?

A Our house view has not fundamentally changed from the previous quarter regarding our view on continued accommodative monetary policy by the European and Japanese central banks. The result of the referendum in the United Kingdom has changed our view on the growth prospects in the UK, which increases uncertainty around the potential impact on the growth prospects in the UK over the long term and possibly on Europe. However, we do not believe that a decrease in trade with the UK could have a big impact on European growth in the medium term, and the same goes for global growth.

A version of this article appeared in the print edition of The Sunday Times on August 14, 2016, with the headline 'Riding out the volatility with multi-strategy investments'. Print Edition | Subscribe