Skip to the content

The top performing GARS alternative that’s yielding 4%

29 January 2016

Somewhat overlooked in the press, this fairly unique portfolio from Aviva Investors is quickly gaining favour among the professionals.

By Daniel Lanyon,

Senior Reporter, FE Trustnet

Investors by and large followed two major trends in fund selection in 2015, carrying on a pattern several years long: a search for income and a desire to place money in portfolios that look to provide an ‘absolute return’ and protect against the downside.

Over the past year this has been evident in fund flows. Invesco Perpetual Global Targeted Return saw £3.8bn of new cash flow in, while CF Woodford Equity Income was boosted by net inflows of £3.3bn, according to FE Analytics. In contrast Richard Woolnough’s M&G Optimal Income fund shed the most – £7.2bn.

You could argue therefore that it was prescient that Aviva Investors launched the Aviva Investors Multi Strategy Target Income fund at the end of 2014, which is a yielding absolute return fund. It has a current yield of 4.3 per cent.

Co-managed by FE Alpha Manager Nicholas Samouilhan, Ian Pizer, Brendan Walsh and Peter Fitzgerald since launch, the portfolio is built around 25 to 35 strategies drawn from a range of global investment ideas spilt across asset classes.

Steve Lennon investment manager at Parmenion said: “The portfolio is constructed using different strategies which have a combined total stand-alone risk which is akin to, or possibly more than, equities.”

“However, these strategies are designed to be non-correlated and so the portfolio risk is targeted to be between one third and one half of equities once the benefits of diversification are taken into account.”

“Therefore, this fund offers a truly diversified return profile to traditional asset classes, part of which is a smoothed income stream. The fund is managed by a large and experienced team, many of whom used to work on the Standard Life Global Absolute Return Strategies [GARS] fund.”

“Aviva Investors, headed by Euan Munro (also ex GARS), have placed a great deal of emphasis and weight behind developing funds which aim to deliver specific outcomes rather than relative returns,” he added.

Since the fund’s launch it has delivered a return of 6.64 per cent against a fall in the FTSE All Share index of 4.21 per cent.

Performance of fund, sector and index since launch


Source: FE Analytics 

Aviva Investors is the first asset management firm to come to market with this specific type of product, Lennon notes.

“The team have hit their ambitious targets so far. The primary objective for the fund is to deliver a gross income of cash (BoE base rate) plus 4 per cent regardless of market conditions,” he said.


“The income stream is smoothed as much as possible so provide steady and predictable income. In addition, the fund aims at least protect capital but ideally to grow it by 1 per cent per annum and to realise volatility less than half that of global equities, as measured by the MSCI AC World index.”

An investor putting £10,000 into the fund at the beginning of 2015 would have seen income of £518.92 paid out as dividends. By comparison the Vanguard FTSE U.K. All Share Index paid out £368.43 and the Vanguard FTSE UK Equity Income Index paid out £462.80 over the same period.

Income paid out of funds from £10k in 2015

Source: FE Analytics 

The volatility of the fund has in fact been less than a third of the MSCI AC World index as has its maximum drawdown, our data shows.

Ben Willis, head of research at Whitechurch Securities, has just started buying the £495m fund for the firm’s lower risk, income focused portfolios.

“We have reduced bond exposure further and are using this fund as a yielding alternative. We have been keeping an eye on the fund since launch and started allocating to it after its first anniversary.”

“2015 was a good test for the fund and during volatile periods for risk assets throughout last year, it displayed the kind of resilience that is expected from this type of investment vehicle. The fact that it also pays a dividend, and delivered on its income target, of 4 per cent over the Bank of England base rate is very attractive in the current low rate environment. Aviva have put a lot of store in the success of this fund, and it could prove to be a real winner for the group.”

Adrian Lowcock, head of investing at AXA Wealth, backs the income profile of the fund as well as its downside protection credentials.

“I this fund should provide more stable income as it looks to spread income payments with an aim of providing a constant 4 per cent income,” he said.

“The fund should also protect volatility as it is a long/short equity/bond fund. This sort of fund gives an element of diversification but is not a one stop shop for income investors as they will need to look at alternative assets where income is generated in different ways.”


However, Charles Stanley Direct’s Rob Morgan says investor should be aware it is far from a traditional income asset.

“Although this is a yielding fund, it must be noted that the portfolio doesn’t generate a ‘natural’ income that supports all of the target yield,” he said.

“There is a core of traditional equity and bond exposure that offers an element of this but it is supplemented by derivatives strategies such selling call options and various other techniques.”

He thinks the fact the fund pays out monthly makes it a potentially attractive vehicle for regular income seekers, but it must first and foremost seen as a diversifier designed to represent only a small portion of an income portfolio.

“The concept of absolute return investing to income investors is potentially very attractive and I applaud the innovation, but paying away income means that there less compounding of profits, which may mean that any drawdowns are costly.”

“I like the idea, but capital management is going to be crucial to success, something that can be gauged more effectively with a longer track record than at present.” 

In terms of risk adjusted returns, the fund has been slightly more volatile than GARS over the past year but has beaten it substantially as well as Invesco Perpetual Global Targeted Return – another portfolio run by ex-GARS management.

Risk adjusted returns over 1yr

 

Source: FE Analytics 


Chelsea Financial’s Darius McDermott, is also a fan of the fund.

“There are not many funds yielding over 4 per cent in the current climate and as we are negative on bonds an absolute return fund with a yield fits the bill nicely,” he said.

“This is a multi-asset, multi strategy fund with a portfolio of lowly correlated investments. A good addition to those looking for income and lower risk.”

The fund has a clean ongoing charges figure of 1.1 per cent. 

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.