The heyday of multi-strategy absolute return funds seems to have passed with the waning fortunes of its most successful exponent Standard Life Investments Global Absolute Return Strategies (GARS). However, Aviva Investors’ Mark Robertson said a multi-strategy approach would have helped investors trying to navigate the coronavirus sell-off earlier this year.
Robertson is head of multi-strategy at the asset manager and manager of the £3.6bn Aviva Investors Multi-Strategy (AIMS) Target Return and £1bn AIMS Target Income funds. He said having enjoyed strong returns of 9.93 per cent for AIMS Target Return last year - in what was “a good investing environment” - he knew that 2020 would be harder.
“Coming into 2020, [we were] recognising that while 2019 had been a good year, it was probably going to be a bit more challenging and we started to take some of the risk out of a number of those strategies that had done particularly well for us,” he said.
When the sell-off came in March, however, the manager said its multi-strategy approach helped protect investors from some of the worst of the drawdown.
“I think that market environment was challenging for most people and we had individual strategies within the overall strategy that worked very well in that tougher environment,” he explained. “They were designed to work well in that type of environment.”
During the year to 23 March – when the S&P 500 bottomed – the AIMS Target Return fund was down by 5.74 per cent while AIMS Target Income had lost 12.09 per cent, compared with a fall of 19.90 per cent for the US blue-chip index, in sterling terms.
Performance of funds vs S&P 500 between 1 Jan 2020 and 23 Mar 2020
Source: FE Analytics
“If I think of some of the strategies [that worked], what we call our ‘good balance sheet’ [strategy],” he said. “This is where we’ve identified companies that have very strong balance sheets, where you would be exposed to the quality factor.
“And we offset that with a short exposure against the broad equity market during those periods of stress.”
He added: “Other strategies such as short Asian FX strategy, in periods where the dollar is strong and perceptions of growth concern are emanating out of emerging markets or Asia, in particular, those strategies perform very well.”
Robertson said a multi-strategy approach means that while one part of the portfolio is protecting against more short-term market movements, another can be focused on longer-term investment themes.
“You want strategies that can do well under those more challenging market environments, providing an offset to other parts of the portfolio where you have that longer-term investment thesis in mind,” he explained.
“Whether it be around some of those thematic ideas we have in relation to ESG [environmental, social & governance] expressed through our electric vehicle strategy or whether it is some of those longer-term thematics around technology which we express through our 5G basket.
“Those types of strategies in a broad negative market environment can become a challenge.”
From an income perspective, the ability to rely on different strategies can also help AIMS Target Income deliver on its yield requirements, particularly when dividends are being cut in the equity space as companies come under pressure to preserve cash against a tougher operating environment.
“Within our income fund, we’ve obviously made use of the income derived from dividends [in the past] and that has needed to be reassessed,” he said. “We have been through a process with our equity team of reaffirming where we see the dividend stability and when we think there is a high likelihood that dividend payments will be met and identify where perhaps some of the dividends are more at risk.
“Where we think those fragilities are we will look to divest from those names from a purely income perspective and then, of course, we need to replace it.”
The issue of finding income has been exacerbated by low government bond yields as rates have been cut to all-time lows.
As such, Robertson said the team has become more favourable to credit in the AIMS Target Income fund as central banks have been more willing to extend support since the onset of the Covid-19 pandemic.
“In the income strategy, we have increased both the euro and US high yield exposure to offset some of that lost dividend income,” he said.
“We’re working with those specialist teams to understand the dynamic in markets, how we think that income profile might change over time, and make sure we’re positioning the funds to achieve the income objective.”
Robertson said while AIMS Target Return delivering strong returns in years like 2019 shows that it can participate in rising markets, the ability to shield investors from market drawdowns is just as important for any absolute return strategy.
“The objective we always have is to minimise drawdowns, protect capital, but also capture the upside when it’s available,” he concluded. “We do think that is something that – as investors look at their portfolio and think about how they can get diversification – is where absolute return strategies can absolutely help.”
Performance of funds over 3yrs
Source: FE Analytics
Over the past three years, AIMS Target Return is up by 0.34 per cent while AIMS Target Income is down 5.65 per cent. AIMS Target Return has an ongoing charges figure (OCF) of 0.85 per cent, while the AIMS Target Income has an OCF of 0.85 per cent and a yield of 4.60 per cent.