13th August 2021
I have mixed emotions over the recent news that Aviva is to close its Multi Strategy Target Income fund. It was a strategy that I long believed would fail to deliver on its over-ambitious targets, but the inconvenience this causes investors and the damage to the reputation of the fund management industry is upsetting.
Back in March 2017, I wrote the following in our Hawksmoor Funds Quarterly Report:
“A recent feature in the fund management industry has been strong demand for funds with bold ambitions to provide investors with a fixed high yield, minimum growth target, capital preservation and deliver this with relatively low volatility. In a world of record low interest rates, it is understandable why such funds would attract billions of pounds from investors seeking this ‘holy grail’ of investment. However, it is the same extraordinary economic conditions that make investment difficult enough, without the challenge of additional promises and targets. This approach runs contrary to our belief that in a low yield environment, investors who shun volatility must accept a lower return than has historically been available or accept more volatility or illiquidity in their pursuit of higher returns. It is therefore no surprise that, notwithstanding their best efforts, many such funds have failed to deliver on their targets despite being managed by very talented managers at well-resourced firms. We don’t claim to be the cleverest managers in the industry but we think it is our common-sense and pragmatic approach to investment that has been a major contributor to delivering superior total returns for our investors over the years.”
As the old saying goes “Nobody ever got fired for choosing IBM.” This can also be attributed to investors choosing funds managed by well-known groups like Aviva. Its strategy of launching a fund based on a set of attractive, but ultimately unobtainable, features is not uncommon in the fund management industry and we have commented in the past on how many funds are launched and closed each year. This is upsetting as it shows some fund management groups do not truly believe in the funds they launch. Most are typically marketing-led to latch on to a theme or strategy that might appeal to the masses. If performance or asset-gathering does not live up to expectations, the fund can be quietly closed, much to the inconvenience of its investors.
To illustrate this point, when our Vanbrugh Fund was 1 year old in February 2010, it was one of 144 funds in its sector (then called the ‘IMA Cautious Managed Sector’, now it is the less-snappy ‘IA Mixed Investment 20-60% Shares Sector’). Today it is one of just 68 funds that have been in existence since 2009, meaning 76 funds have since closed or merged. Survivorship bias is probably a subject for another note, but the survivors in the fund management industry are notable for their continued commitment and relevancy, as well as their performance.
While Aviva’s fund was disappointing investors, other multi-asset income funds, such as our very own Distribution Fund, were delivering a similar yield to Aviva’s of around 4%, but also generating attractive total returns for investors. We have never promised a specific return or volatility number as it just isn’t possible to do consistently. Indeed we have been at pains to explain that in a world of near zero risk-free rates it is necessary to take some risk to achieve an acceptable level of income.
This is why our Distribution Fund sits in the IA Mixed Investment 40-85% Shares Sector – to reflect the flexibility required and additional, but responsible, risk required to manage an income mandate. It is possible to invest responsibly for income in alternative assets (such as infrastructure, property, shipping and songs) and selective equity markets – even though the 10 year gilt yield has fallen from 3% in 2012 to around 0.5% today – but not if you are unable to tolerate any short-term volatility.
Since the Aviva Multi Strategy Income fund launched in December 2014, it has generated a total return of 4.7%, while our Distribution Fund has returned 56.5% (Source: FE Analytics, 10/08/2021). Meanwhile both funds have delivered a similar level of yield. Yes, the volatility profile has been different but most investors would probably agree with Warren Buffett who once said “Charlie [Munger] and I would much rather earn a lumpy 15 percent over time than a smooth 12 percent”.
Aviva’s marketing prowess raised as much as £2.4bn at the peak for this strategy, with investors easily persuaded by the promise of an attractive yield and low volatility, at a time when bond yields were pitifully low and equity markets were/are volatile. Aviva closing this fund, which still has £400m in it, also highlights the scale required by some large fund management businesses to justify the existence of their funds. The sum of our three Funds is £415m and every investment into our Funds is valued.
I hope the money left in the Aviva fund finds its way to other multi-asset income funds, like our Distribution Fund, where a common-sense and pragmatic approach to management, without over-promising and under-delivering, is, in my opinion, a better proposition to investors.
Daniel Lockyer – Senior Fund Manager
This financial promotion is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. HA4496.