Insto mandate seeds Aviva fund launch

A global institution is placing $225 million with Aviva Investors to be the asset manager's cornerstone investor for its latest fund launch in Australia.

Last month Aviva Investors chief executive Euan Munro revealed the firm, via its new mandate win, would establish its third multi-strategy fund in Australia - the AIMS Fixed Income Fund.

Speaking to Financial Standard in Sydney, Munro said the launch of an absolute return bond fund was timely given February's equity and bond market turbulence. The fund answers to investor concern over volatility because it aims to deliver returns in both rising and falling bond markets.

And Munro believes there is a lot more to play out in bonds. He sees no immediate end to movement in interest rates and if they continue to increase, and selected equity markets and emerging market debt continues to deliver, "then I'm pretty confident we'll meet client expectations and targets over the balance of the year."

The chief executive said 2018 will be the first year for a long time where there is going to be net supply from governments "that's not totally knocked up by central bank buying through their QE programs."

He adds the "marginal investor" has also played a role where bond prices have been driven down to an extent where economic prospects don't look too bad - in contradiction to the equity market.

"You look at what the bond market has been appearing to price in over the last few years - there's been pricing in deflation as far as I can see and negative real rates has effectively been indicating that things are so bad that you have to hoard capital and not invest and be terrified, getting principal protection rather than getting a decent return," Munro said.

"That's a different picture than from the equity market and it's been allowed to persist because of this enormous QE."

Munro is buoyed by local currency emerging market bonds which are above domestic inflation and have real yields. He believes a lot of people are assuming US interest rates are on the move upwards, and that a positive US dollar positive is by extension negative for emerging market and local currency debt. But there are flaws.

"One is that it's not necessarily true that rising US rates is going to be dollar positive because I think that one of the reasons rates are going up is because there's concern about Trump's fiscal responsibility - the US will have to make itself pretty attractive internationally to attract the foreign financing that it's going to need more of as it increases its deficit because it's going to have a bigger twin deficit - fiscal as well as trade," Munro said.

"Rising rates in the US in the context of fiscal tightening would be a different proposition than one of what we're seeing. The link between US rates and a dollar may not be the link everyone expects."

Historically the US dollar strengthening damages emerging market debt. However Munro said the reason it damaged emerging markets is because they had an awful lot of US dollar-denominated external debt. You borrow in US dollars and it goes up, you have a problem, he adds.

"Very often that's when they defaulted. It's not necessarily the case now. Market is trading on a muscle memory than necessarily anything that's economically real.

"In the same way European and Japanese equities shouldn't be terrified of the interest rate moves in the US, emerging market debt shouldn't be terrified of dollar-strength should it transpire," Munro said.

Aviva Investors co-portfolio manager and global head of fixed income Dan James said falling interest rates over the last 25 years have created a tailwind for fixed income returns, which is unlikely to be repeated in the next five to 10 years.

With all this in mind, the AIMS Fixed Income Fund will aim to achieve a 3% per annum gross return above the Reserve Bank of Australia (RBA) cash rate and before fees over any rolling three-year period. It will invest in a diversified portfolio of between 25 to 35 strategies, constructed into three categories: market strategies, opportunistic strategies and risk-reducing strategies.

Aviva Investors managing director Brett Jackson said: "While fixed income funds are generally based on two risk factors, duration and spread, our fund is uniquely positioned, relying on six risk factors: duration, spread, curve, volatility, currency and inflation."

"The fund also seeks to exclude investments in companies that manufacture weapons, tobacco products or do significant damage to the environment and society generally. There are very few absolute return bond funds that have these exclusions, but I believe there will be more demand for them in future," he said.

Aviva Investors had assets under management of US$472 billion as at 30 September 2017.

Read more: USAviva InvestorsAIMS Fixed Income FundQEEuan MunroReserve Bank of AustraliaBrett JacksonDan JamesFinancial StandardSydneyTrump
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