Q&A with fixed income portfolio manager James McAlevey September 2018


Industry Moves speaks to James McAlevey, Portfolio Manager for the Aviva Investors Multi-Strategy (AIMS) Fixed Income and Target Return funds, about some of the challenges facing investors in fixed income and how a multi-strategy approach to investing can help. He also shares the things that excite him about fixed income and how machine learning might change the industry.

What are some of the challenges facing investors in fixed income?

Whilst fixed income has been an exceptionally resilient asset class for the last 40 years delivering stable income and strong capital returns, limited drawdowns and diversification from equities, the ability of the asset class to continue to deliver these benefits going forward is likely to be challenged.

Can you describe your investment approach?

Drawing on our global expertise, our investment approach for the fund involves:

• targeting a 3% per annum gross return above the Reserve Bank of Australia (RBA) cash rate (before charges) over a 3-year rolling period, regardless of market conditions;
• aiming to achieve the objective with less volatility than global fixed income, as measured by the Barclays Global Aggregate Bond Index;
• offering investors liquid and cost-effective access to the full fixed income universe through a diversified portfolio of 25-35 strategies; and
• helping diversify the risks embedded in traditional fixed-income portfolios.

The fixed income strategies the fund employs are divided into three categories.

Market Strategies: Our focus is on harvesting the risk premia from traditional fixed income asset classes which we believe offer attractive long-term returns. We use no strategic benchmark.

Opportunistic Strategies: These strategies aim to profit from market mispricing that may exist due to market segmentation, central bank intervention or regulatory changes.

Risk Reducing Strategies: In times of market stress, these strategies can significantly add to the portfolio’s returns, while retaining a neutral to positive return in our central scenario over a 3-year horizon.

Where does the fund find its sources of return?

Whereas traditional fixed income funds tend to have two main sources of return: Duration and Spread, the AIMS Fixed Income Fund has six main sources of return: Duration; Spread; Currency; Curve; Volatility; and Inflation.

As with traditional long only fixed income funds, duration and spread are two potential sources of return for AIMS FI. AIMS FI can go either long or short these risk factors. In addition to the traditional sources of return, AIMS FI can profit from active FX strategies, the relative shape of interest rate curves, rising or falling volatility across fixed income and FX markets and rising or falling inflation.

"Given the challenges facing fixed income markets we feel that absolute return strategies have an important role to play in investors’ portfolios."

How do you decide what securities to invest in?

Each individual investment team at Aviva Investors, including the multi-asset and macro, credit, equity and real asset teams, are tasked with identifying investment opportunities for potential inclusion in the AIMS funds. They do this through their existing research process. There are key criteria that investment opportunities must meet to be considered for inclusion in the funds. These are as follows: the opportunity must be liquid, it must have an attractive return potential within the context of the House View, and it must be based on a three-year investment horizon. Any identified opportunity is written up in an “idea template”, which covers five key questions.

These ideas are broadly grouped into either: “market strategies”, “opportunistic strategies” or “risk-reducing strategies”. There are no fixed levels of exposure to the three categories of market, opportunistic and risk-reducing.

These proposed investment ideas are brought to the Strategic Investment Group (SIG) for evaluation. The SIG comprises a group of senior investment professionals across the organisation representing all our investment capabilities across all asset classes.

The SIG is an open forum, which means that investment professionals at all levels within the business can submit ideas. This encourages engagement from all our investment colleagues as this process allows greater visibility within the business.

Why is an absolute return approach important for fixed income investors?

Given the challenges facing fixed income markets we feel that absolute return strategies have an important role to play in investors’ portfolios.

By aiming to deliver positive investment outcomes in a variety of market environments, with low correlations to other categories of fixed income and a reduced risk of major drawdowns, absolute return strategies can provide a useful tool to help navigate this uncertainty. These strategies typically offer daily dealing terms because they allocate to the most liquid instruments available, adding to their appeal to investors.

The attractions of absolute return fixed income funds are even more enduring in the current environment where yields are no longer falling but starting to rise. Also, investors will continue to look for ways to diversify and create differentiated return streams.

"Portfolio construction ranks equal to the creation of investment ideas, ensuring that we maximise the benefit of delivering our creativity to our clients."

What advantages does Aviva Investors bring to the fixed income table?

Aviva Investors manages over £210bn of assets across a diverse range of fixed income strategies including: government bonds; investment grade credit; high yield; emerging market debt; liability-driven investing; buy and maintain; and multi-strategy. Our focus has always been on delivering sustainable long-term returns for our clients.

Our long heritage as a leading insurer means that we not only have an acute understanding of the nature of risk, but are also used to designing fixed income solutions that meet the varying needs of our clients.

Our fully integrated teams in Chicago, London, Paris, Singapore, Toronto and Warsaw combine to share, robustly challenge and collectively build upon knowledge and insights – across borders and asset class specialities. Our independent research team operates across the entire capital structure, sector-led, overlaid with thematic views.

Portfolio construction ranks equal to the creation of investment ideas, ensuring that we maximise the benefit of delivering our creativity to our clients. We take an innovative and adaptable approach, embedding risk awareness, consistency and rigor throughout the process.

Do you consider environmental, social and corporate governance considerations in your investment approach?

Environmental, social and governance (ESG) considerations are critical to the generation of attractive and sustainable long-term returns in fixed income and they are embedded into every stage of our investment process.

What excites you about managing fixed income?

The fact that everything going on in the world is relevant to your portfolio - from macroeconomics and geopolitics, to issues less commonly associated with fixed income such as climate change.

What is the next big thing in this market?

Technology is already having a significant impact on the world; however, advances in areas such as machine learning are likely to impact on the investment industry and will change the role of the investment analyst and fund manager.

What would you advise your 21-year-old self?

There is no magic formula to success. Hard work and a desire to keep learning are important in this industry.

View James McAlevey's profile Read more about the Aviva Investors Multi-Strategy (AIMS) Fixed Income Fund