Despite massive outflows from absolute return strategies in recent years, there will continue to be a market for such funds in the future, Aviva Investors’ Euan Munro tells Mark Latham.
When UK-listed insurance giant Aviva poached Euan Munro to run its asset management arm in 2014, many assumed that his first task would be to reproduce a version of the highly successful Gars multi-asset strategy that he had created for his previous employer, Standard Life Investments (SLI).
In the years following the financial crisis, SLI’s Gars (the Global Absolute Return Strategy) became Europe’s largest fund on the back of a promise of assured returns even when markets were volatile.
And the growth happened under Munro’s watch as SLI’s global head of multi-asset investing and fixed income.
Speculation that Aviva Investors – a firm with assets under management of £338 billion (€392 billion) – would emulate SLI’s absolute return products following Munro’s appointment as chief executive turned out to be correct. Launched in July 2014, Aviva Investors Multi Strategy (Aims) fund range grew to a peak of £12.6 billion by 2017 – indeed, its success contributed to Aviva Investors’ reversal of fortunes, from a £26 million operating loss in 2013 to a profit of £150 million in 2018.
Five years on, however, and the 49-year-old Scotsman – who was Funds Europe’s Personality of the Year in 2016 – concedes that Aims is only going to be part of Aviva’s story going forward.
While assets in Aims dipped back to £10 billion by March this year, the outflows are small compared with the decline of SLI’s Gars, whose assets halved from a $57 billion high at the end of 2015 to $27 billion by the end of the third quarter of 2018 (and whose losses of 3.1% in 2016 rose to 6.5% in 2018).
“My own experience of running Gars was that it was the financial crisis that really created the realisation that having an appropriate approach to risk management, having somebody concerned with downside risk, makes sense,” the father-of-three says.
Asked whether absolute return products like Gars and Aims have had their day, he embarks on a lengthy reply, adding that one of his main objectives in coming years will be to diversify the business.
Because of the steady bull market since March 2009, markets have “not really had a lot of stress”, he says. “There have been short periods that were quickly rectified by central bank action and so we have not really been through a period where downside protection has been highly valued. I think we are now likely to be entering an era where it will be.
“Aims remains a very successful investment, and I think it will continue to grow over the next two or three years, but it was more popular 12 months ago than it is right now.”
Taking off in the States
The company’s growth in the coming years is as likely to come from the US (where Aviva Investors’ credit business has “really taken off”), Canada and Italy – although “making up ground in our home market of the UK” will continue to be a focus.
“We have a great pipeline of business at the moment and I am very bullish looking forward. Aims is still a small part of our pipeline but the vast majority is other things.”
Munro adds that, while he is “still excited about markets and investment opportunities”, he sees his primary responsibility as chief executive as “making sure I have got the right players on the field and that they can perform to the best of their ability”.
While Aviva Investors has a small number of passive funds, the company remains committed to the active fund management approach, he says. “It is not that passive investing is not an appropriate part of people’s portfolio, but by the time I came in as chief executive in 2014, the passive boat had sailed,” he adds.
“With passive, you need scale and the price pressure is more intense in that part of the market because it does not require any skill or judgement: it is just replication.”
Market conditions over the past two years have been “absolutely perfect” for passive investment, where “simply owning assets, owning the market and not paying anyone fees” has led to the inexorable growth of the mega passive fund houses.
But, Munro warns, “while passive has had a great run, the next recession is going to be a problem and I don’t think that just owning things is necessarily going to be the winning strategy in the future”.
Our conversation about the pros and cons of passive and active investment strategies leads onto a discussion of environmental, social and governance (ESG) investment. Munro believes that when it comes to engagement with companies, the active investment approach has more leverage.
“If the management of a firm is talking to an investment team [from a passive fund house] that they know will not sell, there is very little incentive for them to do anything in response,” he says.
“If they are talking to investors who are absolutely prepared to pull the trigger and create the ultimate sanction of divestment, that adds more spice to that conversation. I am not convinced that there is effective engagement with a company unless there is that threat of sanction.”
In March, Munro hit out at FTSE 100 firms when he called for a “fundamental rethink” of executive pay as concerns over inequality rise. In a letter to chief executives written in the run-up to this year’s annual general meeting season, he said that the remuneration committees of the UK’s largest firms should explore “alternative options for rebasing pay”.
He is proud of Aviva’s track record on socially responsible investment, pointing out that the firm was one of the founding signatories to the UN’s principles of responsible investment. “We have been very strong on governance, which we also think is the route to the ‘E’ and the ‘S’ [in ESG],” he says.
“We feel we have got a moral responsibility as custodians of capital to make sure we are leaving a better world behind us, but it is just good risk management to be concerned about these things because if companies are responsible for an environmental disaster, it can cause the share price to implode.”
He is not, though, a fan of investment firms simply drawing up exclusion lists of companies they will not invest in. “If we just exclude a company with a dreadful carbon footprint from our portfolio, it could potentially fall into the hands of shareholders that don’t care at all about improving the environment,” he says.
Looking at the view from his seventh-floor offices in the City of London – which commands spectacular views of the neighbouring Cheesegrater skyscraper, the Scalpel, the Gherkin and two more towers under construction in Bishopsgate – one could be forgiven for feeling upbeat about the future of the UK’s financial services sector, notwithstanding the £1 trillion of asset transfers from the country since the Brexit referendum.
Asked about leaving the EU, Munro says that his firm is well prepared for any eventuality, from a hard to a soft Brexit. “There never was a single market in fund management services,” he says. “Europeans have typically bought Sicav funds whereas in the UK, people bought Oeic funds.”
The fact that Aviva has offices in Luxembourg (where the firm’s Sicav fund range is domiciled) and Paris means that the firm has, to use the regulatory jargon, “sufficient substance” in the EU to continue operations unhindered.
At most, he believes, distribution agents currently employed on UK contracts might have to be re-employed through legal entities based in the EU27.
The potential loss of EU-wide passporting rights was briefly a worry, but a recent memorandum of understanding between the FCA and the pan-European financial regulator Esma means that “that risk seems to have been taken off the table, even in a hard Brexit situation”.
However, while Aviva Investors itself is unlikely to be significantly impacted by Brexit, Munro fears that firms involved in cross-border banking or insurance could be. “There are risks and I very much hope that politicians don’t underestimate the importance of the financial sector to the UK economy and make sure that activity carries on as uninterrupted as possible.
“Regardless of why it occurred, we had a referendum on Brexit and that showed we are a very divided nation on this, but there was a public vote and I think politicians have got to interpret and act on the vote.
“If you had asked me about a Brexit agreement 12 months ago, I would have thought we would have managed to have achieved that by now. We are now seeing the effect of the uncertainty on investment in the economy.”
Without an agreement to remain in a customs union with the EU, Munro says he does not see any resolution to the Northern Ireland problem. “Any infrastructure on that border risks unrest and so long as we have a shared border with the eurozone, I can’t see any way around that, personally.”
As the interview draws to a close, Munro dismisses speculation that the Aviva Group might be broken up by, as some have suggested, selling off its international business to focus on the UK.
He also dismisses calls from some private shareholders, such as Philip Meadowcroft, that the group should offload its asset management division on the grounds that profit levels at Aviva Investors are not high enough.
Munro says that such calls do not represent the view of the group’s largest shareholders. Profits at Aviva Investors have more than doubled since he took over, he says, and now account for 5% of group profits, up from 2% in 2013. Much of the criticism being made of the firm five years ago has since been substantially addressed, he adds.
In post-interview small talk, he lets slip that at golf, he has an impressive handicap of 18. “I have played a number of the nice courses up in Scotland, but I am not a member of any of the clubs you would have heard of, I am afraid,” he adds modestly.
After a week spent in London or travelling on business, he looks forward to spending most weekends at his family home in rural Perthshire. “Outside work, I tend to have a fairly low-key existence. I work very hard during the week and at the weekend enjoy spending time with the family.
“As an asset manager, I am privileged to work in some of the great cities of the world. I love the buzz of London, New York, Chicago and Tokyo, but I also like retreating to the Scottish countryside as I like the contrast.”
©2019 funds europe