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I’m Darius McDermott from FundCalibre. Today I’m joined by Nick Edwardson, senior product specialist for multi-asset at Aegon, to talk about the Aegon Diversified Monthly Income fund. Nick, good morning.
Darius, good morning. Nice to see you.
So, Nick, this is the first time we’ve spent any time discussing the fund. So, maybe if you’d tell us a little bit about the fund; the aim, and how you go about finding opportunities, and what type of investor you think this product might be suitable for.
[00:29] Yes, certainly, thank you, Darius. It’s an unconstrained multi-asset income solution, in effect. When I say unconstrained, you know, we don’t have a benchmark or a fixed strategic allocation that we work towards. We are looking for the best opportunities, and that evolves clearly as the macro picture changes, to deliver on our three objectives, which are a 5% yield, some capital growth over the medium term, and a risk profile [that is] lower risk than equities; actually, we think that the benefits of diversification will give us a risk profile that’s between half and two thirds of global equity markets.
How do we do that? Well, the multi-asset team is 14 strong, and their primary role in this, is the asset allocation decisions. How much do we want in bonds, how much in equities? But it’s very <inaudible> for us to leverage the asset class specialists across the much broader Aegon asset management group, so our fixed income team, our equity team, our real assets, as well as the RI [Responsible Investment team] – mustn’t forget them as well on the ESG perspective – all help with a very collaborative approach to bringing together security selection, which populates the portfolio.
Because this is a bespoke portfolio, it’s not a fund of funds, it’s derivative light, it is broadly long only and it … who’s it appropriate for? Frankly, anyone these days who’s looking for either an income for income’s sake, or as part of a total returns solution. You know, income has its own merits, and I think particularly so in the current climate.
So, you talked about one of the objectives then being that yield above 5%, and I see the yield is actually sort of above 6[%], which is very attractive. Is that sustainable or is that just a function of the income that you can get from equity and bonds today?
[02:30] It is attractive, first off, absolutely agree with you wholeheartedly. It’s a function of a couple of things. Firstly, the growth that we have managed in the actual income that we’ve distributed per unit over the course of the last 18 months – that’s been strong. I think that growth will probably taper a little bit, but we’ll look to continue to deliver the same level of income.
And the second element is clearly the decline in the NAV over the course of the year to date. Everyone’s familiar with markets and how they’ve moved in the last nine months. So, the capital value decline affects that yield calculation. I think the yield figure will probably come back from six [%] as that capital value rises, and I think it will recover. Markets will recover from the current level. That’s why the yield will fall, not because we’re not delivering the income that we’re currently delivering.
So, that takes me nicely into one of your major asset classes, which is bonds. [It’s] been a very tough year for bonds, particularly in the rising [interest] rate environment, which we’ve seen in 2022. What are your thoughts on the asset class today, and how much more attractive are the income opportunities from bonds today than maybe they were a year or so ago?
[03:59] A key point, frankly. At the moment, you know, the return, the total return on sterling corporate bonds year-to-date, has been worse than that of the FTSE All Share [index]. But, as yields have risen, as the risk-free rate has risen, and the spreads on corporate credit have widened, we get to the point where some of the stuff actually looks really quite attractive.
And so, one of the biggest shifts in our portfolio year-to-date, has been an increase in the bond component from about 32-33% [at the] end of January, to 45-46% today. And a chunk of that has been in sovereigns in our US Treasury allocation, which is up to about 9% and a bit more. [We’ve] very much kept duration low, and I think that’s clearly been the right course. But that picture has perhaps [been] changing a little bit too.
So, amongst the corporate credit allocation, maybe the bigger shift has been in the investment grade element in recent months. But I think when you can get 7,8,9% and more on high yield, and when you can get 5, 6, 7 [%] on IG, it looks pretty attractive. And therefore the mix of our portfolio has evolved.
So, you mentioned high yield. I see that you have a triple C-rated bond, which would be at the higher risk end of high yield. Are you in any way worried about default as we head into, maybe, a sort of a slowing economic cycle? And I don’t know if you want to actually touch on that bond itself, as to why that is attractive for that extra risk?
[05:44] Well, we’ve got more than one <laugh>. Now, I’m not going to major on that too much because it’s still only a little bit more than 2% of the overall portfolio. So, in that sense, it’s only a very small contribution to overall portfolio risk. But it is clearly at the riskier end of the credit spectrum.
Now, nothing that we own in that space is on a negative credit watch. And in fact, most of them are on a positive credit watch. So, there’s an expectation perhaps that you can get an upgrade. And that would be positive, I think, in helping to drive the total return of some of those bonds.
But we look at every credit allocation that we make, whether it is in the investment grade or high yield and where it is in each of those classes, as well as the equity and the alternative components that we have. And we think about how their risk contribution relates to the broader portfolio, and we’re trying to deliver that overall balance. And from time to time, triple Cs [are] going to have a role in that.
Clearly, I think the risk is that default rates are likely to rise from here because we’re all broadly expecting a recession of… how deep and how protracted, that’s a matter for debate. And so, we do look at the individual issues, and that comes back to the point I made earlier. The input of our asset class specialists is vital in helping us understand the individual securities which we own.
So, look, maybe just then finally, we have rightly focused on bonds of fixed income. It’s been the story of the quarter. This is an income product, the income opportunities from fixed income have improved dramatically. But let’s just finish off by talking a little bit about your alternative assets. And we see
that you have some things likeplane leasing, wind farms, data centre, wastewater to name but a few, would you highlight one or two of those areas and describe the attractiveness of them, apart from just the yield?
[07:57] Yep. The fund’s been running now for more than eight years, and for almost all of that period, the alternative allocations have been a meaningful part of what we’ve done, because we’ve been in … we were in a bond bull market, and you were getting less and less income from bonds. And we liked the contractual cash flows in this alternative space, whether that be real estate, infrastructure, renewable energy assets, or the aircraft leasing, which you mentioned.
Now, we’ve been out of aircraft leasing for quite a long period of time now; we moved on from that, and we were right to do so pre-covid. We still retain quite a bit of infrastructure, but the overall allocation has shrunk quite dramatically through the course of this year. As we’ve increased the bonds, we have reduced the bond proxies, so infrastructure and renewable energy [are] down from a little bit over 20% at the start of the year to about 13 [%] now, and the real estate proportion of the fund [is] down from approximately 9 [%] to under 5 [%].
And that feels the right way; as bonds are more attractive, then the bond proxies lose some of their attraction. And for real estate, that’s partly because the rising cost of debt makes the funding of these businesses increasingly difficult.
Where we are in that space is really in the more defensive areas, such as logistics and data centres, which have clearly done well out of the changing environment we all live in – and residential. But it’s less than 5% of the portfolio.
Renewable energy [is] clearly benefiting from the higher power prices that we see at the moment. And that’s going to be a large part, a growing part of the mix, frankly, for energy generation, globally in any case. And then in the infrastructure space, some of that is the sort of regulated utilities that benefits from that shift to greener energy. So, names like Endesa in Spain, Enel [S.p.A.] in Italy, SSE in UK; companies which are driving that transition to cleaner energy.
Nick, thank you very much for taking us through the Elite Rated Aegon Diversified Monthly Income fund. And if you would like information on the Aegon Diversified Monthly Income fund, please do visit FundCalibre.com