Absolute TAA Fund

For investment professionals only. Not approved for use with customers.

In recent years, changes in the regulatory regime through UCITS III have opened up the world of hedge fund techniques to retail mutual fund managers. This regulatory evolution has coincided with a period of volatile equity and bond markets that has undermined investor confidence in traditional relative return investing. Combine this with a low interest rate environment that translates into little or no reward for sitting in cash and you have a growing number of investors seeking out alternative ways of generating positive returns.

Aviva Investors Absolute Tactical Asset Allocation fund (Absolute TAA) is a "Newcits" fund offering investors a transparent, daily-priced route into the Aviva Investors tactical asset allocation (TAA) capability. The fund was launched at the start of 2006 and is managed by Adrian Jarvis and Steve Cleal who have worked together for eleven years. In developing their investment ideas they draw on the skills of 18 investment specialists who are experts in their respective fields. Together, the team advises on TAA mandates worth £50 billion, and is directly involved in the management of a significant portion of that.

What does the fund offer investors?

The Aviva Investors Absolute TAA fund can improve the risk-return profile of a typical balanced portfolio due to the strategy's ability to deliver returns that have a low degree of correlation with conventional assets - partly due to the use of long/short investing which allows the strategy to aim to deliver positive returns in both rising and falling markets. TAA also taps into a wide opportunity set across asset classes and currencies and can almost be considered a distinct asset class in its own right.

The team's investment approach

Aviva Investors TAA team believe markets are inefficient for a variety of reasons including behavioural bias and the differing objectives of market participants. These inefficiencies provide a rich opportunity set, best captured through a distinctive investment process:

• Our financial analysis seeks to uncover the most likely economic scenario and considers possible alternatives, allocating probability scores to each of the scenarios.
• We then use quantitative tools to determine the risk and return characteristics for every asset class under each of the scenarios we have outlined.
• For each scenario we determine an optimal portfolio, designed to produce the highest potential return for a given level of risk.
• Our asset allocation committee brings the human element into the decision making process - its members rigorously scrutinise, refine and incorporate the output into one ‘optimum' portfolio. An independent risk management programme monitors exposures on a daily basis.
• The template portfolio is executed by our implementation team. Given the huge scale of trades that the team implements each year, it has access to timely market intelligence and the latest trading techniques, enabling us to execute derivatives trades cheaply and efficiently.

The strategy upon which the fund is based has been employed by Jarvis and Cleal to manage client money for more than a decade and the team has never had a calendar year of negative returns. The Aviva Investors Absolute TAA Fund itself has an impressive long-term track record - Jarvis and Cleal target positive 12-month returns but warn investors that there will be very short periods when drawdowns occur given the targeted level of risk in the portfolio. Since the fund's inception in January 2006, however, there have only been 7 monthly drawdowns, with 2 of those only marginally negative.

What is their current view of markets?

Adrian Jarvis, portfolio manager, explains: "Undoubtedly one of the key issues facing financial markets at the moment is sovereign debt and the knock-on impacts on the global economic outlook. The strains in the system are evident - most notably in Greece and Portugal - and our economists believe that there will still be some form of default or debt restructuring. It also raises important political considerations around the principles of monetary union and whether fiscal transfers from richer regions in Europe to poorer ones are sustainable. In a global economic context, the robust cyclical rebound we have been seeing also looks more fragile in the light of these mounting sovereign concerns. We are working closely with our economics team to understand the full extent of the potential impacts of the very high levels of sovereign indebtedness and how this filters through into our economic scenarios."

Jarvis continues: "Our process recognises the inherent uncertainty of market and economic conditions and we aim to build portfolios capable of adding value, or at least preserving capital, against a wide range of outcomes. This scenarios-based approach can be unappealing for investors who prefer confident predictions from their investment experts rather than portfolios with positions that hedge one another. But the performance of this style of investing is far more consistent and we feel more compelling as a result."

Important information

Unless stated otherwise data is at 10 June 2010 and any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature.
The value of fund and the income from it is not guaranteed and may fall as well as rise. Investors may get back less than originally invested.

CI061177 06/2010