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It's the outcome that matters
EUAN Munro, chief executive of Aviva Investors, was bemused when he learned earlier this year that he was in the running for an award as one of the most innovative fund managers of the past 20 years.
As it turns out, Mr Munro clinched the award by the UK's Financial News in May - partly for his cracking track record at his previous company, Standard Life Investments, and partly for his brainchild - a multi-asset multi-strategy approach to funds that has attracted billions of dollars in assets.
As the name implies, multi-asset funds invest in a range of assets, including derivatives. Multi-strategy adds a layer of complexity, employing strategies across and within asset classes, going long or short as the manager sees fit without being tied to a benchmark.
The funds aim for level of income, return or risk. In industry-speak, the funds also aim for an absolute return at a controlled level of risk - a persuasive pitch by any measure.
Says Mr Munro: "It doesn't seem to me to be enormously innovative to say - let's explore what the client really wants and try to build on that. Sadly the industry hasn't got a great history of doing that. It has done what has been convenient for it, which is to try and beat an index."
He started working on the multi-strategy concept in 2002 when he was managing balanced funds for Standard Life Investments. It was an uphill climb, he recalls. Markets had tanked following the technology bust and clients were fretful.
"The trigger for me was the bear market of 2002 or 2003. I was going to see clients to explain that I was beating their benchmark, but the fund was down 10 to 15 per cent and clients weren't happy - for good reason. But to some extent I was doing exactly what they asked me. They had specified the benchmark, perhaps 60 per cent in equities, and I was doing the asset allocation against that.
"But that really taught me that whatever the client specified, what they really wanted was different. That really focused me on building outcome-oriented funds. It met with a lot of scepticism in the first few years, but in 2008 when the financial markets melted down, the concept was proven."
Since then the term "outcome-oriented" has become part of fund management jargon, and any firm intent on success in the wealth management space will have a multi-asset offering.
Aviva's hiring of Mr Munro in 2014 is seen as a coup, thanks to his sterling 18-year record at Standard Life Investments. At the Edinburgh-headquartered asset manager, he established the Global Absolute Return Strategy (Gars), which raked in some £26 billion (S$51.2 billion) under management over a decade, with another £20 billion in related multi-asset strategies.
A similarly gratifying playbook seems to be unfolding at Aviva Investors. The Aviva Investors Multi-Asset & Multi-Strategy (Aims) platform, set up in 2014 shortly after he joined, now has assets of US$110 billion, roughly a quarter of the group's total assets under management of US$438 billion. Aims has launched Target Income and Target Return funds.
The multi-strategy style of investment has its roots in macro hedge funds, says Mr Munro. Macro hedge funds have the flexibility to take long or short positions in a range of assets such as forex, interest rates and equities, taking the cue from the manager's macroeconomic view of the world. "I can't lay claim to designing the macro hedge fund. It hadn't been put into a mutual fund format. I would also argue that macro hedge funds were mainly built for their principals. You get other people's money, and got their agreement to speculate. If it worked, you got 20 per cent of the upside, and you charged them 2 per cent a year. It seemed like a very skewed arrangement.
"Effectively whatever risk allowance you are given, you used to the max and shot for as high a return you possibly could get given the level of risk. What we're doing at Aviva Investors, and at my firm previously, is to focus on the outcome that's important to the client and try to do the job with as little risk as possible.
"Clients have two conflicting objectives. They want great returns but they want to preserve their capital. You can't guarantee to do either, but you can try to deliver an acceptable return with as little risk as possible. That's the proposition we have in the mutual fund space."
Ironically he responds with caution to the oft-made criticism that investment management has been generally bereft of innovation in recent years. "My thoughts are that you need to be a bit frightened when you see innovation. I can remember when there was a lot of innovation in credit markets. People were slicing and dicing credits into different tranches of CDOs (collateralised debt obligations). It wasn't good. Value had evaporated from credit and the only way to make a decent return was to leverage up to ridiculous levels.
"Fundamentally the skill of the asset manager is not to try to be fabulously creative and innovative, but to invest in innovative companies that drive the real economy. At Aviva Investors, hopefully, we're at the more innovative end of fund management. Our job is to spot the innovators in the real economy."
Mr Munro grew up in an environment far from the world of finance, in a mining community in Scotland. His mother was a nurse and his father a school teacher. He studied physics and electronics at the University of Edinburgh and toyed with the prospect of becoming an engineer. "Mines were closing and the community wasn't especially affluent. There were quite a number of Asian companies setting up fabrication plants in Scotland," he recalls. In his student days, he served a job placement with NCR which made cash machines.
But with the foresight that may be unusual in one relatively young, he thought that the career path of engineers was stymied by a glass ceiling. "They were very important technically but never seemed to run the firm. There was quite a bit of frustration. People with qualifications in sales and marketing ended up running the business."
He won a scholarship to study medical physics one summer but found a similar conundrum. "I was working on machines that smashed kidney stones. I actually got my name on a paper in urology. What I found was that medical physicists were, for whatever reason, treated as second class citizens by medical doctors. I was with a fabulously skilled physicist with a Phd, but he didn't have much status in the hierarchy.
"I could have been a doctor but maybe there was too much pride in me. I wanted to see a route to the top. I wanted an environment where if I did well, I could go to the top."
He found this potential in actuarial science, and he obtained a diploma in actuarial maths. "Certainly at that time, a lot of insurance companies were run by actuaries. So here is a technical role where I could take all my math ability to."
His first placement was as an actuarial trainee in the investment division of Scottish Provident where he eventually became a fund manager. He hasn't looked back since. "All of a sudden, I was exposed to this amazing world of markets which I enjoyed. I was top quartile fund manager when I moved to Standard Life. I concentrated on building a track record and I guess I did distinguish myself. I was put in charge of a big endowment fund in Standard Life in early 2000. I was given responsibility early which I appreciated."
He rose to board level at Standard Life Investments, and was responsible for managing nearly US$200 billion of client funds.
Now at Aviva Investors, he strives for a culture that eschews the individual star manager in favour of a team approach. "If everything is built on the individual, then you really haven't built a business that's sustainable. You have built up someone's ego and when he walks out the door, you lose your business.
"While I have always wanted to see that route to the top and to operate at the highest level of the industry that I chose, I always worked for and had respect for teams."
At one point early in his career, he was the sole manager of an inflation-linked bond fund. "It was great fun, I had the highest level of autonomy, and was able to run a decent sized portfolio. But it was never going to be a colossal-sized portfolio. A sensible consultant would say - well, it's all down to him and what happens if he goes. Should you not have more of a team?
"We're such a big business already. Unless you build something that's tens of billions of dollars in size, it's not going to move the needle. If you're to have that level of success, it has to be a team approach."
Particularly for a multi-strategy approach, the key is to elicit the best and most creative ideas from the firm's team of investment professionals - Aviva has a total of 405 globally and 11 in Asia. "We try to get people to give a 360-degree perspective of an idea. Tell us the economic circumstances when it will do well, and do poorly. If someone recommended to buy five-year Japanese debt, it may work spectacularly well. But we'd demand some honesty. At the point they put forward the idea, what was the maximum upside? That allows you to be quite disciplined so that when an idea works far better than you expected, you know it's time to take profit, and that it's not skill but luck.
"What we're hard on is when people put forward an idea and say it will work, for instance, if commodities go up, and it doesn't. That's a disappointment because it shows they haven't understood the drivers of the idea."
Meanwhile, Mr Munro believes central banks have reached the limits of interest rate policy. "We're at an inflection point because there is a limit on how negative you can make rates. Otherwise people will buy safes and store money outside the banking system."
Fund managers will have to distinguish among the policy options facing the world's central banks. "As an asset allocator, one of the things it has been possible to do for a while was to anticipate central bank policy without necessarily having to take a firm view on whether it will work or not.
"Generally assets, whether equities, bonds or credits, have all done better over the past few years than they would have because of declining short and long term rates. But rates can't come down any further. As asset managers, we're going to have to make some choices as to which parts of the world are going to generate some self-sustaining growth. We have been able to duck that issue to some extent."
Clarification note: Aviva Investors has clarified that the Aviva Multi-Strategy platform, previously mentioned in the story, should be known as the Aviva Multi-Asset & Multi-Strategy platform instead. The story has been revised to reflect that.
Chief executive officer
1987-1991: Bachelor of Engineering, Physics & Electronics, University of Edinburgh
1991-1992: Postgraduate diploma, Acturial Maths, Heriot-Watt University
1992-1995: acturial trainee, then fund manager, Scottish Provident
1995-2013: executive director, head of fixed income & multi-asset investing, Standard Life Investments
2014: Joined Aviva Investors