Asset classes

Gilts

With respect to gilts, performance can be found in asset and market allocation, yield curve and duration. Our strong market position in the UK gilt market provides our fund managers an intimate knowledge of market positions and technical factors. They consequently take positions in arbitraging stock anomalies – positions which tend to be shorter-term and more tactical.

The gilts team utilises a range of criteria to assess investment opportunities. A structured scorecard approach is used to assimilate and weight a wide variety of relevant market information. Scorecards indicate asset allocation, currency and duration positions, and to some extent, positions along the yield curve. A pure ‘scorecard portfolio’ is maintained to monitor the effectiveness of this part of the process before additional views are overlaid.

Fund managers refine these positions and implement decisions across their portfolios. They also take independent tactical positions to add value over shorter time periods. The team employs a risk-budgeting approach in taking positions, based on analysis of the opportunity set and the relative success of differing historic positions.

Index-linked gilts

Unlike many of our competitors we believe that it is possible to add value through the active management of index-linked bonds.

Our basic investment process for index-linked bonds is similar to that used for gilts. We use a quantitative scorecard overlaid with fund managers’ judgement to identify opportunities we can exploit in terms of overall market level, the shape of the real yield curve, and anomalies between pairs of index-linked gilts.

We use Aviva Investors credit research resources when we invest in corporate index-linked bonds, and analyse “break-even inflation rates” to switch into fixed interest gilts when appropriate. We also use relative-value analysis in the timing of our switches into overseas index-linked bonds; and when we do so, we hedge out the associated currency risk. Finally, and where mandates allow, we look to exploit opportunities in off-benchmark positions.

Global bonds

Our global fixed income strategy is established through a cycle of meetings involving each of the specialist local teams: sovereign, credit, emerging markets and liquidity – the output of which forms our overall asset allocation strategy.

Sources of outperformance will depend on the specific client mandate, and particularly any constraints. In most cases, we expect the composition to be broadly as depicted in the pie chart below, although these are only indicative – and the emphasis will change over the course of an economic cycle as the opportunity set evolves and the value added from each source varies in terms of generating performance.

Credit

We have one of the largest and most experienced credit research teams in the UK, complemented by exchange of information with the credit analysts in the US and French offices. This forms the basis for a truly global credit capability in terms of knowledge and research that covers the full credit opportunity set and places us well to offer solutions oriented portfolio management for our clients.

As a significant market player, we are able to gain access to senior management and regularly have first call on new issues. In addition, our equity holdings provide additional leverage at senior corporate level.

Our process looks to benefit from the knowledge of our credit analysts. Supported by a quantitative framework, analysts take a number of individual strategies from a broad range and combine this with a portfolio construction and trade execution structure which aims to deliver reliable risk adjusted returns.

Integral to the process are live risk analysis and continuous performance attribution. This information is fed straight to the team through a partnership with UBS Delta, and means portfolio engineers can easily analyse the effect of existing and new positions. Rather than an afterthought, risk and attribution are part of idea generation in seeking alpha.

High yield

High yield expertise has been in existence at Aviva Investors since the early 1990s, and our global high yield strategy was launched in September 2008. This global high yield strategy is supported by 14 US credit analysts and 11 European credit analysts*. Credit analysts specialise by sector and industry, providing broad coverage of industries globally. Analysts work across the entire quality curve in order to provide comprehensive industry perspective.

Our process and philosophy relies on pure corporate credit expertise. We do not deviate from this pure approach. We conduct rigorous security selection and frequent monitoring, resulting in a successful track record and low defaults.

Emerging market bonds

Aviva Investors has strong emerging markets debt credentials. Our dedicated emerging market debt team is responsible for both hard currency and local currency emerging market debt investments. We have one of the longest track records in the industry managing local currency denominated bonds.

Jerry Brewin, head of emerging market debt, has experience of managing emerging market bonds since the first growth phase of the market and has successfully steered our funds through the Asian crisis, Russia’s default and Argentina’s default. Jerry joined Aviva Investors in 1999 and the hiring of Kieran Curtis in 2005 and Valentina Chen in 2007 has created a highly skilled team dedicated solely to managing portfolios in this asset class.

Asset backed securities

We manage exposure to mortgage-back securities through Aviva Investors US office. The three MBS portfolio managers have a total of over 25 years’ MBS experience**. Two securitised analysts and one quantitative analyst help generate alpha within the MBS portfolios. Aviva Investors actively manages various MBS securities and primarily invests in specified pools to ensure the most optimal loan characteristics are included in the portfolios. Aviva Investors believes that by performing in-depth analysis on the underlying loan characteristics, pricing inefficiencies can be exploited to generate positive returns.

Mixed portfolios

Diversified fixed income mandates with composite benchmarks form an important strand of our fixed income capability and we have a successful track record of managing these. We have developed capabilities in high performance target approaches in both credit and sovereign, and have extensive experience in adding value from asset allocation decisions, including non-benchmark assets.

*Data as at 31 March 2010.
**Data as at 31 December 2009.