Many asset managers are owned by insurance companies, since insurance companies tend to have a lot of assets to manage. For some years before the financial crisis, these managers were often seen as stick-in-the-muds, propped up only by having a large and captive client in their parent companies.
“We’d been berated for being an insurance-owned manager, or categorised with the bank-owned asset managers,” says Niall Paul, deputy chief executive of Aviva Investors London. During the credit crunch, however, “the power of Aviva was incredible”. Being able to call on the insurer’s expertise and connections in order to understand and manage the asset manager’s exposure to the Lehman Brothers’ default last year was valuable, he says.
Having weathered the storm, Mr Paul, who is head of equities as well as deputy chief executive, is now at leisure to return to the task he has been working on for the past three years: trying to remould Aviva’s active equity fund management business.
Aviva Investors is the company launched a year ago incorporating all of Aviva’s investment companies, most notably Morley Fund Management. It now has two internal divisions: Global Investor Solutions and Aviva Investors London.
“It felt as though the market was bifurcating, between those who wanted market exposure or beta and those who wanted a highly active fund manager,” says Mr Paul. His side of the business wants to be the latter, but has had to move a long way from its roots. “Our starting point was the balanced fund, basically index plus a bit. Most of our managers were very cautiously active.
“Our fund management position was investing not to lose rather than investing to win.”
While this may seem entirely reasonable for an insurance company, it did not play well in a performance-oriented fund market. Three years ago, just 7 per cent of Morley’s funds outperformed their benchmarks.
Since then “a mixture of changing people and changing approach” has pushed relative performance to the point where nearly three-quarters of funds outperform, and in some of the rockiest markets in living memory.
The insurance company parentage was particularly helpful in navigating last year’s stormy markets, says Mr Paul, because “working for an insurance company, people think a lot about risk”.
The mixture of recruitment and “changing approach” is not easily divisible, according to Mr Paul. “One of the ways we’ve encouraged excellent people to join us is by removing a lot of the restrictions fund managers used to work under and allowing them to use a lot more instruments.”
Aviva Investors London has launched both offshore hedge funds and onshore funds under the Ucits III directive, the European regulatory framework that allows retail funds to use techniques such as short-selling using derivatives.
It has also been subject to a process of cultural change, as Mr Paul called on his emerging markets experience to inform the kind of active fund management he demanded of his equities team.
This is built on three core principles, he says, namely high conviction investing, always looking for a contrarian approach, with a concentrated portfolio. This is a long way from the “investing not to lose” one might expect of an insurance-owned asset manager.
Having the asset management company integrated with its global siblings in the middle of this process sounds disruptive, but Mr Paul puts a brave face on it. “The transition started before Aviva Investors began, but what that did was allow the business to articulate the change to clients.”
The changes are partly in order to attract new third party assets – of the assets currently managed by Aviva Investors London, around half are internaland another quarter are retail funds distributed through Aviva’s UK life company.
In 2008, it seemed like an advantage to have substantial internal funds under management, as they were less likely to be withdrawn by unhappy investors, but nevertheless, the fund manager is ambitious to expand its institutional base.
“For Aviva, it’s a great endorsement if we win external mandates,” says Mr Paul, who says he has never seen such support for the asset manager from its parent company. “They realise we are a massively under-utilised part of the business,” he says, pointing out that asset managers have traditionally commanded higher prices on the stock market, measured by earnings per share, than life assurance companies. This means if Aviva Investors can make its mark on Aviva’s bottom line, the share price might rise to reflect that.
In order to do this, he says, the fund manager will have to rebuild its relationship with the consultants who rule the UK institutional market. “Their views on our investment capabilities have improved across the board.”
The UK is not the only target for Aviva Investors, however.
“We’ve got ambitions to grow globally,” says Mr Paul, “though we’re stronger in Europe.” The US, a notoriously difficult market for foreign fund managers to get a foothold in, “is slow to develop”, but the Asian markets are looking a little more welcoming as “there’s a slow build-out through partnerships”.