Citywire march 2011 aegon


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  • As manager of an Absolute Return fund in what has traditionally been regarded as a long-only house the question I am most commonly asked is, how have I found the transition to short-selling? Short-selling is a different discipline from long-only, it entails different and possibly greater risks. For one thing, if a position moves against you as a long-only manager, it gets smaller as a part of the portfolio. If you’re short and the position moves against you, it gets bigger. Your downside from a position is theoretically unlimited. Another difference that the stock you are selling short is borrowed stock, which you have to pay to borrow and which may be recalled over time. In short selling, you have to be more alive to risk. Particularly when liquidity conditions are easy. Selling something you don’t own. Crashing a car you have agreed to sell – it’s awkward and expensive. To do it successfully you need a lot of mathematics and a lot of common sense. But there is nothing magical about short-selling. In fact the biggest impediment to long-only managers moving to selling short is the very same weakness which many long-only managers fail to properly address in their long-only portfolios – sell discipline. The first question we asked ourselves when we began to think about Absolute Return over three years ago was: are we any good at short selling? We commissioned a third party company called Inalytics to analyse whether our sell decisions added value. They presented to us the chart you see here. It shows that the stocks we sell from AEGON’s long-only portfolios go on to significantly underperform after they have been sold. This gave us confidence that we can sell stocks well. We then took two and a half years proving to ourselves, through an audited paper portfolio, that we could successfully sell short. The results gave us confidence to launch the AEGON UK Equity Absolute Fund with seed capital a little over six months ago. STRONG UK TEAM. STOCK EXAMPLES. From an investor’s perspective, the first question I would ask of any long-only manager wanting to move short is, do you have a proven and successful sell-discipline in your long-only funds?
  • Pictures of PIGS, DEFLATION/INFLATION, N africa, Chinese growth? Plenty to contend with, all in a days work or unintended consequences of QE. Did feel like we were giving the fund a baptism of fire. What are the two things that I remember most from the first year?
  • Chart of rising correlations through 2010.
  • Oil price chart surrounded by pictures of Egypt/Tunisia/Oil refinery/Aircraft
  • Just as we would encourage investors to have a diversified portfolio, so do we have a diversified approach. Cash + Long + Short = The fund performance is the difference between the long and the short portfolio, so the asset class risk is eliminated.
  • Citywire march 2011 aegon

    1. 1. AEGON Asset Management Beating the Beta March 2011 David Pringle Investment Manager AEGON UK Equity Absolute Return Fund
    2. 2. Investing in AEGON UK Equity Absolute Return <ul><li>Aims to deliver a return significantly above Bank of England base rate with similar volatility to government bonds </li></ul><ul><li>A disciplined, repeatable process </li></ul><ul><ul><li>Delivers on buy and sell decisions </li></ul></ul><ul><ul><li>Generates returns from a multi-cap approach </li></ul></ul><ul><ul><li>Volatility of less than 8% annualised </li></ul></ul><ul><ul><li>Uncorrelated returns </li></ul></ul>Delivering strong risk adjusted returns
    3. 3. Capturing alpha from sell ideas <ul><li>Third party verification of our sell decision expertise </li></ul><ul><li>Sell decisions on average underperform the market </li></ul><ul><li>Long only funds cannot fully harvest this skill </li></ul><ul><li>Extensive test period to prove capability </li></ul>Source: Inalytics. Fund: AEGON UK Equity OEIC from April 2004 to December 2010 Adding alpha from sell decisions SELL
    4. 4. Volatile markets… … becoming the norm? Low correlation in uncertain times
    5. 5. Q. In a model portfolio, how much would you allocate to Absolute Returns? <ul><li>0% - unconvinced </li></ul><ul><li>< 15% </li></ul><ul><li>> 15% </li></ul>
    6. 6. The alpha squeeze Source: Bloomberg CBOE Implied Correlation Index Collapse of Lehman Brothers Uncovering alpha
    7. 7. The case of the disappearing hedge Source: Bloomberg Fund manager = Risk manager Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 65 70 75 80 85 90 95 100 105 WTI Crude Oil (ICE $/bbl
    8. 8. Fund structure Themes Pair trades Best ideas <ul><li>Several names to diversify individual stock risk </li></ul><ul><li>Long, short and long-short </li></ul><ul><li>Bottom-up uncorrelated stock ideas </li></ul><ul><li>Long and short </li></ul><ul><li>Gradual outperformers </li></ul><ul><li>Catalyst-driven </li></ul>Diversification at various levels
    9. 9. Risk management <ul><li>Batting for singles </li></ul><ul><ul><li>Correlation = 6.5% </li></ul></ul><ul><ul><li>Realised volatility = 2.1% </li></ul></ul><ul><ul><li>Information Ratio = 1.2 </li></ul></ul><ul><ul><li>Sortino Ratio = 2.1 </li></ul></ul><ul><ul><li>Average VaR = -2% </li></ul></ul>Delivering uncorrelated returns Source: AEGON Asset Management as at 21 March 2011
    10. 10. Q. What do you think is an appropriate benchmark for an Absolute Return fund? <ul><li>LIBOR </li></ul><ul><li>Peer group </li></ul><ul><li>Specific target </li></ul>
    11. 11. Fund outlook – still favouring emerging markets Source: Longview Economics East over west US & West – Deleveraging Emerging Markets – Leveraging US Deleveraging e.g. Consumer Credit outstanding US$trn India, China & Brazil Loans Outstanding
    12. 12. Fund outlook – preference for corporate spend <ul><li>The investment share of GDP in major economies is close to an all-time low </li></ul><ul><li>Whilst non-financial corporates free cash flow is close to a record high share of GDP </li></ul><ul><li>With balance sheets and profitability now in good shape, corporates are looking to the drive further growth through investment </li></ul>Source: Thomson Reuters, Credit Suisse Research UK CBI investment intentions are at their highest since 1997 Corporates to lead the recovery
    13. 13. Fund outlook – and what we don’t like <ul><li>The domestic outlook remains in doubt </li></ul>Source: FactSet Generating short ideas <ul><li>Margins being squeezed by input costs </li></ul>'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 0 100 150 200 250 300 350 400 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 S&P GSCI Sugar - Commodity Index (Left) Tallow ($ per lb.) (Right) 50 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 -6 -4 -2 0 2 4 6 8 10 -30 -20 -10 0 10 20 30 40 (% 1YR) Index Of House Price (1983) (Right) (% 1YR) Real Household Final Consumption Expenditure (Left)
    14. 14. Investing in AEGON UK Equity Absolute Return <ul><li>Delivering excess returns over base rate with low volatility </li></ul><ul><li>Returns are generated from the proven UK equity process </li></ul><ul><ul><li>Capitalising on our sell ideas </li></ul></ul><ul><ul><li>Uncorrelated returns </li></ul></ul><ul><ul><li>Lipper Awards 2011, Best UK Equity Group (Small) </li></ul></ul><ul><ul><li>Four funds rated by OBSR </li></ul></ul>Delivering strong returns at low risk
    15. 15. Important information <ul><li>This document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, or relied upon by, private investors. </li></ul><ul><li>The information in this presentation is based on our understanding of the current and historical position of the markets. The views expressed should not be interpreted as a recommendation or advice. Past performance is not a guide to future performance. The value of investments and the income from them may fall as well as rise and is not guaranteed. </li></ul><ul><li>The value of the fund may also be impacted by a decline in an entire market or a specific asset class. Regardless of market conditions, the fund aims to deliver a positive absolute return for clients, rather than tracking or seeking to outperform a benchmark or index. This fund is a medium to long-term investment. Fluctuations in exchange rates may affect the capital value of the fund. </li></ul><ul><li>The AEGON UK Equity Absolute Return Fund is a sub-fund of AEGON ICVC, an Open Ended Investment company. AEGON Asset Management UK plc is the Authorised Corporate Director of the Company. </li></ul><ul><li>AEGON Asset Management includes AEGON Asset Management UK plc (no: 113505) and AEGON Investment Management UK ltd (no: 212159). Both are registered in Scotland and have their registered office at AEGON House, 3 Lochside Avenue, Edinburgh Park, Edinburgh, EH12 9SA. </li></ul><ul><li>AEGON Asset Management UK plc provides segregated and retail funds and is the Authorised Corporate Director of AEGON ICVC, an Open Ended Investment Company. AEGON Asset Management UK plc is authorised and regulated by the Financial Services Authority, (FSA reference no: 144267). </li></ul><ul><li>AEGON Investment Management UK ltd provides investment management services to AEGON, which provides pooled funds life and pension contracts. AEGON Investment Management UK ltd is an appointed representative of Scottish Equitable plc, an AEGON company, whose registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (FSA reference no: 165548). </li></ul>FP ID No: 2011/11599