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A decade of evolution – what’s changed since 2014

A decade of evolution – what’s changed since 2014
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ARTICLE TYPE
Market Updates
TOPIC
Multi-Asset
PUBLISHED
March 07,2024
READ TIME
5 mins
AUTHOR
Vincent McEntegart
SHARE
Back
ARTICLE TYPE Market Updates
TOPIC Multi-Asset
PUBLISHED March 07,2024
READ TIME 5 mins read
AUTHOR Vincent McEntegart
SHARE

Since its launch in 2014, the Aegon Diversified Income Fund has delivered an average level of income of 5.2%* per annum despite the challenges of the macro environment. This was also a decade when investment practice and the regulatory framework around ESG saw great change.

 
What’s the secret behind these compelling returns?
 

The fund’s success in solving the income puzzle is its flexibility and the breadth of resource that identifies a diverse range of global income-bearing assets.
 

We enter a new decade for the fund with markets delicately poised for potentially lower interest rates and declining inflation.
 

As we explain below, the fund’s history shows it is well positioned to navigate the next chapter in the market’s evolution and to capitalise on the inevitable income and total return opportunities it will generate.
 

The changing macro environment

Investors have faced a plethora of issues over the past ten years, including the Covid-19 pandemic, China growth, trade wars, Eurozone debt crisis and war in Ukraine. For income investors, however, the dominant driver has been the post-Covid inflation spike, and the subsequent volatile rates environment and its impact on bond markets.

 

We have explored the impact of the ‘bond reset’, and particularly its impact on our alternatives allocation in a separate note, but key to the fund’s performance in recent years has been the flexibility of its asset allocation and the breadth of its opportunity set. In combination those factors have allowed for a consistency of income delivery regardless of the prevailing rate environment.

 

Consistency versus floating and fixed rate product (fig 1)**.

dmif-article4-chart1.jpg

 

The fund has the flexibility to select the most appropriate income opportunities within the prevailing market environment. In 2022, for example, when rates reached historic lows and spreads tightened, the fund’s small investment grade credit allocation offered diversification and dampened volatility but not yield. The ability to access alternative sources of income such as off-benchmark bank credits and FX carry highlight this ‘through-cycle’ capability. With rates potentially at the top of the cycle, this ability may be very important for those seeking to solve the income puzzle in the years ahead.

 

Consistently premium outcome versus the fund’s peer group (fig 2). ***

dmif-article4-chart2.jpg

 

The fund’s rolling annual historic yield has been double the level offered by its sector for all but a short period. The fund is not held to an inflexible benchmark, nor constrained by a rigid strategic allocation framework. Instead it evolves in real time, as markets do, which allows the fund to anticipate developments - or to respond to them - promptly in pursuit of its objective.

 

ESG - changing perspectives

The way society thinks about the environment and social matters has changed significantly since 2014 and perhaps one of the most important drivers was the Paris Agreement reached at COP21 in 2015.

 

That same year the integration of ESG factors was formalised into our credit research and, subsequently, our equity research. While our analysis of individual securities has always been thorough, the availability of additional data has ensured that ESG considerations are now embedded across all our portfolios, which has the following benefits:

 

   
1. Deepens our knowledge Bringing new aspects to light, providing a more comprehensive view of the investment
2. Strengthens our conviction As fundamental, research-driven investors, it can make us more confident in our decisions
3. Promotes a long-term focus Clearing the short-term noise allows us to focus on long-term and fundamental trends, risks and opportunities

 

We have shied away from active exclusions in this strategy. We believe it is better to engage with investee companies than to exclude them, but this enhanced analysis has affected the portfolio. For example, previously we owned tobacco companies, many of which continue to offer an attractive yield, but an increasing ESG focus by investors means the prospect of capital flight is real; we’re not in the business of eroding capital to support income.

 

As a group we have built a well-resourced Responsible Investment Team who direct our policy, inform our research and report as appropriate to meet our obligations to investors, regulators and stakeholders. We are signatories to the UK Stewardship Code and the PRI, members of the Net Zero Asset Managers Initiative and a range of other bodies. These activities are reflected in policy development and reporting. The burden is materially greater than we could have imagined when this fund was launched but ultimately, we believe the way we approach ESG issues as a firm, and within this portfolio, better informs our investors.

Conclusion

We do not manage the fund to any benchmark or against its Investment Association sector (Mixed Investment 20-60% shares). However its interesting to see how the fund’s total return has compared over the past decade.

  1 Year % 3 Years % 5 Years % 10 Years %
Aegon Diversified Monthly Income Fund (B Inc) 7.23 8.41 18.19 64.95
Quartile ranking 1 1 2 1
Investment Association Mixed Investment 20-60% Shares median 4.69 4.08 15.56 42.75

Source: Lipper as at 23 February 2024, B Inc GBP share class. NAV to NAV, noon prices, net of ongoing charges, excluding entry or exit charges. Inception 25 February 2014



To achieve this we have continually sought to learn from the challenges and opportunities of the last decade which include the ever-evolving macro environment and the regulatory framework.


Throughout, the fund has maintained its commitment to harvesting a premium natural income from its investments. We are active managers and clients expect us to deliver outcomes that they cannot achieve using passive strategies and market betas. We believe we have done this.


For investors in the Fund, thank you for your support. We aim to make the next decade as rewarding as the first. If you are not yet invested we hope this ten year milestone could be a catalyst to invest in future. The fund’s relevance today is as strong as it was in 2014. And there is now a rich history to evidence our investment approach which has delivered attractive outcomes for investors.

 

DMIF-banner-10years-website.png
 

 

 

 

*Source: Aegon Asset Management UK, as at 1 February 2024. Aegon Diversified Monthly Income Fund B Inc share class average of historic yield since inception. The Fund launched on 25 February 2014.
**Source: Bloomberg, 7 year period to 29 February 2024.
***Source: Aegon Asset Management UK, as at 1 February 2024. The historic dividend yield is the sum of the previous 12 monthly distributions divided by the share price at the end of that 12-month period. Distributions are declared after the end of the month to which they relate and paid one month later. Income distributed is natural income, with no sacrifice of capital. The most recent monthly distribution is based on an estimated distribution rate. All figures are for the Aegon Diversified Monthly Income Fund B Inc (GBP) share class. The Fund launched on 25 February 2014.

Important information

More about the authors

Vincent McEntegart Investment Manager

Vincent McEntegart, investment manager, is a member of the multi-asset group. He is co-manager of the Diversified Income strategies. Prior to joining Aegon AM, Vincent worked for Goodhart Partners (an MBO of the multi-manager business of WestLB Mellon Asset Management) where he was a partner responsible for client relationships and new business.

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