The Interview – Olaf van den Heuvel, Aegon Asset Management: “We expect markets to recover slightly, but also more setbacks that will surprise the markets”
Olaf van den Heuvel, European head of tactical asset allocation at Aegon Asset Management and portfolio manager of the Ucits-compliant Global Opportunities Fund launched last December, expects the fallout following the credit crunch to continue along with further ‘surprises’ like Greece or Dubai.
GFM: What is the background to your company and funds?
OvdH: Aegon Asset Management is a wholly-owned subsidiary within Aegon, an international life insurance, pension and investment group. The asset management business operates in Europe, the US and Asia. The European unit encompasses Dutch and UK investment management companies with a main office in Edinburgh and head office in The Hague.
Aegon Asset Management was formed in 2009 as a global entity to consolidate the group’s asset management businesses, but its underlying businesses have a long history; many of its subsidiaries in the Netherlands, the UK and the US have managed money since the mid-19th century.
The firm offers a broad range of funds and investment solutions with award-winning expertise in equities and fixed income investment management and a distinguished record in managing ethical and property funds. At the end of last year Aegon Asset Management managed EUR193bn and employed 1,254 people including 305 investment professionals.
I am European head of tactical asset allocation and portfolio manager of the Global Opportunities Fund, which was launched in December 2009. My team, which comprises my deputy Gerard Moerman as well as Rogier van Aart, Jacob Vijverberg and Robert Jan van der Mark, is part of Aegon Asset Management’s multi asset group and is based in The Hague. Senior economist Pieter Jansen left in April, and for the time being his responsibilities are being shared by other members of the team and the strategy and economics department.
The total assets for which the team determines tactical and strategic asset allocation totalled EUR14.9bn at the end of March, while the Global Opportunities Fund had approximately EUR34m in assets as of May 20.
GFM: What is the structure of your fund?
OvdH: The Aegon Global Opportunities Fund is one of five sub-funds of Aegon Investment Company (Ireland), which was incorporated on June 25, 2007 and is authorised by the Irish Financial Services Regulatory Authority. A Ucits III fund, it is listed on the Irish Stock Exchange. Aegon Asset Management (UK) is the promoter of the Irish umbrella fund and is contracted as its investment manager and distribution agent, although the whole of the global asset management business is involved in supporting the product.
GFM: Who are your key service providers?
OvdH: The fund’s administrator is Citi Fund Services (Ireland) and its custodian is Citibank International in Dublin. The auditor is Ernst & Young in Dublin and the legal advisor is A&L Goodbody Solicitors.
GFM: How and where do you distribute the fund?
OvdH: The Global Opportunities Fund is currently distributed in the UK, the Netherlands, Ireland and the Channel Islands, and we are registering the fund in other European countries including Germany, Luxemburg, France, and Switzerland, where strong client interest has already been shown. For the future we are considering looking into distribution in Asia. Targeted clients include both retail and institutional markets and family offices.
GFM: How would you assess the impact of the recent global financial crisis and economic downturn on your business?
OvdH: The global financial crisis and economic downturn affected our overall assets under management and reduced our profitability in the short term. However, we absorbed this impact and our asset base and profitability is now expanding.
Many markets such as corporate bond markets and property markets were illiquid during the crisis, posing short-term challenges in areas such as valuation of assets and in some cases in managing cash flows, issues we handled well.
As an active manager, the rapid changes in markets provided opportunities for us to add value on behalf of our clients, and this is now reflected in our investment performance across a range of products. The changes have also made many investors reassess their own risk appetite and requirements, creating further opportunities for us to meet their needs with new services such as asset allocation services.
It is worth noting that many investors are now focused on what they consider the next big challenge within investment markets, the rise of inflation. We at Aegon Asset Management agree with this concern and are working with our investors to mitigate this risk.
GFM: What are the advantages and disadvantages of offering hedge fund strategies within a Ucits structure?
OvdH: Market feedback continues to suggest an increasing trend toward Ucits products even within the institutional community, which has resulted in many hedge funds offering a Ucits version alongside their original vehicles. Whilst many would think of Ucits as a retail vehicle, it does give the possibility to create a transparent institutional risk-controlled regulated structure, while gaining access to the profile and global brand of a Ucits structure and allowing the fund to be passported into other EU countries as well as potentially marketed in Asia, Africa and South America.
There are investment restrictions under a Ucits structure compared with a hedge fund structure, but the advantages of using a known, widely available regulated structure seem to outweigh the negatives.
GFM: What is your investment process?
OvdH: The investment management process is a fundamental and objective discipline that predominately results in relative asset allocation positions within and across asset classes in a process-oriented and risk-controlled manner. The process, based on the Aegon quadrant framework, aims to exploit short-term market inefficiencies. Most trades are implemented as pairs trades and are market neutral with respect to value at risk, while others are long only. Our views are implemented via derivatives and non-derivative assets.
The Aegon quadrant framework appraises information about possible investments from four different perspectives: macroeconomic, valuation, qualitative and technical. Each quadrant uses different models and indicators to derive a score.
In the macroeconomic quadrant we combine various economic data and analysis, resulting in a score (which can be zero) for the potential investment position. Examples of considerations are the investment clock – where we are in the business cycle – and objective analysis on the basis of realised economic data.
The second quadrant combines multiple fundamental valuation analysis, yielding a score for the potential investment position. Examples include yield gap, dividend yield and roll return.
In the third quadrant we combine multiple technical analyses, employing as potential considerations the indicators investment flows, momentum, relative strength index and moving average convergence/divergence.
The fourth quadrant combines multiple qualitative analyses. The data considered could include consensus expectations, liquidity of the asset, consumer confidence and sentiment.
An idea is scored in each of the four quadrants to produce a total score. Should this merit investment, a position will be initiated based on allocating part of the 10 per cent diversified VaR risk budget in relation to the magnitude of the score. Risk is continuously monitored and adjusted as appropriate. When the score diminishes, positions are sold.
GFM: How do you generate ideas for your funds?
OvdH: All team members follow markets closely, especially in their asset class. We have several fixed models or frameworks that follow valuation, macro variables and technicals for various specific trades. These are updated continuously and sometimes acted upon if favourable. Apart from that, we do continuous research to improve our understanding of current events and try to think of the best way to exploit our macro/fundamental view of markets.
GFM: What is your approach to managing risk?
OvdH: There are four elements to the risk management process at Aegon Asset Management. First, the fund managers manage the investment and market risks of the portfolio themselves. This is one of the main aspects of their job – to ensure that the risk of the portfolio secures additional risk-adjusted return and is within product guidelines. Risk considerations are part of their portfolio construction discipline, and this is particularly true with the Global Opportunities fund, where VaR is the over-riding determinant of position size and ideas.
The ideas that become portfolio positions and their weights are all based on a risk budget. The team will discuss the risk of any position and its impact on the portfolio at length before the trade is implemented. Bloomberg Algorithmics is used to calculate the risk as defined by VaR for new ideas and current holdings.
In monitoring and managing risk, the portfolio management team also uses output from the portfolio risk management team. They review the stress testing output on a weekly basis and monitor on a weekly basis total VaR and the VaR of each position.
Pre-trade checks are also part of the managers’ investment management system. Restrictions are hard-coded in the front office portfolio management system, thinkFolio for exchanged traded instruments. ThinkFolio acts as a first check on any position taking and ensures proper trade processing; it highlights any guideline breaches before the execution of trades and picks up any breaches of guidelines resulting from market movements. Pre-trade checks are conducted on OTC instruments by another portfolio manager, who also reviews the trade.
The second element to the risk management process is the Portfolio Risk management team, which models the portfolio’s risk and sets up and maintains risk measurement systems. Their output assists the portfolio managers in understanding the sources of risk in the portfolio and advises on ways to mitigate it.
The team designs and implements all the risk controls necessary to ensure the product is executing its strategy and meets its regulatory requirements. They do periodic back testing audits of the models to check their adequacy in modelling the required risk parameters and produces weekly reports showing the breakdown of VAR across strategies and for the portfolio as a whole. The team also performs stress and scenario testing on the portfolio, using lagged data and incorporating the major financial events of the past 20 years as well as hypothetical events. Currently more than 25 major events are modelled in the stress test.
The third risk management function is a group in operations known as portfolio risk control, which is completely independent of the front office and monitors the operational effectiveness of the risk controls in place to ensure that client-specific and regulatory guidelines are adhered to. They monitor adherence to the agreed limits on exposure, securities and risk and calculate VaR daily. Breaches are first reported to the fund manager, while material breaches are subject to breach escalation procedures.
The fourth element of the risk management process involves the regulatory and operational risk team headed by Helen Mullin, which ensures that Aegon Asset Management UK as an organisation is fulfilling its regulatory requirements and is administering the investments and the fund administration functions proficiently.
GFM: How has your performance compared with your expectations? What are your performance expectations for the future?
OvdH: Our performance has been positive during the first months of 2010. Both our cross-asset class and foreign exchange positions performed well as expected, and we are on track to reach our target performance. Our historical performance has been slightly better, but not smooth, so it is too early to draw any conclusions. Going forward, we expect markets to recover slightly, but we also expect more setbacks that will surprise the markets.
GFM: What opportunities are you looking at right now?
OvdH: We are currently evaluating cross-asset positions in equity versus credits, regional positions in credits and several foreign exchange positions.
GFM: What events do you expect to see in your sector in the coming year?
OvdH: We expect that the fallout after the credit crunch will continue and that ‘surprises’ like Greece or Dubai will continue to pop up. This will cause significant volatility in various markets, so we are especially focused on managing tail risks. However, this volatility will also provide us with attractive entry points.
GFM: How do you assess investors’ current expectations?
OvdH: Investors’ sentiment seems to move up and down with market levels. Overreactions both positive and negative will provide us with ample opportunities. Currently, investors are focusing on sovereign risks, but we have not as yet spotted opportunities in sovereign markets. The risk aversion caused by this phenomenon does increase the attractiveness of other markets.
GFM: What differentiates you from other managers in your sector?
OvdH: We believe our real competitive advantage comes from our objective, disciplined fundamental approach, as many of our peers use purely quantitative methods. Our four quadrant framework forces the portfolio manager to consider all relevant arguments and limits the likelihood of decisions being made based on the manager’s own biases or current market sentiment.
A very important aspect is that the model uses both fundamental data and qualitative arguments and can therefore be applied in all market circumstances, which we believe adds to its robustness and success.
A benefit from this disciplined investment process is that positions are taken when there is real opportunity and sold when the opportunity is waning. When fear in markets is high and some investors are too afraid to take the risk, the model is likely to highlight purchase opportunities. Likewise, when the greed factor is high and investors think the markets’ increase will continue, the discipline of the model is likely to signal sales.
GFM: How do you view the environment for fundraising over the coming 12 months?
OvdH: Due to the nature of the Global Opportunities Fund, we are confident that the strong interest expressed so far will materialise in new assets under management.
GFM: How do you expect your market to be affected by proposed regulatory changes such as the EU’s AIFM Directive?
OvdH: As the Global Opportunities Fund has been launch under the Ucits III framework the proposed directive does not influence the fund directly, although the impact on competing funds that are affected by the directive might result in a flight of investors to recognised schemes such as Ucits. But this remains to be seen.
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