Niall Paul is global CIO for equities at Aviva Investors in London and his primary focus is to ensure that the equity teams are able to deliver high-quality investment performance across all portfolios. He oversees the provision of investment lifecycle analysis for his team and ensures that contrarian, high-conviction portfolios are implemented.
Paul joined Aviva Investors in 1999. Before being promoted to head of equities in September 2006, he was head of emerging markets and Asia. Prior to joining Aviva Investors, he worked as a fund manager for four years at Foreign and Colonial Emerging Markets.
What are the main reasons for this trip? What are you looking to get out of it?
From a top-down focus, how sustainable is the growth story coming out of Asia? And then what are the implications of that for the rest of the world. Asia and emerging markets led the recovery; they bottomed at the end of last year and the developed markets took a while longer to bottom out. However, the Chinese A-share market has been weak for the past month or two. There are some legitimate concerns about the duration of the recovery.
What is the role of the A-share market on a global level?
The Chinese manufacturing engine has a dramatic impact for a lot of major industries in Europe, one of which is the wind industry. We are big investors in renewables and we have a very strong SRI [socially responsible investment] team, so trying to understand some of the dynamics in that industry as relates to China is very important.
It's a very important export market for big alternative energy producers, such as Vestas and REC, and there's been a growing trend for the Chinese to develop their own companies in those sectors, which include Goldwind and Sinovel. So that's had a very big impact on the pricing of, for example, generators within wind turbines and materials used in solar power production. And it's important to understand how these price effects work.
What are the prospects for alternative energy companies?
Wind and solar are our two biggest renewable energy focuses, and both industries have been damaged by fear of financing large-scale projects. The oil price has come down a lot, so a lot of projects look less attractive than they did when the oil price was at $150 a barrel last year. But also there are these concerns about manufacturing capacity additions coming from China, and how companies here can gain market share versus the Europeans. It's those kinds of things we're looking at.
Our SRI funds can invest in alternative energy, but there are other things they can include in the portfolio, so if we get a sense that alternative energy sector is going to suffer pricing pressure for the foreseeable future, we have an opportunity to refocus on other areas. I'm thinking in particular of healthcare and biotech, which haven't performed very well at all, but we think there's a great value story there.
Why do you feel biotech and healthcare are attractive?
There are some worries about healthcare reforms for biotech and pharmaceuticals sector particularly, but these stocks are incredibly attractive in the current market. Many of them are yielding 6.5% dividend yields. The big stocks in this market are those like GlaxoSmithkline and AstraZeneca.
There are a few straws in the wind that suggest these sectors should see a recovery. This recovery in markets is following a very traditional pattern: firstly the leveraged-balance-sheet companies that fell the furthest in the crisis have bounced the most in the recovery. So there's a tick in the box for that. Other areas that performed very well in the past bull phase were industrials and mining - investors have also rushed back into those during the uptick.
How has the global financial crisis affected these sectors?
My view is that there'll be a new leadership emerging. As the rally broadens out, you'd expect that pharma and biotech will have a good bounce. The thing is that the leaders in one bull market are very rarely leaders in the next.
One of the important changes for investors when they move to high alpha is that we try to get alpha managers to invest with conviction and adopt a contrarian invest philosophy. Which basically means searching out opportunities in areas of the market that have been largely ignored.
The CLSA conference is an interesting barometer of that: any meeting that's related to commodities or the boom in China are absolutely packed out, whereas pharmaceuticals are not well represented here. If you had the big pharma companies presenting here I imagine you'd have a lack of appetite to listen to what they say. [At the conference] they're all following yesterday's trend, so our job is to search out tomorrow's trend.
What's Aviva Investors' AUM and where are you seeing new business these days?
Globally we have £222 billion in AUM. That's down slightly because of markets [from a year ago], but not because of redemptions. We've actually net grown funds by about £3 billion, two-thirds of that from external sources.
This is not just from the launch of new products, It's as much a result of where restrictions are being lifted. For example, we have had inflows of £250 million into our global tactical asset allocation (TAA) fund year-to-date in Europe, not just the UK. Now we're looking to distribute the strategy on a global basis
Another example is our global high-yield fund - the fund manager is based in the US, but the fund recently won a sizeable mandate in Taiwan in May 2009, which would never have happened before Aviva Investors was formed. It was in fact our first official cross-border sale into Asia since the set-up of Aviva Investors in September last year. The FSITC Global High Yield Bond Fund, an open-ended fund, is a sub-advisory agreement between Aviva Investors North America and First Securities Investment Trust Co (FSITC) in Taiwan amounting to a $120 million investment.
How are you doing relative to your competitors in Asia?
So, I think we're catching up to where a lot of asset managers are. It was a wasted opportunity not moving this way before, and we're now catching up in a meaningful way.
The advantage of taking your time is that you can learn from others' mistakes. We're being very careful about the products we select to be sold in different markets; making sure they're registered in the right territories. We're very keen on the absolute-return side of the spectrum. The Global TAA fund is an example of that. We've launched a UK absolute-return equity fund, which is going down very well in the UK. If we can look at more absolute-return products, that complements the range nicely.
We want to focus on the more sophisticated, high-alpha end of the product spectrum, an area that's been neglected by the hedge fund community, because they've focused on the two-and-twenty aggressive side of the hedge fund market. And this past of the business is separate from the traditional long-only market. We're trying to commercialise a segment of the market and bring sophisticated absolute-return products and investment capabilities to a bigger audience.
I've read that traditional fund managers may move towards performance fees similar to the hedge fund approach. What do you think about that?
The ongoing problem is aligning the fund manager's interest with that of the clients. Quite often, a lower base fee and a higher performance-related fee does exactly that, because if you don't perform, then the client doesn't pay and that's in no-one's interest. If you do perform, your client will be happy to pay for that performance, so everyone's interest will be very much aligned. Undoubtedly that trend will continue for performance-related fees to be part of the equation.
Active management has taken a lot of criticism in recent months. How much of your business is active and what do you feel about the active versus passive debate?
Of Aviva Investors London, the high-alpha business is entirely active. As a proportion of Aviva Investors overall, we are around a third of the equity assets, and the rest are quantitative and passive funds.
My believe is that the past 15 years have seen a generation of fund managers effectively becoming closet indexers, and that's been brought around by consultants and very short-term focus on invest performance - and it's that kind of behaviour that's damaged the industry and damaged the credibility of active management. Through the creation of Aviva Investors and looking to get fund managers to focus on conviction.