Aviva Investors, with $440bn of assets under management, is doing things differently to weather a potential downturn in credit. It believes outperformance is achievable – in both up and down markets – by leveraging portfolio construction as a source of alpha that many other credit managers ignore.
While many other credit managers allocate portfolios by sector aligned with a traditional benchmark, Aviva Investors uses a unique portfolio construction process to allocate risk.
The portfolio construction process involves creating custom risk sectors defined by spread volatility. The team then use a risk optimisation process to allocate risk efficiently across these sectors.
The process starts by forecasting total returns for each custom sector at six points along the curve under three interest rate and five credit spread scenarios. Constraints are added to ensure the output is duration and curve neutral, investable, and reflective of top idiosyncratic ideas.
Using inhouse scenario modelling and risk allocation, the 26 credit analysts can consider the best idea in a spectrum of market environments. This has led the US Long Government/Credit strategy to outperform 75% of peers over the past year.
The strategy has a five-year annualised return of 7.80 through 30 September 2019, representing an outperformance of 99 basis points. Other investment grade strategies have outperformed their respective indices by roughly 100 bps over the same 5-year period.
Judges praised the focused niche strategy, saying that their robust process explains extensively how they generate alpha and that its "performance speaks for itself".