Aegon Asset Management: A decade of evolution – what's changed since 2014

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)**.

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). ***

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:

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.

_{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.

_{*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

For Professional Clients only and not to be distributed to or relied upon by retail clients.

The principal risk of this product is the loss of capital. Please refer to the KIID and/or prospectus or offering documents for details of all relevant risks. For all documents please see www.aegonam.com/documents

Past performance does not predict future returns. Outcomes, including the payment of income, are not guaranteed.

Opinions and/or example trades/securities represent our understanding of markets both current and historical and are used to promote Aegon Asset Management's investment management capabilities: they are not investment recommendations, research or advice. Sources used are deemed reliable by Aegon Asset Management at the time of writing. Please note that this marketing is not prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing by Aegon Asset Management or its employees ahead of its publication.

Income is not guaranteed and 5% is a target yield, being the fund's target total distribution over the next 12 months as a percentage of the current mid-market share price. The target yield may be revised in future.

Fund Charges are taken from capital, increasing distributions but constraining capital growth.

All data is sourced to Aegon Asset Management UK plc unless otherwise stated. The document is accurate at the time of writing but is subject to change without notice.

Data attributed to a third party (“3rd Party Data”) is proprietary to that third party and/or other suppliers (the “Data Owner”) and is used by Aegon Asset Management under licence.  3rd Party Data: (i) may not be copied or distributed; and (ii) is not warranted to be accurate, complete or timely.  None of the Data Owner, Aegon Asset Management or any other person connected to, or from whom Aegon Asset Management sources, 3rd Party Data is liable for any losses or liabilities arising from use of 3rd Party Data.

Aegon Asset Management UK plc is authorised and regulated by the Financial Conduct Authority.