Adapting to market shifts: a decade of Aegon Diversified Monthly Income

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Hello, I’m Chris Salih, investment research analyst at FundCalibre, and today I’m delighted to be joined by Vincent McEntegart and Debbie King, managers of the Elite Rated Aegon Diversified Monthly Income fund DMIF. Thank you both for joining us today.

[00:15] Vincent McEntegart (VM): Hi, Chris.

[00:16] Debbie King (DK): Good morning.

Let’s get straight into it. So obviously the fund celebrates its 10 year anniversary this year. Maybe just talk to us about how the strategy continues to stay relevant year after year.

[00:32] VM: Yeah, so there’s it is an interesting one because, you know, every year we tend to find that there are new ways of implementing multi-asset solutions. And so to remain relevant really a fund like DMIF [Diversified Monthly Income Fund] has to have a very strong value proposition relative to the competitor funds. Part of that is providing an attractive risk-adjusted return to investors. But also in the case of diversified monthly income, it’s about delivering a premium yield. And that of course has relevance to investors who are looking for income from their capital.

Another point I think that makes the fund stay relevant is that, you know, I think investors always value transparency and trust, and I hope that’s something that they, they see in the fund and in Aegon. And I think finally the fund offers daily liquidity, and I think that means that investors are never, we never ask our investors to give up the most important control they have, which is ultimately immediate access to the capital.

Obviously there’s many multi-asset funds out there now, and they all do sort of different things. Maybe just expand upon the flexibility and how your portfolio in particular is constructed in terms of the different sleeves that make up the fund.

[01:51] DK: So thanks for the question on how the portfolio is constructed. I think one of the key aspects to this fund is the freedom it has to navigate both markets and economic cycles in real time. And by freedom I really mean sort of choices. This fund has a lot of choices available to it, both in terms of its asset allocation choices – it’s a global fund so we can invest in developed markets and emerging markets. We have very wide investment parameters. You know, we don’t asset allocate to any fixed benchmark, so that gives us a lot of freedom and choices to go and find the best income and the best growth opportunities really from anywhere and at any time.

So how the portfolio does this is we blend the more traditional asset classes of bonds and equities together with the more diversified alternatives class. And within that I would include things such as listed real estate, listed infrastructure, listed renewables, many of which have thematic sort of tailwinds behind them, really helping to support the investments such as in renewables. We have the energy transition there.

In terms of the process, the fund blends a top down and bottom up process. We’re looking at that kind of macroeconomic top down view, valuations at an aggregate level with bottom up we’re really filling the fund with individual securities on a line by line basis. And how we do that is we use bespoke asset class sleeves that are populated using the best ideas of our Aegon Asset Management kind of specialist asset class colleagues. That means that we can include new sleeves as opportunities arise, and also it means that some sleeves might fall away over time as they serve their purpose and, and more interesting opportunities are available to us.

So it’s very much a customised portfolio, a lot of ingredients going in to construct and manage a global multi-asset portfolio of this type. But it’s very much a team effort. And I would just add here that it is, you know, the really strong working relationship that we have here with our multi-asset group and our specialist asset class colleagues that’s a key factor in the fund success and continued longevity.

You mentioned the changing components there, obviously it’s not just the components, it’s obviously the environment that changes as well. So, you know, 10 years things have changed quite a lot. Obviously the portfolio changes with it. I mean, could you maybe go into a bit more insight in how that sort of works? I mean, the perfect example is interest rates: obviously, for most of the life of this fund, rates were very low. You’ve had to go to other areas like alternatives and to find those interest rates now, now to find that that income, now it’s a bit more accessible, maybe talk us through how that’s, how that’s evolved and a general overview of how the portfolio has changed over time.

[04:51] VM: Yeah, absolutely. I simplify it to two distinct periods really in the last 10 years the period before 2022, and then the period from 2022 to today. And as you say, Chris, that pre-2022 period, we have base rates from the Bank of England and other central banks, very low, close to zero and also very low bond yields. And that made it a very difficult time for investors, particularly those looking for income from their capital. We launched Diversified Monthly Income in 2014 into this environment. And we launched it as a solution to that income shortage for investors. And you know, we use a global universe and as Debbie talked about a range of different asset classes and that’s what made it possible at that low interest rate environment for us to achieve the income yield of 5% pre-2022. And we did that, again as Debbie touched on, by using alternatives to replace bonds. They were a key source. We had around 35% of the NAV in those alternatives pre-2022.

And, then when that that period changed in ’22, the 40 years really of a bond bull market ended and we had what we sometimes refer to as a great reset in the bond market, interest rates and yields are now much higher, 4-5% more, more normal levels you would say. And that’s enabled us to then switch out of the alternatives into bond markets. And we now have around 35%, sorry, we were around 30-35% in bonds and that’s now around 50%. And the alternatives have been reduced accordingly from 30-35% to around 15% today. So that’s the kind of big picture of the change we’ve made. There’s a lot more monthly portfolio data on the Aegon website if listeners want to look for that. But hopefully that gives you a sense of how we’ve changed it over time.

And just quickly to follow up on that, also, you’ve been allowed to look at some growthier names, haven’t you as well with that extra freedom that you have with the income too, if I’m right?

[06:59] VM: That’s right. Yes. We’ve been able to hold more in growth equities, particularly in the US than we would otherwise be able to do because they have much lower yields on them – 1% typically is a yield you might get in a technology US equity – so yes, we’ve been able to hang onto to more of those or buy more of those because bonds yields are much higher and are helping us achieve our income target.

Okay. If we stick to bonds, because obviously bonds jump out as those two time periods between 2014 and 2022 and 2022 to now, that allocation to bonds has obviously gone up in most places, but obviously for you guys as well, maybe just talk to us about the sort of higher allocation to bonds and impacting future asset allocation decisions specifically for you guys because I know you also have a bit of an interest in high yield, which has been a bit of a polarising market for some people – some are fans, some are not in this environment. Just give us some insights into that please.

[07:59] DK: Sure, Chris, I’m happy to, to pick up on that one. There’s probably two points I’d make it at the start around bonds generally; they’re viewed as a more defensive asset class, and that’s largely due to the contractual nature of the income stream and also the fact that – generally all going well – you get your capital back at the end of the bond’s maturity. So more defensive asset class means generally they’re lower volatility assets. So if you have more bonds within your portfolio, your portfolio is generally has lower portfolio risk. That means that there, there’s scope to add risk elsewhere. The second point I would make about bonds is you know, they throw off more income. They generally have a higher coupon than the dividend yield you see in equities. That means for a fund of this type that the income we need to gather from other asset classes can be lower and we can still make our 5% yield target. That allows the fund, as Vincent’s touched on, to kind of shift the equity mix away from perhaps higher dividend yielding equities but with lower growth, to incorporate some lower dividend yielding equities, but ones that have higher growth potential, like some of the technology names that he touched on.

To answer your high yield question specifically, you know, like I mentioned earlier, the sleeves that we build the fund with are highly customised to the objectives of the fund. That means that we’re not just taking a slice of an index and everything that goes with that. We work very closely with our asset class specialist colleagues to make sure that the sleeve is built to our exact requirements, which means at any given time we can have a higher quality, higher yield sleeve perhaps than you might see in an index. We can avoid CCCs or very highly-levered companies if we choose not to have that risk because, for example, we prefer to have the equity risk. And that’s certainly something that we’ve done lately in the fund.

In terms of high yield generally, we were starting to increase our weight into that when all the yields were around 8- 9%. Now that’s a very attractive level on a medium-term view or of a two to three year view. You very rarely – you can – but you rarely lose money with yields at that level just because of the income that they’re throwing off. So, like I say, you know, high yield, we have been very favourably disposed to the asset class, but still very careful in our individual selection of bonds to make sure that they are right for the objectives and what we’re trying to achieve with this fund.

Okay. And just lastly, we’re sort of six, seven weeks into 2024, still relatively early – do you want to just give us your outlook for the market now? I mean, recession has been talked about technically in one for the UK – deep, shallow, how do you see things playing from here?

[10:59] VM: Yes, markets are very uncertain at the moment. There’s a huge amount of focus on what central banks are going to do in terms of cutting interest rates. Inflation’s come down so it looks like they have room to cut interest rates which would be good news for anyone with a mortgage. But and those lower rates are also needed not just for mortgages, but to just boost general economic growth, particularly outside of the US and hopefully therefore to avoid any kind of recession. The pushback would be that wage growth which is a good news story, wage growth has been higher than in the past. But, but for central banks that higher wage growth may mean that they delay cutting interest rates. So we just have to wait and see how that works out and what impact that has on markets this year.

Because of that background, we are are preferring companies that have got, you know, strong balance sheets, resilient earnings and, overall for the year, we think that you know, we expect to get steady returns from the credit parts of the portfolio. And, unlike last year where the equity market was very narrowly dependent on a small number of technology stocks, we think that there should be a broadening out in equity returns beyond technology this year. So overall we think it’s somewhat similar similarities with 2023 and we think patience will be rewarded.

More long term, as we look forward to the next 10 years, we certainly have confidence that the process that we’ve had in place these last 10 years can continue to deliver the yield and the return outcomes that we are targeting. And, and just finally, we would like to, you know, say thank you to all the investors for their support over the last 10 years and we hope that we’ll be talking with you and seeing you for the next 10.

Vincent and Debbie, thank you very much for joining us today. And if you’d like to learn more about the Aegon Diversified Monthly Income fund, please visit FundCalibre.com.