Following a strategic review, Aberdeen Asset Management (now Aberdeen Standard Investments) was appointed as manager on 11 February 2017 and the trust was renamed Aberdeen Diversified Income and Growth Trust (ADIG), retaining its absolute return focus, but employing a more widely diversified multi-asset strategy.
ADIG’s ability to access distinct alternative asset classes and a very broad range of longer-term, less liquid investment funds that may otherwise be closed to retail investors is a key differentiator of the trust.
On 31 March 2017, ADIG adopted a new investment objective targeting a total portfolio return of Libor +5.5% pa (net of fees) over rolling five-year periods. As BIST, the trust previously targeted a total portfolio return of UK CPI +4% pa (before ongoing charges) over a five- to seven-year cycle.
From October 2011 to February 2015, the trust (BSET) had a composite benchmark index weighted 80% FTSE All-Share index and 20% FTSE World (ex-UK) index. Prior to October 2011, the benchmark was a 75:25 composite of these two indices.
Libor is due to be phased out by 2021 and the manager is in the process of identifying a suitable alternative measure, following which the board will seek shareholders’ approval for a change in the investment objective.
ADIG’s share price and NAV total returns were negative in the last quarter of 2018, corresponding with the broad sell-off in global equity markets. However, ADIG’s NAV was primarily affected by the uncorrelated negative returns of its two Markel CATCo insurance-linked securities holdings, due to loss provisions for 2018 events, most notably Californian wildfires, as well as raised loss reserves for 2017’s hurricanes and wildfires.
ADIG’s listed equity exposure dragged on NAV performance in the fourth quarter, but a number of other asset classes made positive contributions, most notably emerging market bonds and infrastructure. To put ADIG’s performance in context, its -4.1% portfolio return in the final three months of 2018 compares with a -10.6% return for the MSCI AC World index, and the strategy has shown similar resilience when equity markets have experienced comparable falls.
ADIG recorded a slightly negative NAV total return (-0.5%) over one year to end-March 2019, but its share price total return was a positive 1.9%. Over two years since the change of investment policy, ADIG achieved positive share price and NAV total returns of 10.0% and 3.9%, respectively, equating to annualised returns of 4.9% and 2.0%.
While these returns are lower than ADIG’s absolute return benchmark of Libor +5.5% pa, this is a medium-term objective and the managers believe it can still be achieved over a five-year horizon, including the first two years under the current investment policy. Three- and five-year data are shown for reference but are less relevant given ADIG’s change of investment policy at end-March 2017.
ADIG’s NAV total return trailed the FTSE All-Share and MSCI AC World indices over one year and over the two years since the change of investment policy, while its share price total return outperformed the FTSE All-Share index over two years. However, we note that ADIG’s share price and NAV total returns both clearly outperformed the FTSE All-Share and MSCI AC World indices over the first year following the change of investment policy (to end- March 2018).
We note that ADIG aims to achieve this objective over rolling five-year periods, and the return profiles of the asset classes held in the portfolio mean that NAV returns would be expected to be differentiated from the benchmark over shorter periods. Also shown is ADIG’s NAV total return relative to the FTSE All-Share index, which highlights the trust’s broadly uncorrelated performance relative to equity markets.
Aberdeen Diversified Income and Growth Trust
|Discount to NAV||1.6%|
|Discount to NAV||3.4%|
|Progressive FY 2019 yield||4.7%|
Investment strategy – Diversified, unconstrained selection
ADIG’s ability to generate its targeted, sustainable, long-term returns stems from the multi-asset approach adopted by the manager, which includes the following three key elements:
- Genuinely diversified portfolio. The breadth and scope of the trust’s multi-asset investment opportunities are considered essential to achieving an attractive and sustainable level of long-term growth, with the uncorrelated nature of returns from different asset classes also making a valuable contribution to risk management.
- Unconstrained and flexible asset allocation. The manager is not restricted by index allocations and the portfolio need not hold investments in any asset class that is believed to offer unattractive returns. Target asset allocations can be varied over time in accordance with the relative return prospects for individual asset classes, which enables the manager to maintain a consistent long-term growth target.
- Robust risk management. Risk management is embedded within the investment approach, starting from the diversification that underpins portfolio construction, and benefits from the investment team’s breadth and depth of experience from a variety of backgrounds. Specialist portfolio construction and quantitative risk tools are used alongside the portfolio managers’ qualitative judgments, ongoing scenario analysis and peer review within the investment team.
The board and the manager believe that equities should form a core, but not dominant, part of any growth or income portfolio. This is reflected by ADIG’s target portfolio weighting in equities (quoted and unquoted) being varied in a 20-30% range since it adopted its current investment policy. Given their current low returns, government and investment-grade corporate bonds are not expected to feature in the portfolio in the near term. However, they form part of the broad multi-asset opportunity set and may be held when the portfolio managers see them as relatively attractive.
The majority of the portfolio is expected to comprise a range of diversifying assets, including:
- Equity-driven assets – developed and emerging market equity, and private equity.
- Alternative diversifying assets – high-yield bonds and loans, emerging market debt, alternative financing, asset-backed securities, property, infrastructure, commodities, absolute return investments, insurance-linked securities, farmland and aircraft leasing.
- Low-return assets – gold, government bonds, investment-grade credit and tail-risk hedging.
ASI’s global investment platform includes over 1,000 investment professionals across teams specialising in equities (quantitative and active), fixed income (emerging market debt, high-yield bonds, loans, investment-grade credit and government bonds), property, property multi-manager, private equity, infrastructure, real assets, hedge funds and other alternative asset classes.
The managers’ view – Traditional assets face major headwinds
Lead portfolio managers Mike Brooks and Tony Foster observed that a traditional balanced portfolio of equities and bonds has generally served investors well over the past 10 to 30 years, producing good returns with lower volatility than equity markets. However, looking forward, they believe this approach faces significant headwinds.
Firstly, strong fixed income market returns have been driven by falling bond yields, partly due to unprecedented monetary easing, suggesting weaker current prospects for returns from government bonds. Secondly, equity markets have reached new highs despite generally challenging economic conditions, also partly helped by central bank monetary easing policies. As central bank support diminishes, equity market risks may well resurface, with market volatility remaining elevated. The managers also highlighted that equity markets can perform poorly for extended periods, such as the 12 years from end-December 2000, over which time the FTSE 100 index produced a lower total return than cash.
Brooks and Foster noted that ADIG’s portfolio delivered a positive return in FY 2018, but this was behind its medium-term objective, with insurance-linked securities and emerging market bonds notably dragging on performance, while equities and asset-backed securities were among the stronger contributors to returns. They commented that the contribution from asset classes such as property, real assets and special opportunities is expected to grow over time as initial long-term investments reach maturity and new opportunities are identified by the specialist managers.
ADIG’s managers highlighted that during FY 2018, new investments were added in private equity, social infrastructure and insurance-linked securities; since the year-end, commitments have been made to funds investing in economic infrastructure in Europe (SL Capital Infrastructure II), and social infrastructure in Latin America (Andean Social Infrastructure Fund I), as well as healthcare royalties (Healthcare Royalty Partners IV) and litigation finance (Burford Opportunity Fund). In addition to the Burford fund, a ca 1% of NAV position was taken in Burford Capital, which is the world’s leading provider of funding for commercial litigation. Burford finances the legal costs of carefully selected commercial cases, typically in return for a percentage of the damages or awards paid to successful claimants. Importantly for ADIG, returns on Burford’s investments are dependent on the outcome of their cases and are not influenced by broader economic developments.