The investment cycle The return of volatility & The importance of being selective for multi asset investors in the current environment John Deehan - Investment Sales Manager
Multi-Asset Choice Cost efficient 3 world class, multi award winning fund managers Seeks to optimise returns for the level of risk taken Blended approach of active and passive investments Active, passive and blended styles Seeks to optimise returns by targeting different risk levels Primarily low cost passive investments Reduce risk and create unique portfolios by blending funds from the same risk profile Lifestyle options available Seeks to optimise returns by varying the funds exposure to return seeking assets Primarily active investments 1. Source: Aviva 30 November 2017. 2. Source: Aviva 31 December 2017. Over 86,000 customers 1 Over 3 billion in 2 assets 2
Aviva Investors Collaboration and diversity is at the heart of our process Fixed Income Equities Multi-asset Corporate Research ESG 87 investment professionals 250 billion AuM 27 investment professionals 78 billion AuM 36 investment professionals 118 billion AuM* Team: Equities team in London 28 investment professionals Industry & regional focus 9 investment professionals 395 investment professionals Team: FI team in Chicago Team: Equities team in Paris Team: Strategy team in Singapore Source: Aviva Investors. Staff data updated as at 28 February 2018. AUM data updated as at 30 September 2017. *Please note: Our Multi-asset team manage 118 billion ( 104bn, $140bn) of assets managed by investment desks across Aviva Investors and would be included in the equities and fixed income figures above. The coloured boxes on the map represent examples of AIMS strategies in the fund proposed by our global asset class teams. 3
Looking back in time A three year review 4
What happened to asset classes? Asset class performance for a EUR-based investor over the last 3 years Asset class performance for a EUR-based investor over the last 12 months Past performance is not a guide to future performance. Source: Bloomberg, Aviva Investors as at 31 January 2018. 5
% Yield US equities implied volatility What happened in 2017? Bond markets not fully pricing in positive US economic fundamentals 2.7 2.6 2.5 2.4 2.3 2.2 2.1 2.0 US 10 y yields lower Bye-bye liquidity, hello volatility? 80 72 64 56 48 40 32 24 16 8 240 190 140 90 40 US rates implied volatility US 10-year government bonds yield US equities volatility US rates volatility Past performance is not a guide to future performance. Source: Bloomberg, Aviva Investors as at 31 January 2018. 6
House View Key themes Turning point for global monetary policy in sight Underweight duration and credit Opportunistic Chinese reform Overweight to emerging market assets Market outcomes to be increasingly determined by fundamental factors Overweight value regions and sectors Peak financial regulation Preference for European banks Expectations of sustained inflation Overweight to US inflation Source: Aviva Investors as at 31 December 2017. 7
$bn Turning point for global monetary policy Expect higher interest rates 4,000 2,000 Asset purchases Bond issuance Net supply 0-2,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Federal Reserve, ECB, BoE, BoJ, SIFMA, Datastream as at 30 September 2017. 8
Historically low drawdowns for S&P 500 Expect volatility to normalise 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17-19% -5% -6% -5% AVERAGE -8% -3% -7% -11% -12% -17% -19% -14% -7% -7% -7% -10% -16% -19% -10% -6% -7% -10% -12% -3% -29% -27% -33% Warning: Past performance is not a reliable guide to future performance. -47% Source: Aviva Investors, Bloomberg as at 31 December 2017. 9
Building a multi-asset solution in todays environment Key considerations Home bias Global Passive Active Internal External Unhedged Hedged Static asset allocation Dynamic asset allocation 10
Investment process Our investment process draws on all our strengths Strategic asset allocation Tactical asset allocation Implementation Long-term asset allocation House View Asset Allocation Committee Portfolio construction Fund management Globally unconstrained Published quarterly but constantly debated Meets regularly to apply House View to asset classes Selecting the optimal investment vehicle and ongoing risk management Daily rebalancing of cash flows by dedicated implementation team Harnessing our global resources to determine optimal asset allocation Constructing risk-managed portfolios that are robust 11
Strategic asset allocation Aligned to ESMA risk bands MAF Funds MAF Cautious MAF Strategic MAF Dynamic ESMA* risk rating 3 4 5 5-year volatility band (%) 2-5 5-10 10-15 MAF Cautious (Risk 3) MAF Strategic (Risk 4) MAF Dynamic (Risk 5) Growth Defensive Uncorrelated Source: Aviva Investors at 31 December 2017. * ESMA is European Securities and Markets Authority. The asset allocation splits shown are for illustrative purposes only. 12
Tactical asset allocation Adding value around the strategic asset allocation Relative weights to strategic asset allocation (%) Underweight Overweight Growth assets UK equity European equity North American equity Japanese equity Pacific basin equity Emerging markets equity Global high yield Emerging markets debt (local currency) Emerging markets debt (hard currency) Defensive assets US Treasuries Australian government bonds US Inflation Protected Securities Global investment grade Cash Short AUD v EUR Short CAD v EUR Uncorrelated assets Absolute return -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% Source: Aviva Investors as at 31 January 2018. 13
US 10yr Inflation Breakeven Outlook Expect a pick-up in inflation Global inflation expectations recovered during 2017 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.1 2012 2013 2014 2015 2016 2017 10yr US Inflation Breakeven Tighter labour market creating upward pressure on wage growth US Unemployment Rate(LHS) US Wage Growth (RHS) 9.0% 7.0% 5.0% 4.5% 3.5% 2.5% Macro economic fundamentals point towards a sustained return of inflation to target Positive backdrop for Growth assets but Defensive assets will be more challenged Tactical overweight to growth assets and US Inflation Protected Securities (TIPS) 3.0% 2012 2013 2014 2015 2016 2017 1.5% Source: Aviva Investors, Macrobond and Bloomberg, as at 31 December 2017 14
Price to Book value ratio The importance of being selective European versus US equity 20% 10% 0% -10% -20% -30% -40% -50% 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: MSCI and Morgan Stanley as at 31 August 2017. Europe vs USA PBV (% Premium) WARNING: Past performance is not a reliable guide to future performance. Median 15
Level 2011 2012 2013 2014 2015 2016 Bn Outlook Expect European banks to outperform broader market European banks are well capitalised 1000 800 600 400 200 0 Tier 2 Additional Tier 1 Core equity Tier 1 Banks are attractively valued and should benefit from an increase in rates European banks positively correlated to higher yields 150 130 110 90 70 2015 2016 2017 Euro Stoxx Banks index (Lhs) 10yr German bond yield (Rhs) 0.6 0.4 0.2 0.0-0.2 Yield (%) Tilt portfolio to European banking sector Implemented via a Euro Stoxx Banks Future Sources: Bloomberg, Aviva Investors, Basel Committee on Banking supervision as at 31 December 2017. 16
Spread Looking further afield Emerging market versus developed equities 20% 10% P/E relative to developed markets P/B relative to developed markets 0% -10% -20% -30% -40% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 WARNING: Past performance is not a reliable guide to future performance. Source: Bloomberg, MSCI, Factset, as at 31 August 2017. 17
Debt to GDP % A closer look at fundamentals Emerging economies benefit from solid fundamentals 160 140 120 G7 Govt. Debt to GDP Emerging Markets Govt. Debt to GDP 100 80 60 40 20 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 WARNING: Past performance is not a reliable guide to future performance. Source: Aviva Investors, Macrobond as at 31 August 2017. 18
PMI A closer look at fundamentals Emerging economies benefit from improving sentiment 54 53 52 51 50 49 48 Emerging Markets Manufacturing PMI 47 Emerging Markets Services PMI 46 Sep 2014 Mar 2015 Sep 2015 Mar 2016 Sep 2016 Mar 2017 WARNING: Past performance is not a reliable guide to future performance. Source: Aviva Investors, Macrobond as at 31 August 2017. 19
Indexed performance (%) Emerging Markets Equity Small Cap Active & internal 150 Why active Why EM Active? small & internal? cap? 140 130 120 110 100 90 80 Source: Bloomberg as at 31 August 2017. Aviva Investors Emerging Markets Equity Small Cap MSCI Emerging Market Index MSCI Emerging Markets Small Cap ishares MSCI Emerging Markets Small-cap ETF 70 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 WARNING: Past performance is not a reliable guide to future performance. 20
Higher interest rates Volatility to normalise Asset prices to be determined by fundamentals 21
What have we learned? Those who do not remember the past are condemned to repeat it Benjamin Graham, The Intelligent Investor 22
Thank you
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