Aviva Investors – Edinburgh

Aviva is the largest insurer and a leading life and pensions provider in the UK and Aviva Investors is its asset management business. The Edinburgh office was set up in 2018 with nine senior staff from Aberdeen Standard Investments. Aviva Investors manages around $444 billion. $50 billion in active equities. It has offices in 19 financial centers including Edinburgh, London, Paris, the US (Chicago) and Canada staffed by over 40 equity investment professionals.  Global equity strategies include: Income ($776 million – income and capital growth), Endurance (c.$1 billion – defensive capital growth) and launched in 2019, Unconstrained (opportunistic capital growth). AUM in global equities are currently $2.5 billion and this figure is expected to grow.

Mikhail Zverev joined Aviva Investors in October 2018 as Head of Global Equities. He was formerly Head of Global Equities at Standard Life Investments (SLI) and also portfolio manager on a number of funds. He joined SLI in 2007. After graduating from St Petersburg State Technical University with a BSc Physics, Mikhail started his career in 1998 with Trigon Capital, an Eastern European investment banking firm. He gained his MSc Accounting and Finance from London School of Economics and joined the investment banking division of Schroder Salomon Smith Barney in London in 2001, before moving to First State Investments as an Analyst, UK Equities in 2002.

As someone who has been involved in the Scottish investment management industry for many years, how would you characterize the current environment north of the border?

Edinburgh has seen a few changes in recent years such as the merger of Aberdeen Asset Management and Standard Life but also there has been healthy growth of new firms, including Aviva Investors. While the likes of Aberdeen Standard, Walter Scott and Baillie Gifford remain important institutions, these ’new kids on the block’ are increasing AUM in Edinburgh, adding diversity and bringing more professionals into town.

Aviva has 19 financial centers around the world – in which locations are there active equity investors? 

London, Paris, Edinburgh and Chicago currently have active equity investors.

How do the London, Paris, Edinburgh and Chicago offices collaborate? (e.g. if a corporate was visiting – who is the best contact)

European equities are run from London and Paris; with the bulk of the team in Paris. Emerging market and global equities are run from London and Edinburgh. There is also a dedicated US equity team in Chicago which currently has four investment managers; but this will increase to eight.

Of the $50 bn in active equities – you are responsible for $2.5 bn in dedicated global equities?

Correct. In the past 12 months, Aviva, which is one of the largest asset owners in Europe has decided to really get behind active equities at a time when many in the market are withdrawing/reducing their exposure. We have doubled our equity team from 20 to over 40.  The global equity team has tripled. That’s a very big investment. A large proportion of our parent company’s assets have not been run actively but now we have the opportunity to run more assets actively. We also expect to increase active equity third party assets.

The global equity team of six is located in London and Edinburgh – how does that work?

If a US or European company is visiting London, Edinburgh or Paris – let us know and we will organise the best place to see the investment professional who is covering that industry. If there is a scheduling conflict, we have video conferencing and make use of it between the four locations (e.g. London, Edinburgh, Paris and Chicago). We are very accustomed to using cross regional office collaboration with video conferencing.

How do the various investment teams (e.g. Global, US, UK, European, EM and ESG) collaborate? 

We see each other a lot and use video conferencing. We are comfortable working across offices. Our key differentiator is that we work on a cross regional and sectoral basis. For example, if we are considering a telecoms equipment stock we not only look at competitors within that industry but also the wider semiconductor industry too, so we look at the whole value chain.  We are very stock specific investors and look for the non-consensus view about the future fundamentals of the company.

Within the global equity team – you tend to specialise by sector – discuss.

TMT is my main sector focus; but I am also back up on industrials. However, we are all generalist PMs too. Seeing companies is super important for us. We try to be competent hosts of meetings even if it is not our sector, to use companies’ time most effectively. We are well prepared, know the company’s business, will have read conference call transcripts and done our homework before a meeting. We then want to really understand what’s happening in the business.

Within the newly launched Unconstrained fund – 20 stocks make it on your “global winners list” – discuss.

This is where we have highest conviction that there is material upside which differs from consensus. We have genuinely identified something that the market has missed. The primary source of our information is conversation with companies – both the companies in question and in the eco system. Seeing companies is paramount for ideas generation and conviction.

Average position and largest position?

In Unconstrained, 2 – 4% is a typical position but we may start smaller and go larger.

You benchmark against MSCI ACWI – performance?

Our Global Income and Global Endurance equity strategies both performed strongly against the benchmark and are in top quartiles in their respective peer groups (since launch for Endurance, and over the last 5 years for Income). Global Unconstrained is launching as we speak, but I have run a Global Unconstrained equity strategy for 8 years at Standard Life Investments and it outperformed the benchmark and was in the top quartile in its peer group over that period. So we’re confident we can continue delivering strong performance for our clients.

Active share is 90%+.

Correct.  We are highly active, high conviction, stock specific investors with an investment horizon of 3 years plus.

How do you incorporate ESG into your investment process?

We have a dedicated ESG team who do company level analysis to identify any governance, social or environmental risk.  We read what they produce but we also compare it to what we know about the business.  It contributes to our understanding of the risks and opportunities of the business.  If ESG risks are identified, we will address them with a company and see if the positives outweigh the ESG risks.  The only sector we can’t invest in is controversial weapons (such as cluster munitions) as we are UN PRI signatories.  Apart from in one or two ethical funds, there are no hard exclusions so we can invest in aerospace, oil & gas, mining, tobacco etc.

Screens used?

We don’t really use screens but do use quantitative tools to allow us to determine inflection points in company fundamentals.  There is no formulaic screen as there isn’t a particular type of company that we look for.  We like to understand a business and the changes affecting that company and industry and if that differs from the consensus view.  We are style agnostic.  We might invest in a high growth company where we think growth will be stronger and longer than the market expects or one which is going through a difficult time but where we expect it to recover more than the market thinks.

Do you vote your proxy?

We are very active voters.

Buybacks or dividends?

It depends on individual circumstances – no overriding preference.

Discuss some holdings:

First Republic – we like the sustainability of its growth, the quality of the franchise, the competitive advantage they have over peers in the niche of mass affluent private banking. That is mostly held in our unconstrained and stewardship fund (ethical).

Equifax – we believe it will not only see a strong recovery following the data breach a couple of years ago. But it is re-investing in its IT platform which will improve cyber security and make it a more competitive information provider within its industry.  So, we see recovery and growth.

United Health – despite the political noise about US healthcare, it is the most farsighted in the health insurance space in building its portfolio of assets which means it will increasingly become a gatekeeper and agent of cost control in the US healthcare system. The market under-appreciates its opportunities and competitive positioning.

Bayer – the market is too focused and too pessimistic on the Monsanto glyphosate litigation.  It misses the latent opportunities in the crop protection and seeds businesses.  We are at the bottom of the agricultural cycle.  It is in a strong position following its acquisition of Monsanto.

SK Hynix – a Korean semiconductor memory company (like Micron in the US).  The market underestimates the consolidation and discipline (both supply and price) and the long-term growth in demand for memory from cloud and data centres and consumer electronics mobile devices.  It has been going through a bad down cycle which is why stocks are depressed.  We are prepared to look beyond that.

What upside do you look for?

The best we can find in the market.

Do you have to meet management before you buy a stock?

We have a strong preference to meet management before we buy a stock and, once we are invested, like to speak to and see management regularly.

How do you prefer to meet management?

We prefer one-on-one meetings as we prefer to control the agenda.  We rarely ask management to go through the presentation.  We always come to a meeting fully prepared.  We appreciate it is not always possible to have a one-on-one so we are also happy to meet management at conferences and we do travel to meet companies too.

MiFID II – has it affected you?

Absolutely.  It has focused our attention on the cost of corporate access now that services from the sell-side are unbundled.  Our research relationships are in a state of flux.  We need to focus on the highest quality input and focus our research dollars to get the best value.  We like to use alternative routes to meet companies such as direct access or professional IR service providers such as Phoenix-IR.

Any tips for companies about communicating with Aviva Investors?  Key do’s and don’ts?

There is an implicit bias in spending time with existing investors and this makes sense.  But it is just as valuable to spend time with potential investors who know and like the business and are waiting for an opportunity to invest.  If the share price tumbles, for whatever reason, those investors currently on the bench, can step in and back you up in times of uncertainty.  They are ready to jump in and support the share price if there is a shadow over it due to an unexpected macro event for example.  If you are already a long-term holder and the share price tumbles, you might not have the ‘dry powder’ to buy.  So, companies should cultivate having a bench of investors ready to step in.

Why should corporates target Aviva?

We are long-term, bottom-up, responsible owners who will hold a stock for 3 years plus.  We only want to meet you if we are interested in your business.  We really care about what happens in your business.  We won’t discuss the macro environment or competitors.  We want to discuss positive change you’re benefiting from or implementing in your business, and we will support you if the stock is unfairly punished by the market if we believe you are more resilient than the market gives you credit for.

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