The Aviva Investors US Equity Income II fund was launched in September 2013 as a successor to the Aviva Investors US Equity Income fund. The original fund was soft closed to new investors following a period of significant inflows. Like its predecessor, this fund is run by Henry Sanders and Thomas Forsha, from the firm’s US equity subsidiary River Road Asset Management.
Mr Sanders states: “The objective of the fund is to outperform the Russell 3000 Value benchmark on a total return basis by 200 to 400 basis points annualised over a market cycle and to provide a yield in excess of the benchmark yield.”
One difference between the two US equity income funds is the second has a greater large-cap bias than its predecessor, meaning it is less constrained and should provide lower levels of volatility.
Mr Sanders explains: “The strategy utilises a fundamentally driven research process to identify attractive purchase candidates from an all-cap universe of high-yielding equity securities. It invests in well-managed, financially strong companies with high and growing dividends, targeting companies that are also trading at a meaningful discount to the assessed absolute value.”
Typical investment criteria include minimum market capitalisation of $1bn (£817m) at time of purchase and an indicated dividend yield of at least 2 per cent.
He believes this stock selection process is complemented by a risk-averse approach that employs balanced diversification and a structured sell discipline. He says that “unlike most value investors” they do not average down on losing positions.
“As the team has matured and the firm’s strategies have experienced a broader variety of economic and market cycles, we have continued to refine our sizing and sell disciplines and risk management guidelines,” says Mr Sanders. “These changes are intended to tighten up our discipline, as it relates to our existing philosophy, and allow for broader participation in discussions and actions related to various risks in our portfolios.”
Macroeconomic factors have little impact when it comes to determining portfolio positioning or exposures, the manager confirms. According to the key investor information document for class one income shares, the clean retail share class, the fund sits at level five on the risk and reward scale and has ongoing charges of 1.64 per cent.
Over three years to October 4 2016, the fund (share class 2 income) has delivered a return of 59.6 per cent, in line with the Russell 3000 Value index’s gain of 59.4 per cent and slightly ahead of the IA North America sector average return of 56.3 per cent, FE Analytics reveals. But in the past 12 months to October 4, the fund has managed to pull ahead, returning 39.4 per cent to investors, compared to the index’s 34.4 per cent rise and the peer group average of 28.1 per cent.
Mr Sanders attributes the fund’s outperformance to stock selection in the financials and industrials sectors. He picks out several holdings that contributed to performance in the year to date to the end of August this year. “The outperformance in financials was driven by the strong return of Reit [real estate investment trust] holdings, most notably, Iron Mountain (+46 per cent) and Ventas (+32 per cent), the first and fifth highest contributors to portfolio return, respectively,” he points out. “Industrials benefited from the holding of ADT.”
