AEGON ASSET MANAGEMENT
OPTIMUM INCOME FUND
Aim: Income or growth by investing in high yield and investment grade corporate bonds
Minimum investment: Lump sum £500, monthly £50
Investment split: High yield corporate bonds 50%, investment grade corporate bonds 50%
Yield: 8.5% gross a year
Isa link: Yes
Pep transfers: Yes
Charges: Initial 4.5%, annual 1%
Special offer: Initial charge reduced to 3.5%
Offer period: Until June 30, 2002
Commission: Initial 3%, renewal 0.5%
Tel: 0800 454422
The panel: David Flowers, Director, Ronald Blue & Co North,
Martin Dilke-Wing, Director, Morgans Independent Advisers,
David Cowell, Associate, Andrews Gwynne Associates,
Bruce MacFarlane, Partner, Capital Trust Financial Management
Suitability to market 7.5
Investment strategy 7.0
Past performance 5.7
Company's reputation 6.3
Product literature 5.3
Aegon Asset Management's optimum income fund is an Oeic that invests equally in investment grade and high yield corporate bonds. It has a target yield of 8.5 per cent a year.
Considering the market suitability of the fund MacFarlane says: “There are an increasing number of corporate bond funds in the market. The Aegon optimum income fund seems little different compared with what is already there from other providers.” Flowers thinks it is well placed in terms of target income and risk profile.
Dilke-Wing says: “The fund looks like a useful new entrant into the area that many analysts and management groups are trumpeting as this year's solution to the high return, low-risk conundrum. There are a lot of other contenders out there.” Cowell says: “High-yield bonds are flavour of the month and should prosper in the short term if we see the equity market rise this year.”
Identifying the types of clients the fund could attract Dilke-Wing says: “Typically, this type of fund is aimed at grannies bored with their diminishing building society returns. While this is still the case, a number of groups are starting to target equity-cynical younger investors with this type of fund. Rolling up 8.5 per cent a year in an Isa environment with an acceptable level of risk may be an attractive proposition.” Flowers says: “An income seeker or risk-averse client, but those with a long-term view as fixed interest is unlikely to outperform equities in capital growth terms for quite a while.”
Cowell says: “A client who is a realist. Most people think that fixed-interest is low risk. This is not necessarily so, particularly in high-yield bonds.” MacFarlane says: “The fund is suitable for clients who require a higher than average regular income. The client would need to be aware of the medium-risk nature of the fund and have an awareness of how interest rate movements can affect the capital value of such an investment. The Isa wrapper will be attractive by providing investors with the gross yield.”
Examining the fund's marketing potential Flowers says: “It is nothing dramatically new. This will slot neatly into the berth previously occupied by distribution bonds.” Cowell can see few opportunities. He believes it could be seen as a me too fund as there are similar funds available with track records.
MacFarlane says: “The fund will have little marketing opportunities for us as we are currently cautious with regards to the corporate bond market at this juncture of the interest rate cycle.” Dilke-Wing says: “In itself, post-Isa season, there are probably not many marketing opportunities. But it may prove a viable piece in the jigsaw puzzle of portfolio construction.”
Discussing the fund's useful features and strong points, Cowell highlights the high gross redemption yield. MacFarlane mentions that income can be paid regularly to suit the investors circumstances. Dilke-Wing finds it difficult to spot any strong points for the fund as he feels it does not aspire to radical innovation. He eventually goes for the company's reputation and track record in fixed-interest investments. Flowers says: “Good investment heritage and a well balanced strategy to blend income from low- and medium-risk investments.”
Assessing the investment strategy MacFarlane says: “The optimum income fund is a blended fund, which combines a mixture of higher yielding higher risk corporate bonds with lower risk investment grade bonds. The high-yield bonds will provide a high level of income, but expose investors' capital to risk. Preservation of capital will principally be provided by the investment-grade element of the portfolio. The portfolio will be constructed to mitigate capital risk, but at the same time designed to provide a realistic above-average yield of more than 8 per cent.”
Dilke-Wing says: “The investment strategy is typical for this type of product in that it appears to combine high quality fixed-interest securities with high-yield bonds to generate maximum returns at minimum risk. The acid test of whether this can be achieved is its performance.” Flowers says: “It is good, it should work well in the long-term.” Cowell complains there is little information provided in the literature and points to inconsistencies between the brochure and key features as to what the fund will invest in.
Pointing to the drawbacks of the fund Dilke-Wing says: “You have no real idea of the weighting of the various components and the levels of risk being taken. It is a matter of trusting the manager and the analysts to find good quality high-yield bonds.” Flowers says: “It is expensive and unlikely to see much capital growth.” MacFarlane can find no disadvantages.
Examining the company's reputation Flowers says: “Aegon was originally Scottish Equitable, which had a good reputation in the IFA marketplace. Aegon can only add to that by bringing significant financial security and investment clout.” Cowell says: “Some of the longer-term performance comes from the original Scottish Equitable unit trusts. It is particularly strong in Europe and fixed interest.
MacFarlane says: “Aegon has a good reputation for managing fixed-interest assets globally.” Dilke-Wing says: “Aegon has an excellent reputation in the institutional fixed interest sector and is known to IFAs. As the asset management operation behind Scottish Equitable's pension funds, unfortunately Scottish Equitable's performance has been decidedly poor over the medium term. Aegon has no performance in the UK retail investment market.”
Looking at the company's past performance record Dilke-Wing says: “On the retail side, it does not look too clever. It is asking a lot of investors' faith that they ignore Aegon's sub-average performance across its range of unit trusts because it has won prizes for institutional fixed interest fund management.” MacFarlane says: “It is very good in the fixed-interest sector.”
Flowers says: “In fixed interest, it has been very good in recent times. Over the longer-term, it is difficult to research because one has to decide whether to examine Scottish Equitable's performance or Aegon's.” Cowell finds the performance patchy.
Identifying the possible competitors for the fund, MacFarlane goes for Aberdeen fixed interest, Baillie Gifford corporate bond fund and Royal & Sun Alliance extra income bond. Cowell says: “ABN Amro has a good short – to medium-term record, LeggMason recovery income is also impressive, and Standard Life higher income.” Dilke-Wing cites Aberdeen, Fidelity, Henderson and ABN Amro.
Dilke-Wing thinks the charges are standard. MacFarlane says: “The charges are in line with the rest of the market, but slightly high for a corporate bond fund.” Flowers says: “For a bond fund, it is expensive.” Cowell thinks the initial charge is high but that the annual management charge is reasonable.
The panel agree that commission is fair, although Flowers has reservations that it may be too high in the 1 per cent world.
Looking at the literature, Cowell is unimpressed. He says: “It is poor, it doesn't explain anything in detail and there appears to be discrepancies between the sales brochure and key features.” Flowers thinks it is well written and that the orange-pink colour interesting. However, he also found some inconsistencies within it. MacFarlane thinks it is eye catching and easily understood. Dilke-Wing found the literature disappointing and far too simplistic to allow IFAs any sort of evaluation of the fund.