Matt Christensen

Global investors are increasingly asking for the monitoring and assessment of environmental, social and governance (ESG) risks in their portfolios according to a report published by AXA Investment Managers.

Paris-based Matt Christensen, Global Head of Responsible Investment at AXA IM, who is in Australia this week presenting at the GTQ Investing in Responsibility Conference in Sydney said: “Our clients are assigning greater importance to how ESG factors impact their returns in the long run. In the last twelve months we have worked with several European pension funds as well as AXA Group to help them take responsible practices into account more explicitly. This is a clear trend and is gaining momentum globally and in Australia.”

AXA IM has responded to this demand by increasing its stewardship activities and coverage in 2013. The volume of responsible investment assets managed by AXA IM grew by 18% in 2012.

Impact investing catches attention from global and local funds

Impact investing – which is broadly defined as investments in businesses and/or funds that generate social and/or environmental benefit in return – is starting to catch the attention of sizeable funds globally and locally.

“The impact investing market is still relatively young but its growth has resulted in initiatives that enhance its credibility such as the setting up of standards such as IRIS (Impact Reporting and Investment Standards) or labels such as GIIRS (Global Impact Investing Rating System),” he said.

AXA IM is currently working with AXA Group on an impact investment fund of funds strategy.

Integrating ESG and Smart beta

According to AXA IM, another area in the investor spotlight is the compatibility of smart beta and responsible investment.

“The concepts may seem unrelated, but both approaches reflect a move by investors away from the unintentional and often uncompensated risks associated with traditional index tracking and a greater willingness by investors to make their own determinations about desired exposures, risks and expected returns. There has been little academic research on their compatibility to date, but our back-tested investment analysis shows that ESG SmartBeta has the potential to offer investors a lower total risk and higher return than index investing, along with improved diversification and strong ESG performance.

“A number of academic studies* have shown there has been no penalty for pursuing a responsible investment approach, which was a concern for some investors in the past,” Christensen said. “Analysing assets according to ESG factors as well as traditional financial factors can uncover risks and opportunities that might otherwise not come to light. Responsible investment analysis is simply a good risk-aware way to manage a portfolio,” Mr Christensen said.

The Responsible Investment team is also working with AXA Rosenberg, the quantitative equity expertise within AXA IM that manages SmartBeta Equity, to offer integrated ESG and Enhanced Index solutions.

Craig Hurt, Sydney-based Director of AXA Investment Managers in Australia and New Zealand, said: “Through the strength of our global RI research initiatives, we aim to offer Australian institutional investors – and their individual members and investors – a wider opportunity to invest in strategies incorporating ESG principles, a demand that we can only see increasing in the years to come.”

The post Increasing investor interest in responsible investing: AXA IM appeared first on AdviserVoice.

Smarter strategies required for older investors.

It’s a well known fact we are living longer, in fact a new research paper from AXA Investment Managers (AXA IM) indicates that every day we live we currently gain five more hours of life expectancy.  The paper, ‘Thoughts about the rise in longevity’, considers the complex relationship between populations living longer and the pressure this puts on businesses, individuals and markets on a global scale.

According to the paper, the economic theory of the life-cycle predicts that retirees dissave (where spending is greater than income) to maintain their standard of living despite lower income and switch to less risky assets as their risk appetite reduces, having far-reaching consequences on their retirement savings.

AXA IM Director for Australia and New Zealand Craig Hurt said Australia’s ageing population required smarter strategies that would make their money work harder for longer.

“Longevity is increasing at a pace difficult to apprehend, in many countries, half the babies born today could live 100+ years. As we are living longer superannuation shouldn’t just been seen as a drawdown option after retirement age. Investors need to consider continued growth of their capital for a longer period of time with less volatility. Australian funds are showing most interest in employing smart-beta products for post-retirement portfolios, where there is less sensitivity to tracking error in place of a stable, less volatile return,” he said.

AXA IM launches Global SmartBeta Equity pooled fund for investors in the post retirement phase

AXA IM has expanded its SmartBeta range with the launch of the AXA World Fund Global SmartBeta Equity. The Fund seeks to provide long-term investors with an efficient, well-diversified and low cost way to achieve improved equity market returns by capitalising on market inefficiencies and avoiding the inherent drawbacks of indexing.

In May 2012, AXA IM launched its SmartBeta solution with a series of innovative corporate bond strategies.  Since then the SmartBeta range has been developed to offer smart solutions for harvesting beta from equity markets and fixed income.  On a global scale AXA IM now manages over A$4 billion¹ across its SmartBeta strategies (fixed Income over A$1.6bn and equity approximately $A2.6bn).

The latest addition to this range, the AXA WF Global SmartBeta Equity, is a long-term equity investment strategy that aims to efficiently deliver an improved total risk/return profile for investors. The strategy is designed to achieve 100-200 basis points annualised excess return, with approximately 80% of the market volatility, over the full market cycle. It is intended to avoid full participation in speculative bubbles, and to exhibit less extreme drawdowns during market shocks.

Tim Gardener, Head of Institutional Client Strategy at AXA IM, comments: “Institutional investors want smart, dynamic solutions that generate long-term, cost effective returns. We believe that traditional market cap-weighted indices expose investors to sources of structural systematic risk that, over an investment cycle, are under compensated. In particular, our research shows that volatile stocks and those with poor ‘earnings sustainability’ have been persistent sources of additional risk, but not additional return. Traditional market cap-weighted indices also often concentrate exposure in a relatively small number of large caps. The AXA WF Global SmartBeta Equity has been designed with the aim of overcoming these challenges and, in turn, achieving improved equity market returns for investors, over the full market cycle.”

The AXA WF Global SmartBeta Equity revolves around three building blocks:

1. Systematic filter: to reduce exposure to uncompensated risk and improve sustainable earnings growth
2. Intelligent diversification: to protect against concentration risk, while managing liquidity
3. Smart implementation: to minimise cost.

The Fund leverages AXA Rosenberg’s data platform and proprietary insight into the fundamental drivers of risk and return. For example, their proprietary, forward-looking measure of ‘sustainable earnings growth’ is the cornerstone of the filtering process. AXA Rosenberg has more than 8 years’ experience managing portfolios that target reduced volatility and reject market capitalisation. The Fund also benefits from continuous investment oversight and on-going SmartBeta research and development.

Craig Hurt concludes: “We believe that blindly tracking an index however it is constructed can never be optimal as they studiously ignore real time information and the evolving environment. Our SmartBeta strategies give investors another option – offering an outcome focused, practical investment strategy that seeks a more efficient equity market beta. With a less volatile return profile, these strategies are a good fit for the post retirement phase where members have higher account balances and are more sensitive to periods of drawdown.

The post Australian funds show interest in smarter, less volatile strategies for ageing population appeared first on AdviserVoice.

Japan, the recent revelation for investors.

With cash returns failing to match inflation in many countries and investors looking for alternative ways to boost returns, institutions continue to face a challenging economic climate despite equity markets rallying this year.

Against this backdrop investors are being forced to take greater risks in higher volatility and low liquidity investments to achieve target returns according to Tim Gardener, Head of Institutional Client Strategy at AXA IM, presenting at the Australian Superannuation Investment Conference on the Gold Coast today.

Despite the global headwinds, most investors believe, there are positive growth signs for the United States but they remain concerned that Europe has not moved far enough on structural change. This is hindering its recovery. Across the rest of the world, institutions are becoming more realistic on long term growth prospects for emerging markets.

“Many of the emerging markets have delivered much less recently with capital moving back to developed economies such as theUnited Statesin anticipation of a recovery. While emerging markets returns are likely to be volatile, the long term positive direction of the emerging markets story is still the prevailing view,” London based Mr Gardener said.

Another positive and surprising story for institutional investors this year has been Japan, fuelled by the growth policy commonly referred to as Abenomics, the equity market has increased by over 55% over the past 12 months.

“The revelation for investors this year has been Japan, a country which was so often ignored by institutional investors over the last 20 years. Fund managers and investors are having to rethink the strategic weighting of Japan which in many global portfolios had fallen to close to zero despite the size of the underlying economy,” he said.

But the periods of easy monetary policy which has boosted stock markets across the world will likely have follow on effects, most likely in the form of inflation and many investors are trying to position portfolios with this in mind.

“Most investors believe that quantitative easing has built inflation into the system. The problem is that since so many investors fears the same outcome, in this case inflation, the underlying assets which are considered to be long term inflation hedges are becoming expensive as demand outstrips supply,” he said.

SmartBeta, a potential solution to navigate headwinds

With potential issues needed to be navigated carefully, institutional investors are looking for ways to get more out of equities and bonds using smarter strategies including moving away from investing according to traditional market capitalisation indices and into alternative approaches. Looking at theUSequity market investing across size, value and momentum, there is a significant long term premium involved which can be exploited using a Smart Beta approach.

Commenting on Smart Beta strategies locally, AXA IM’s Director of Australia & New Zealand, Craig Hurt said: “Since AXA IM announced its global SmartBeta equity strategy in Australia six months ago, significant interest has been shown by local investors looking for cheap diversified global equity exposures which provides a more sophisticated and efficient way of capturing equity market beta than traditional approaches.”

Concluding on how institutional investors are adapting to the current market condition, Mr Gardener said: “Superannuation funds are looking at ways to ensure they meet their objectives of generating real wealth and protecting existing wealth. Strategies which worked previously are being scrutinised to determine long term viability as the industry advances from just repeating historical strategies which were once successful.”

The post Superannuation funds and institutional investors face headwinds despite market rally appeared first on AdviserVoice.

The new solution offers long term investors a more efficient way of capturing equity market beta while avoiding the limitations of both market cap weighted indices and alternative weighted schemes – namely exposure to poorly compensated risks, poor diversification, failing to look towards the future and cost leakage.

Hosting a series of roundtables for Australian institutional clients and asset consultants this week, Tim Gardener, Head of Institutional Client Strategy, AXA IM, commented:

“Most investors are now aware of the pitfalls of market cap weighted indices. However, we believe that while alternative solutions go a long way towards overcoming the drawbacks of market cap none address the problems inherent in index tracking.”

The AXA IM SmartBeta Equity strategy is constructed around the same three building blocks as AXA IM’s SmartBeta Bond strategies, which have already seen strong demand from investors globally. 

AXA IM’s three SmartBeta building blocks are: 

• Filter: rules based filters aim to reduce exposure to uncompensated risks
• Diversify: intelligent diversification aims to avoid concentration risk while managing liquidity
• Implement: rebalancing and trading in a way that leverages our experience as investors, while keeping costs low.

Australian investors can also now access the SmartBeta Bond Strategies via the newly launched AXA World Fund Global SmartBeta Credit Bonds. 

AXA IM launches new beta harvesting guidelines 
To help guide investors through the benefits of SmartBeta solutions AXA IM also today released a new white paper “Investing in Equity: Smart Beta or Dumb Beta?”. The paper looks to shift the focus from which index an investor should blindly follow, to deliver solutions to help investors access equity beta cheaply and efficiently. 

“In harvesting beta, a smart investor is not looking to take ‘bets’ as an active manager might, although they are persuaded of the need to avoid the pitfalls of blindly tracking an index. The smart investor recognises that equity investing involves taking on risk, but wishes to limit both longer term loss of wealth and shorter term downside volatility by avoiding, as far as possible, the stocks that are overvalued when markets head south,” explained Tim Gardener.

In designing the strategy AXA IM has leveraged its AXA Rosenberg team’s expertise in engineering and managing quant equity strategies. The AXA IM SmartBeta Equity strategy will be managed by a team from AXA Rosenberg and benefits from their experience of constructing and running portfolios that reject market capitalisation and target desirable fundamental features. The approach uses proprietary risk filters and leverages AXA Rosenberg’s research and data platform.

Demand for SmartBeta solutions rising in Australia, and globally
AXA IM has a long and solid track record of managing SmartBeta type strategies for its insurance parent AXA Group. Craig Hurt, AXA IM’s Director of Australia & New Zealand, anticipates increased interest in these solutions as the 1 July MySuper deadline draws closer and many funds are still grappling to strike the right cost/ return balance to deliver the best outcome for members.

“Following the GFC, many local and global investors shifted their active global equity funds to passive management and by and large that has proven to be a correct decision over the last five years. Economic history however teaches us that extended periods of monetary stimulus, such as we have witnessed these past few years, inevitably lead to bubbles and bubbles by their very nature cannot be predicted with any consistent level of accuracy.

“We’re concerned that many investors in passive global equities will find themselves nursing avoidable losses in a few years time. We believe the SmartBeta global equity strategy offers a sensible middle ground between blind index tracking and expensive active management strategies,” Mr Hurt concluded.

The post AXA IM expands SmartBeta range appeared first on AdviserVoice.

Matt Christensen, Global Head of Responsible Investment for AXA IM, comments: “We are seeing increasing interest from clients in ESG analysis that can be applied to asset classes such as sovereign debt. The eurozone crisis has only amplified this interest as the evaluation of sovereign issuers’ creditworthiness has been brought to the fore.”

A research paper by AXA IM’s Responsible Investment team, ‘Sovereign debt investing: ESG framework and applications’ outlines two ways that investors can draw upon ESG analysis for their sovereign debt portfolios. The first addresses investors’ desire to limit reputational risk by screening the investment universe using specific ESG criteria before the portfolio construction phase. 

One of AXA IM’s clients asked the firm to minimise the reputational risk of their existing emerging markets sovereign portfolio holdings. The rules-based reputational screen identified 10 (from a total of 57) sovereign issuers that presented significant reputational risk – representing 9.7% of the universe’s market capitalisation.

The move to rules-based screening did not significantly alter the quality, yield and duration characteristics of the portfolio. In terms of credit quality, the risk screen reduced the percentage of highly speculative debts and this quality improvement was without significant impact to the yield and duration.

“A key issue for investors is the long-term sustainability of a country’s economic and political situation and therefore addressing ESG issues naturally aligns with this. In addition, many institutional investors wish to limit reputational or headline risk in order to avoid negative perceptions associated with a particular activity or regime. Investors may find a reputational risk strategy based on negative screening particularly useful for emerging markets since these countries tend to score poorly on governance measures such as control of corruption relative to developed markets” explains Matt Christensen.

The research also examined how an ESG overlay would impact a sovereign debt portfolio’s key characteristics. The study showed that an ESG overlay within defined risk parameters does affect country allocation and can improve the ESG performance of a sovereign debt portfolio whilst having a limited impact on other key portfolio characteristics including quality and duration.

The top ESG over-weights for emerging markets were Poland and Chile. For developed markets, Spain topped the list for its better than average ESG score, despite a poor S&P long-term rating and gloomy economic prospects. The top ESG under-weights for emerging markets were the Philippines, Columbia and Indonesia. For developed markets, Japan was the largest underweight largely due to governance issues, while sovereigns with high quality long-term ratings such as the United Kingdom and the United States were slightly underweight largely as a result of poor environmental indicators. 

Craig Hurt, Sydney-based Director of AXA Investment Managers in Australia and New Zealand, said ESG factors may be becoming more material to sovereign debt investing and investors are taking note. 

“We’ve begun to examine the different ways in which ESG criteria can be applied to sovereign debt portfolios. We are already using this ESG country framework in our core RI funds, but see an opportunity to expand this into our mainstream funds. The strength of our model is its flexibility, which allows us to propose different ways to integrate ESG criteria according to a fund’s specific objectives and the client’s requirements.

“Through the ongoing expansion of our global RI research and initiatives, we aim to offer Australian institutional investors – and their individual members and investors – a wider opportunity to invest in strategies incorporating ESG principles,” Mr Hurt concluded.

The post AXA IM launches new ESG framework appeared first on AdviserVoice.