Kev Toohey

AXA Investment Managers (AXA IM) has launched its first ever fully integrated ESG SmartBeta strategy in the Australian market. The AXA IM ACWI SmartBeta Equity Fund (the fund) 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 weighting schemes.

Powered by AXA Rosenberg, the quantitative investment arm of the global AXA IM group, the fund is now accessible via the Asgard platform, having been seeded with A$55 million from local Australian Financial Services Licensee, Financial Index Wealth Accountants (FIWA).

Kathryn McDonald, AXA Rosenberg’s director of investment strategy, said while smart beta and ESG might seem unrelated, both approaches reflected a move by investors away from standard index tracking.

“Overlaying smart beta with ESG is quite a new and novel concept but it’s one we feel is a very positive step. Our extensive research shows ESG smart beta can offer investors a lower risk and higher return than index investing, along with a defensive strategy with improved diversification and ESG performance – an attractive concept for long term investors.”

The fund also extends AXA IM’s well-established SmartBeta capability from developed to emerging markets via the All Country World Index (ACWI) ex Australia benchmark, offering  Australian investors a one stop shop for their global equity smart beta exposure.

New AXA IM fund now core part of FIWA’s global equity strategy

Advised by independent asset consultants Atchison Consultants, FIWA has said that based on a number of factors, the dealer group is open to increasing investment in the fund over the coming years.

Commenting on the partnership Kev Toohey, General Manager, at Atchison Consultants said the AXA IM ACWI SmartBeta Equity Fund was now a core element of its global equity strategy within the FIWA diversified strategies.

“We saw real value in moving away from a standard passive mandate towards a more effective means of harvesting the global equity beta. We were also attracted by the diversification play the fund’s emerging market exposure offers investors,” he said.

AXA IM’s SmartBeta strategies gaining positive traction

Today’s announcement follows Mercer’s A$150 million allocation to AXA IM’s global credit strategy in April this year. Globally, AXA IM’s smart beta strategies have garnered approximately US$2.5 billion from investors in the past 18 months.

Craig Hurt, AXA IM’s Director of Australia and New Zealand said a greater number of investors were implementing these intelligent, yet cost-efficient solutions:

“Since bringing our SmartBeta credit and SmartBeta equity strategies to the Australian market we’ve seen an increasing number of investors, both institutional and retail, look for a more intelligent and pragmatic approach to capture the market return. It’s exciting for Australia to be leading the charge on smart beta and ESG integration and that more investors, especially those in the post-retirement phase, can benefit from these types of solutions,” he said.

He will be responsible for the continued development of AXA IM in the Asia Pacific region including Japan. He will also be a member of AXA IM’s Executive Committee.  Simon succeeds Jean-Pierre Leoni who, after four years in Asia, is returning to France where he will lead AXA IM’s Client Management Group.

Laurent Seyer, Global Head of Client Group, comments: “We are thrilled that Simon has joined our rapidly growing team in Asia-Pacific bringing with him invaluable investment management experience along with extensive knowledge of the challenges and opportunities offered by the region. Our focus as a business is on growing third party assets through geographical expansion, client segmentation and further strengthening of our product offering. Asia is a key market for us and with Simon on board, we will work to accelerate our expansion in Asia building on the solid foundations achieved by Jean-Pierre Leoni and the team over the past few years. Today, thanks to these efforts we have a growing presence in the region, providing investors in Asia with access to a wide range of investment solutions.”

Commenting on his new role, Simon Flood, Head of AXA IM Asia Pacific, says, “I am very pleased to be joining AXA IM at what is a very exciting time for the business. I hope that my years of experience in the industry will help AXA IM grow its retail and institutional business across the region. I have great respect for what AXA IM has achieved under the leadership of Jean-Pierre and look forward to working with the team to continue to grow our profile, client base and product offering in Asia.”

Simon is a veteran of the investment management industry. Prior to joining AXA IM, he was Chief Investment Officer at Lion Global Investors Limited and before that held a number of senior investment roles in the asset management industry, covering both the listed, developed and emerging, as well as private, equity markets. He has held a number of senior regional positions including leading the Asia Pacific ex Japan business for Merrill Lynch Investment Managers. Originally from New Zealand, Simon spent 15 years in London, followed by five years in Hong Kong before moving to Singapore in 2009.

AXA IM has been expanding both its investment teams and product offering in Asia. Last month, the firm added 20 funds in Hong Kong and Singapore, bringing the total number of registered funds to 36 across the two markets. In December 2013, Aidan Yao joined AXA IM as Senior Emerging Asia Economist and Jim Veneau became Head of Fixed Income Asia. Mark Tinker transferred from London to Hong Kong in September 2013 to be Head of AXA Framlington Asia.

Mercer’s allocation to AXA IM’s SmartBeta credit strategy complements other managers within their global credit portfolio, enabling Mercer to achieve a cost-efficient and well-diversified global credit exposure without the drawbacks of market capitalisation index tracking strategies.

Craig Hurt, AXA IM’s Director of Australia and New Zealand said local funds were taking notice of these intelligent, yet cost-efficient solutions:

“Since bringing our SmartBeta credit and SmartBeta equity strategies to the Australian market we’ve seen an increasing number of institutional investors look for a more intelligent and pragmatic approach to capture the market return,” he said.

AXA IM’s SmartBeta credit strategy takes an active approach to defining the investment universe, providing Mercer with a more attractive risk/return profile than that offered by passive index tracking strategies.

From a universe of bond investments determined by a number of rules-based and fundamental filters, AXA IM’s diversified portfolio is constructed such that it is not unduly exposed to either systemic or event risk at an issuer, sector or regional level. Using relative value analysis, those bonds that are deemed to offer the best value are equally weighted in the portfolio. Given the purchase price of a bond is critical to the overall return of a buy and maintain strategy, this approach maximises the beta of the portfolio over the longer-term.

Unlike index tracking, SmartBeta credit takes a pragmatic approach to portfolio construction and aims to buy well (the fewer issues that have to be sold before maturity the better), diversify intelligently to minimise exposure to risks, and implement efficiently as unnecessary or high transaction costs can destroy returns. AXA IM now manages over $2.5 billion in SmartBeta equity and $1.8 billion in SmartBeta credit.*

“AXA IM has a long and solid track record of managing buy and maintain type strategies and we anticipate further interest in these solutions in the year ahead. Our SmartBeta strategies are gaining significant traction amongst the post-retirement investment options offered by local funds given their focus on effectively harvesting beta while also seeking to minimise losses,” Mr Hurt concluded.

Consideration of environmental, social and governance (ESG) requirements can be compatible with SmartBeta investing according to AXA Investment Managers (AXA IM). Indeed combining the two approaches may produce higher risk adjusted returns than the cap weighted Market Indexfinds AXA IM’s latest ESG Insight – A responsible investment approach to smart beta equity investing.

“Smart beta and responsible investment are both garnering greater attention from investors. They 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 study shows that ESG SmartBeta can offer investors a lower total risk and higher return than index investing, along with improved diversification and strong ESG performance” comments Matt Christensen, Global Head of Responsible Investment at AXA IM.

According to AXA IM’s research the ESG SmartBeta portfolio which was created for the purpose of the study would have outperformed a ‘vanilla’ SmartBeta portfolio and the MSCI World on both the overall performance and the ESG risk score.[1]

To build the ESG SmartBeta Equity portfolio, AXA IM took its AXA IM SmartBeta Equity strategy as an initial vanilla portfolio. This portfolio is formed by passing the global equity universe through four filters: earnings sustainability, volatility, speculation, and distress. This process reduces exposure to sources of uncompensated risk. The portfolio is then diversified to remove the problem of a high concentration in larger companies that can be present in traditional market capitalisation weighted indices, while avoiding the liquidity risk introduced by many alternative weighted schemes.  The weightings of the smart beta index are then adjusted based on each stock’s ESG score from almost a dozen data points.

“Many investors are now required to incorporate ESG factors into their investment policies” Matt Christensen adds. “It might sound complex managing multiple objectives, but in the real world investors do have many different motivations and needs. If you look at the philosophical foundations of smart beta and responsible investment, the ESG approach is a natural fit with the idea that investors should avoid uncompensated risks. This research shows that SmartBeta strategies can be suitable for ESG investors and can deliver returns over the long-term.”

Craig Hurt, AXA IM’s Director of Australia and New Zealand said: “Overlaying these two strategies is a relatively novel concept and we believe the results provide a positive step for the industry to consider smart beta and ESG in tandem. Now that we have addressed MSCI, our next area to investigate is to include emerging markets and test this approach in an All Country World Index (ACWI) sense,” Mr Hurt concluded.

Increasing demand for ESG factors across broader range of asset classes including sovereign debt

ESG strategies are set to grow over the next 10 years: AXA

Environmental, social and governance (ESG) strategies are set to grow over the next 10 years fuelled by impact investing, an increased focus on board diversity strategies and the use of ESG factors across a broader range of asset classes such as sovereign debt. This is according to leading global investment manager AXA Investment Managers.

Paris-based Matt Christensen, Global Head of Responsible Investment for AXA IM, who is in Australia this week addressing the Australian Superannuation Investment conference on the future of ESG said: “ESG has been firmly on the investment agenda for the past decade and is one of the fastest growing global investment trends. We feel it’s time to forecast the next ten years to ensure we have the right tools in place to support demand for ‘ESG 2020’.”

Impact investing in particular is starting to catch the attention of sizeable funds both globally and in Australia. AXA IM believes this is only set to increase with the impact investing market predicted to grow to US$500 billion by 2019 or 1% of global assets. [1].

“Broadly speaking, impact investing is defined as investments in businesses and/or funds that generate social and/or environmental benefit in addition to financial return – it can be viewed as a complement to the limits of traditional philanthropy and government programs. The market is still 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.

Supporting another growing trend, AXA IM recently developed a strategy that applies ESG metrics to assess countries’ creditworthiness, risks and opportunities in sovereign debt portfolios.

“Until a few years ago it was rare for investors to consider ESG factors for asset classes beyond equity and corporate fixed income. We’re seeing increasing interest in ESG analysis being applied to asset classes such as sovereign debt. This attention to ESG has only been amplified by the euro zone crisis, which brought the evaluation of sovereign issuers’ creditworthiness to the fore. We are already using this ESG country framework in our core RI funds but we also see an opportunity to expand this to mainstream funds over the coming years,” said Mr Christensen.

A final trend AXA IM predicts will grow rapidly in coming years is board diversity.  Despite some of the largest European and Australian corporations being truly international enterprises, the impacts of globalization remain to be fully seen at the board level.  AXA IM believes the rapid rise of emerging economies will continue to springboard diversity at the forefront of the corporate governance agenda, both now and in the future.

“Up to the present time, diversity has largely been focused on gender balance as research points a link between gender diversity at a board level and a company’s financial performance. However we believe, and research now shows, that other aspects such as nationality can also increasingly be seen as a means to bring a broader range of views and experiences to bear within the leadership of companies across the globe. We recently analysed board diversity among the largest 50 European companies by market cap. The results suggest companies need to bolster senior management boards by shaping their composition in a way that better improves their readiness for success in emerging markets – I imagine this would have a similar outcome among ASX listed companies,” he said.

AXA IM strengthens RI capabilities

A responsible investor since 2001, AXA IM’s goal is to integrate ESG factors across the spectrum of its A$703 billion multi-asset investment capabilities. Over the next ten years the firm plans to further expand its global RI research capabilities.

Craig Hurt, Sydney-based Director of AXA Investment Managers in Australia and New Zealand, said “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.”

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[1] Monitor Institute:2009 ]]>

Increasing demand for ESG factors across broader range of asset classes including sovereign debt

ESG strategies are set to grow over the next 10 years: AXA

Environmental, social and governance (ESG) strategies are set to grow over the next 10 years fuelled by impact investing, an increased focus on board diversity strategies and the use of ESG factors across a broader range of asset classes such as sovereign debt. This is according to leading global investment manager AXA Investment Managers.

Paris-based Matt Christensen, Global Head of Responsible Investment for AXA IM, who is in Australia this week addressing the Australian Superannuation Investment conference on the future of ESG said: “ESG has been firmly on the investment agenda for the past decade and is one of the fastest growing global investment trends. We feel it’s time to forecast the next ten years to ensure we have the right tools in place to support demand for ‘ESG 2020’.”

Impact investing in particular is starting to catch the attention of sizeable funds both globally and in Australia. AXA IM believes this is only set to increase with the impact investing market predicted to grow to US$500 billion by 2019 or 1% of global assets. [1].

“Broadly speaking, impact investing is defined as investments in businesses and/or funds that generate social and/or environmental benefit in addition to financial return – it can be viewed as a complement to the limits of traditional philanthropy and government programs. The market is still 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.

Supporting another growing trend, AXA IM recently developed a strategy that applies ESG metrics to assess countries’ creditworthiness, risks and opportunities in sovereign debt portfolios.

“Until a few years ago it was rare for investors to consider ESG factors for asset classes beyond equity and corporate fixed income. We’re seeing increasing interest in ESG analysis being applied to asset classes such as sovereign debt. This attention to ESG has only been amplified by the euro zone crisis, which brought the evaluation of sovereign issuers’ creditworthiness to the fore. We are already using this ESG country framework in our core RI funds but we also see an opportunity to expand this to mainstream funds over the coming years,” said Mr Christensen.

A final trend AXA IM predicts will grow rapidly in coming years is board diversity.  Despite some of the largest European and Australian corporations being truly international enterprises, the impacts of globalization remain to be fully seen at the board level.  AXA IM believes the rapid rise of emerging economies will continue to springboard diversity at the forefront of the corporate governance agenda, both now and in the future.

“Up to the present time, diversity has largely been focused on gender balance as research points a link between gender diversity at a board level and a company’s financial performance. However we believe, and research now shows, that other aspects such as nationality can also increasingly be seen as a means to bring a broader range of views and experiences to bear within the leadership of companies across the globe. We recently analysed board diversity among the largest 50 European companies by market cap. The results suggest companies need to bolster senior management boards by shaping their composition in a way that better improves their readiness for success in emerging markets – I imagine this would have a similar outcome among ASX listed companies,” he said.

AXA IM strengthens RI capabilities

A responsible investor since 2001, AXA IM’s goal is to integrate ESG factors across the spectrum of its A$703 billion multi-asset investment capabilities. Over the next ten years the firm plans to further expand its global RI research capabilities.

Craig Hurt, Sydney-based Director of AXA Investment Managers in Australia and New Zealand, said “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.”

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[1] Monitor Institute:2009

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The great rotation from bonds to equities

While recent extreme volatility in global bond markets again raises the question of the role of fixed income in investor portfolios, new analysis from AXA Investment Managers (AXA IM) shows the significant impact a “great rotation” from bonds to equities could have on investor portfolios.

In The Great Rotation paper AXA IM’s leading researchers discuss and analyse investors’ capacity to take on additional risk and the potential for significant asset allocation shifts in the current market environment.

A great rotation is a big shift of strategic long term asset allocation driven by a combination of factors, including: long-term risk budgeting, the regulatory environment, monetary policy and liquidity. In 2013, AXA IM analysis shows these factors have seen a shift from cash to equities, rather than bonds to equities as investors risk appetite returns and they seek higher returning investments.

However, AXA IM’s Director of Australia & New Zealand, Craig Hurt, said any ‘great rotation’ of investor portfolios from bonds to equities could have multiple repercussions on investment decision making.

“For such a move to occur, both market and regulatory conditions would have to support greater appetite for risk. We evaluated the concept of a great rotation with regards to investors’ long-term investment objectives. The impact of a great rotation in global markets on the average Australian could be significant if their asset allocation is not given due attention,” he said.

“Similarly, if there is indeed a great rotation out of bonds and into equities at the same time Australian retirees are moving out of equities and into bonds in the search for a reliable income stream, then retirees may find themselves on the wrong end of a big global trade,” Mr Hurt added.

Focus on the fixed income landscape

According to AXA IM, while bond investors may already have come to terms with the risk that their exposure to high rated government and investment grade bonds will deliver negative real returns over the medium term, there are still a number of options for fixed income investors in an environment of asset class rotation including; reducing portfolio duration, adding inflation protection and yield pick-up.

“Investors can minimise interest rate risk by limiting the duration of their portfolios or by further replacing interest rate risk for credit risk. There is also a strong argument for seeking inflation protection,” Mr Hurt said.

AXA IM believes there are a number of important questions investors should ask to understand the risk of significant asset allocation shifts from bonds to equities.

Firstly, will other assets offer greater certainty of higher returns if bond yields are to remain very low? Secondly, are we on the verge of a bond bear market that will generate a period of negative returns in fixed income? Third, if that is the case, will it be through higher interest rates or a re-pricing of credit risk premiums? Lastly what can bond investors do in an environment of asset class rotation?

Such questions are even more important for an ageing Australian population as they move from the accumulation to decumulation phase.

“Whereas in the accumulation phase there is a focus on real-return growth assets, the investment strategy in the post-retirement world is generally centred on capital protection, inflation protection and yield generation,” Mr Hurt concluded. .

AXA IM’s Great Rotation paper provides an in depth analysis of options available to investors across the various asset classes.

AXA IM defines Smart Beta as offering long-term investors a more efficient way of capturing market beta while avoiding the limitations of both market cap weighted indices and alternative weighting schemes – such as exposure to undercompensated risk, poor diversification and transaction cost leakage.

In March, AXA IM surveyed 90 Australian institutional investors, including leading super funds and consultants, at a series of educational Smart Beta roundtable events in Brisbane, Melbourne and Sydney. 

According to the survey, one third (33%) of investors and consultants currently allocate money to Smart Beta equity strategies and 17% in Smart Beta bonds strategies. AXA IM’s London-based Head of Institutional Client Strategy, Tim Gardener, said while investors were clearly showing initial interest in the Smart Beta concept, allocations were likely to increase as global investors became more aware of the shortcomings of traditional indices. 

“For years prior to the global financial crisis, investors were generally comfortable tracking indices, despite their flaws and no real long-term harm was caused. The decade facing us will be a period of change and uncertainty, and in our view, there are real dangers in blindly tracking indices based on the past. At AXA IM, we decided the smarter way to harvest beta was not to design a clever index and track it, but rather to develop a series of sensible, transparent, pragmatic and low cost strategies that address the limitations of both market cap indices and alternative indices,” Mr Gardener said.

Demand for Smart Beta solutions to grow in lead up to MySuper
AXA IM’s Director of Australia & New Zealand, Craig Hurt, said he anticipates increased interest around Smart Beta solutions in the Australian market as the MySuper deadline draws closer.

“As of 1 July 2013, Australian super funds will be required to offer a low cost transparent default balanced fund option via a MySuper product. Investors are now facing a new period where return expectations are much lower than we have seen in the past, so there is increasing pressure on fees and hence a strong move to passive investing. Our concern is that in time, this shift will see investors potentially exposed to market bubbles,” Mr Hurt said. 

In response, AXA IM recently launched its SmartBeta™ global equity strategy with $325m in assets. In designing the strategy, AXA IM leveraged its AXA Rosenberg team’s expertise in engineering and managing quant equity strategies.

The AXA IM credit strategy launched in 2012 and has already attracted over $1bn in assets from leading global pension plans. Now, Australian investors can also access the SmartBeta™ Bond Strategies via the newly launched AXA World Fund Global SmartBeta™ Credit Bonds.

“We’re already seeing significant interest from investors globally and locally, and expect to see increased demand ahead of the MySuper deadline,” Mr Hurt concluded.