Jeremy Baskin

Research launched from AXA Investment Managers’ (AXA IM) Rosenberg Equities team has identified new ways to consider investment in smart beta within the context of the equity earnings cycle.

“Risk premia investing – using the earnings cycle to design robust strategies” will be presented by AXA IM at a series of roundtables for Australian institutional clients and consultants this week and builds on AXA IM Rosenberg Equities’ thirty years of fundamental equity research.

Jeremy Baskin, AXA IM Rosenberg Equities global chief executive officer and global chief investment officer, said the research was designed to help investors consider the connection between risk premia and earnings dimensions which could contribute to achieving better investment outcomes.

“The research draws on AXA IM Rosenberg Equities’ commitment to viewing global equity strategies – alpha or beta – through an earnings lens. We focused on the link between risk premia ideas and underlying earnings profiles to help investors understand drivers of reward – and importantly, the persistence arguments – behind select smart beta strategies.”

Mr Baskin said the research served as a reminder that many of the equity strategies referred to as smart beta strategies have their origins in risk premia or ‘factor’ investing.

“The ideas that underlie smart beta investing are not new, but are being applied in a novel way. We’ve outlined an earnings-based framework for thinking about the reward to value, momentum, quality and low volatility equity strategies.

”As advocates of both alpha and beta investment solutions, we believe there is real benefit in investors understanding the link between core risk premia ideas and the dimensions of earnings that drive reward in equity markets. Ultimately we want to challenge investors to demand and apply the same level of rigour to their beta portfolios as they would for alpha,” said Mr Baskin.

Robust smart beta ideas are ones grounded in the real economy

By focusing on the earnings profile of risk premia ideas, and relating those ideas to the earnings cycle itself, Craig Hurt, AXA IM’s director of Australia and New Zealand, said the firm can build smart beta ideas that are grounded in the real economy, rather than statistical backtesting.

“The earnings cycle model can be useful for understanding investors’ risk taking behaviour and provides examples of how blending risk premia can benefit investors through outcome-oriented approaches,” he said.

Mr Hurt added that AXA IM believes in both alpha and beta opportunities in the equity market and is encouraged to see so many asset owners embracing new strategies that could contribute to achieving better investment outcomes.

“At the same time we would urge caution. In our conversations with Australian institutional investors we emphasise that the smart aspect of smart beta investing requires more nuanced and sophisticated weighting, blending and implementation techniques than those found in many off the shelf risk premia products,” Mr Hurt concluded.

AXA IM continues to see growing demand from local and global investors for its smart beta solutions, with the firm now managing $7.4bn in smart beta equity strategies globally (as of 30 September 2015). Locally, the firm is managing $70m in an Australian domiciled pooled fund, which is 6.3% ahead of benchmark since inception (to 30 September 2015).

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Launched in August 2014, the fund offers Australian investors a more efficient way of capturing long-term equity market returns while incurring lower volatility than a capitalised weighted benchmark. The fund, powered by AXA Rosenberg, the quantitative investment team within AXA IM, has successfully navigated three periods of market stress over the past 12 months.

Now at its one year anniversary, Jeremy Baskin, CEO and CIO at AXA Rosenberg, said the fund has successfully delivered the expected lower level of drawdown during market shocks and has returned 37.37% versus the Index return of 32.44% (outperformance of 4.93%) since inception of August 7th 2014 thru August 6th 2015.

“The SmartBeta equity strategy offers a sensible middle ground between blind index tracking and alpha-oriented strategies so equips equity investors with a better chance of improving long-term investment success in a more cost efficient way,” Mr Baskin said. “One example is by avoiding companies that exhibit ‘unrewarded risk’ while at the same time focusing on companies with strong earnings sustainability, a smart beta strategy can offer investors both the benefits of lower volatility while also improving long-term returns.”

Mr Baskin added that the fund’s in-built ESG considerations also positively impacted performance as avoidance of a number of oil service companies, proved helpful over the past year as the price of oil dropped by half.

Investors are interested in the “blending” of various risk premia

AXA IM Director for Australia and New Zealand Craig Hurt, said as market participants have become more comfortable with the concept of smart beta investing, there is an increased interest in the “blending” of various risk premia.

“The smart beta conversation has evolved from investors considering strategies that just focus on one risk premia to a blended, more sophisticated risk management approach. When smart beta approaches are considered in a risk factor analysis framework, investors are exposed to a more diversified set of risk factors and can better control their risk and harvest a wider range of risk premia,” Mr Hurt said.

“The patterns of active returns for each smart beta strategy in the short term are generally imperfectly correlated and this means that smart beta strategies can be combined to target a desired risk and return outcome in a more diversified and targeted manner,” he said.

Leveraging the global investment firm’s long history of global equity management and experience in managing risk-efficient portfolios, AXA IM has launched a series of blended SmartBeta equity strategies with a focus on a number of risk premia such as value and momentum along with insights into quality and low volatility risk premia.

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