The strategic development of AXA Investment Managers, the e340bn investment arm of the AXA Group, typifies the kind of move from balanced to specialist asset management that has gained momentum over the past decade.
In 2003 AXA IM decided to re-focus its business on areas where it felt it had a strong competitive advantage. It is now positioned as a multi-specialist asset manager, offering a range of asset classes including multi-management, hedge funds, private equity, real estate, fixed income and a suite of active equity strategies.
Nicolas Moreau, the chief executive officer of AXA IM Moreau, says multi-specialist management makes sense in an environment where investment styles and asset classes go in and out of favour with the market.
“One of the advantages that we have as a large multi-specialist company is that we can balance out cash flows and revenues irrespective of the movement of the markets themselves,” he says.
However, AXA IM recognises specialist management will not suit everyone. It has therefore adopted the dual role of provider of specialist and broader advisory services with the creation of a new team, known as Balanced and Structured Solutions (BSS). BSS, as its name suggests, uses structured products to provide liability-matching strategies, principally for pension funds.
“We are designing a solution for pension funds where we are investing through bonds and through swaps in order to match the liabilities of the pension fund,” says Moreau.
In the past year, the BSS group together with AXA multi-manager has won mandates worth e2bn advising heavyweight companies in the French nuclear industry on asset allocation and manager selection. In the UK AXA IM won two mandates worth e1.2bn for cash flow matching for pension funds.
Moreau says the decision to set up a dual organisation was driven by the perception that clients’ needs had become polarised: “We saw a segmentation in client demand between people who want advice and people who want a very specialised product. So it makes sense for large asset managers like ourselves to have this type of dual organisation because it is a way for us to cover the needs of our clients.”
AXA IM’s approach to selecting specialist asset classes has been both strategic and tactical, he says. It involves capitalising on existing strengths and developing new ones. For example, AXA IM developed US investment grade and high yield teams to complement its UK and European fixed income capability. “That was totally strategic because we felt that if we wanted to capitalise on our size and become a leader in fixed income, we needed the dollar products.”

There are still significant gaps in AXA IM’s suite of fixed income products, he says. Global aggregates, in particular, is an area currently under discussion. Which part of AXA’s fixed income operations would manage this asset class has yet to be decided: “It’s like all these products where you combine different sources of alpha. The debate is always the same - do you have a single alpha generator, with a single risk management, or do you combine alpha generation from Europe, from the US and from Asia.
“On top of this, the fixed income world is quite complex because for example companies like Daimler Benz will issue credits in three currencies. So we are still in discussions.
“But it is a critical product for us. It’s a critical product because the demand for global aggregates is very large and there will be very few people able to deliver it.
Moreau compares developing new businesses to planting acorns in the hope that they will grow into a tree. “You launch an initiative, it becomes a product, and it fulfils the idea of one or two individuals. It begins to succeed so you provide more resources until eventually it becomes a business.
AXA Private Equity has grown into a sturdy tree, he says. “We launched private equity in 1996 with three or four people managing e70m. Today it’s a team of 80 people managing over e5bn based in four and soon five countries.
The CDO business has flourished similarly. “When we did our first deal, it was handled by one person working part-time. Now there is a team of 35 and they manage approximately e14bn. It’s a big business for us.”
Not every acorn grows, however. AXA IM initially hoped that demand for multi-management would develop in Continental Europe. This has not yet happened, and AXA IM has had to re-structure the business, closing its operations in Paris and New York. “We realised that the market was not yet present in Europe so we decided to re-structure the business and to merge everything in London.”
The key to success as a multi-specialist asset manager, says Moreau, is knowing what to will repay further investment and what will not; which activities to keep in-house and which to outsource.
“When we did a review of all the activities of the business we looked at every product one by one and had to choose whether to stop, transfer, restructure or invest. We decided that anything that would take too much investment for us to become a leader should be outsourced. The objective was to be either the market leader in what we are doing or to deliver solutions to our clients that would be top of the market.”
Last year AXA IM entered into a strategic agreement to outsource its middle and back office operations to State Street. The 10-year deal, for an undisclosed annual fee, covers middle office, fund accounting, performance measurement, fund administration and investment support.
The decision to outsource was driven partly by the need to invest in new systems for the Paris-based operations, Moreau says: “Our French operation is the most complex because it’s the biggest and because it’s where we deal with the most difficult instruments, and we need to invest in new systems. So rather than doing this investment ourselves, we have decided to move to the State Street platform. “
The outsourcing deal is a ‘lift-out’. AXA IM is transferring entire teams and systems to State Street, and more than 300 AXA IM employees will move on to the State Street roll. Some 200 AXA IM employees in Paris and 16 in Cologne have already joined State Street and employees in London will join at the end of March.
In Paris, State Street employees will work with the AXA IM team in AXA IM’s offices but under the State Street banner. In London, AXA IM staff will transfer to State Street’s offices. Meanwhile, AXA IM’s systems will be migrated to the State Street platform over the next two years.
“The benefit for State Street is that they will be able to develop the business in France, in the UK in Germany on the back of our teams and our presence,” says Moreau. “So there will be room to leverage the use of our teams.”
Lift-outs are fraught with dangers, in particular the risk of a ‘cultural’ mismatch. Moreau is confident that this will not be a problem. “To be frank, the cultural fit has been the main criterion of the decision to move to State Street. We went through as very long selection process. At the end we selected three potential partners. All of them were very capable and all able to deliver the service we wanted. But really what mattered was that we had a very good cultural fit with the senior management of State Street personally.”

The fact that the AXA IM deal was a major investment operation outsourcing appointment for State Street in Europe, and the first ever mandate to a third-party service provider in France and Germany, also counted in State Street’s favour, he says.
“We are one of their major clients so we have some weight, which was important to me. I feel that if I’ve got an issue, it will be resolved or at least there will be a fair discussion around the issue.”
Moreau says the deal will enable AXA IM to take advantage of product improvements, based on automated systems and a unique data management-processing platform. AXA IM will also be able to tap WM Performance Services.
Looking forward, Moreau identifies two developments that could provide future sources of business for AXA IM. The first is the growing interest in risk and risk management.
“Risk management is becoming important and represents a big market for us. It need not be just risk management. It could be risk management and execution. Risk will be a big issue for insurance companies, pensions funds, for everyone in fact that has a liability. And I believe this will continue to grow,” he says.
“We need to be cautious because we are not an investment bank, and we don’t take liquidity exposure. But we can give advice.”
The second significant development is the introduction of IFRS, the new international accounting rules. “The new accounting rules mean that the ways money will be managed will be changed. Now a bank or insurance company will want to fight to reduce the volatility of earnings,” he says.
This will provide opportunities to asset managers, he says. “We are designing new ways to manage money that will remove volatility in earnings while retaining the ability to invest in an efficient way.”
The ability to manage risk and control volatility will give asset managers a competitive edge in 2005, Moreau says. “The new developments are important for us because they are also competitive differentiators and it needs a lot of research and development to develop these kinds of products. Not a lot of people can afford to do it.”