Strategically Speaking: AXA IM
Half Italian, half Swedish, CEO of a French company but resident in London, Andrea Rossi embodies what he would like his tenure to be remembered for – diversity. His goal is to increase diversity throughout its products, client base, the geographies it operates in and its staff with a focus on senior opportunities for women.
There are good reasons why Rossi focuses primarily on increasing diversity within the organisation. AXA Investment Managers (AXA IM) is Europe’s fifth-largest asset manager, but of the €746bn under management, over half is insurance assets managed on behalf of its parent group. An extra 10bps in returns on assets it manages for the AXA group would account for double the €257m income that the investment subsidiary contributed to earnings in 2017.
For the parent group, the ability of AXA IM to generate higher returns on a consistent basis is of more benefit than attempting to increase the 5% of earnings that the subsidiary produces from management fees. But as Rossi accepts, to attract and retain staff who generate such returns requires a fund management entity that can compete with the best. That means having the ability to attract third-party funds from a globally diversified client base. He is proud that current third-party assets are a higher proportion of total assets than five years ago, with a net increase of €120bn.
Increasing the geographic diversity of its Eurocentric client base is also a priority. Despite being a global asset manager with strategies that encompass all geographies and asset classes, Rossi admits that the firm is still perceived to be a Europe specialist. While owned by a French insurance company, only about 30% of revenues come from France, says the CEO. Germany, Italy, Switzerland and the UK represent the other main markets. In total, 86% of the client base is European.
It is not surprising that Rossi waxes enthusiastically over the firm’s increasing footprint in Asia, particularly China. AXA IM in 2006 set up a joint venture with Shanghai Pudong Development Bank to manage Chinese A-shares and in 2017 it launched a short-duration Chinese bond fund.
This year, AXA IM obtained a Wholly Foreign-Owned Enterprise licence, allowing it to run independently in China. AXA IM also added an affiliate, AXA IM Chorus, to manage risk premia strategies which launched its first investment strategy in 2017. Given the growth of China’s asset management industry, Rossi sees AXA IM as well positioned to achieve substantial business from the country.
It is not just in its client base that AXA IM seeks diversity. A high dependence on any single product brings its own dangers. AXA IM discovered this with its experience in its quantitative equities division, AXA Rosenberg.
At its height before the financial crisis, Rosenberg had over $135bn (€114bn) AUM. Then, in 2010, the firm failed to disclose a programming error, leading to a securities fraud charge by the US Securities and Exchange Commission, ending the career of its founder, Barr Rosenberg. Its AUM collapsed to $20bn. The division has recovered under a new CEO, Heidi Ridley, and AUM has gone up to $23bn.
Given its origins as the investment division of an insurance company, it is not surprising that fixed-income assets still dominate the asset mix. But the low fees available for managing fixed-income assets provides another driver for diversification in investment strategies.
The challenge for Rossi is to decide where to place his bets in widening the business. The US, for example, accounts for half of global stock market capitalisation. But the AXA Group owns majority stakes in AllianceBernstein and AXA Equitable, which compete for business with AXA IM. US equities would not be an obvious choice for AXA IM without acquiring an existing US equity boutique.
Amundi, DWS and Legal & General Investment Management all have substantial index fund and/or exchange-traded fund (ETF) businesses, while Natixis has a few smart beta-type ETFs. But AXA IM, says Rossi, sees itself as clearly in the active management business. As he argues, passive management is dominated by a few firms at such low margins that it does not make business sense to compete with them. However, through AXA IM Chorus and Rosenberg Equities, it does offer a range of strategies akin to smart beta, and these are likely to increase in scope and gather more assets following the trend of increasing allocations to factor investing.
Similarly, the Buy and Maintain franchise in fixed income offers an alternative to passive, popular with both pension funds and insurance companies alike.
Where AXA IM has seen increased growth has been in structured finance and real assets – both classed as alternative investments – as well as in specialist fixed-income and multi-asset solutions. There has also been success in thematic equities products managed by Framlington Equities, the fundamental equities division. The AXA WF Framlington Robotech fund has reached over $5bn, predominantly from Japanese retail clients but also in a Luxembourg-domiciled SICAV launched last year.
For a large firm, diversity makes sense, but to achieve extraordinary success in the future requires the ability or luck, to be able to lead the pack when it comes to new asset management trends. AXA IM may be in this position when it comes to environmental, social and governance (ESG) issues.
Indeed, AXA IM was an early mover into responsible investment and now has 19 years of experience. At a time when it was regarded as a box-ticking exercise by most institutional investors, AXA IM recruited specialists to raise awareness of ESG and Rossi argues that ESG is now embedded in the investment processes across all assets.
Governance also comes into play with AXA IM itself, with Rossi emphasising that the firm is keen to ensure that women play an equal role, with full representation at the executive level and not just token representation at the board level.
If Rossi succeeds in his goal of establishing a more diversified asset management firm, the AXA Group will have much to thank him for. It looks as though that diversification will be coming from Asia.