Axa Investment Managers believes that a new fixed-income product based on different share classes may appeal to Asian institutional investors.
Jon Bailie, London-based global head of distribution at the €500 billion asset manager, says the idea originated in the area of global inflation-linked bonds.
Governments issue Treasury inflation-protected securities (Tips) in long durations, with an average nine-year maturity. Investors are keen on inflation protection, but often prefer to invest in shorter-duration securities.
Duration defines the degree of a bond's sensitivity to interest-rate movements, and how much capital gain can accrue (or be lost) if rates change. Given that interest rates in the US and elsewhere are ultra-low, investors fear they will rise between now and the time their Tips mature, leading to a capital-gains loss.
Axa IM created a separate share class of Tips -- the 'Redex' share class -- in which it runs an interest-rate futures overlay programme to synthetically reduce the portfolio's average duration. This is done not by its portfolio managers, but by a separate derivatives solutions team.
More recently, the French firm decided to apply the principle to other segments in fixed income, notably high yield. Again, this remains a popular asset class with institutional investors, but the same fears persist about a surprise hike in interest rates.
Therefore Axa IM has created separate share classes that provide investors with rates hedges, and reduce the average duration from four or five years to as little as 18 months, without negating the attractive returns from credit.
The cost to investors is negligible, says Jean-Pierre Leoni, head of Asia-Pacific at Axa IM in Hong Kong. A small fraction of the portfolio's assets are used for margin and collateral, rather than invested in the market, thus sacrificing a small portion of the bonds' yield.
Bailie says Axa IM is putting more resources to work in Asia and the Middle East -- as well as in the UK, where it is rebuilding its institutional team. The firm, which employs a platform with multiple strategies structured as boutique investment managers, sees plenty of opportunities to sell in Asia. It wants to ensure it can back up its sales pitches with client support.
Leoni says another idea the firm is marketing to institutions is tactical asset allocation. Some 50-60% of its assets under management come from Axa Group, including the life insurance business. The investment manager has had success with a TAA strategy for Axa Life, which it sees as a useful track record to market to third-party insurers and pension funds.
Finally, alternative investments are a big part of the firm's offering to Asian institutions, including private equity and real estate, as well as hedge-fund platforms and structured finance.
Most of the firm's clientele is institutional (80-90%), but it has also stepped up its retail effort in Asia under Jean-Luc Eyssautier, director of funds distribution, who has been registering more Axa products with local regulators and marketing to private banks with which Axa has a relationship in Europe.
The team has been updated, with Bailie having joined in Europe only six months ago, after a career at Russell Investments. Leoni and Eyssautier also transferred to Asia from Europe last year.