With traditional market-capitalisation indices increasingly coming under attack, Axa Rosenberg has joined other asset managers in launching its own global 'smart beta' strategy.
Its parent, French insurer Axa Group, became the first – and so far only – investor in the strategy with a $2.5 billion allocation in March.
The recent launch of this offering in Asia highlights the effort by Axa's quantitative equity investment arm to rekindle investor interest from the region, after clients lost confidence in the firm during the global financial crisis and yanked $50 billion from the firm.
Axa Rosenberg says its 20-year-old model of using fundamental research to back its quantitative investment strategies is a core construct of its smart beta strategy.
Asset managers have increasingly been touting smart-beta strategies, which they often classify as active rather than passive. These firms are seeking to redefine beta – or market return – by addressing the shortcomings of passively tracking market-cap indices.
Examples of concerns with the traditional approach include that the price of a stock may not be a fair reflection of its true value, and that a country's stock market cap may not be a fair reflection of the overall market's size and importance.
As such, now is an ideal time to market smart beta strategies to institutional investors in Asia now, says Kevin Chen, Axa Rosenberg’s pan-Asia chief investment officer.
Two common approaches towards smart beta – fundamental indexing and minimum variance – have both demonstrated inadequacies over the past five to 10 years, he argues.
“While fundamental indexing had done well for about a decade leading up to the global financial crisis, it has suffered from high volatility during the crisis, so [such strategies] did not perform well since 2008,” notes Chen. “And while minimum variance did well over the past five years when market volatility heightened, such volatility levels have since come down.”
Fundamental indexing seeks to use other metrics related to a company’s financial performance other than just its share price to determine its respective weighting in an index. Minimum variance focuses on the past behaviour of stocks relative to each other.
Chen says Axa Rosenberg’s approach is different from those of its peers in that it uses particularly detailed fundamental analysis of companies. While other quant managers may look for summary-level data such as price-to-book ratios or price-earnings multiples, Chen says, his team goes deeper, looking at 200 items on the income statement and balance sheet.
This helps investors avoid “uncompensated risks”, he adds, while maintaining low overall volatility over a full market cycle of, say, three to five years.
Axa Rosenberg has been targeting Asian institutions with longer-term investment horizons, such as endowment funds, sovereign wealth funds, insurers and pension scheme managers.
The new smart beta business is a natural extension of the firm’s active alpha business, which focuses on modelling company fundamentals and earnings, and uses technology to build diversified portfolios of stocks to capture mispricing, Chen says.
Axa Rosenberg hopes that joining the ranks of managers offering smart beta products could spark new growth for it in the region.
One of the seven specialist boutiques of Axa Investment Managers, Axa Rosenberg suffered client withdrawals amounting to around $50 billion after it emerged that part of its automated analysis process suffered from a glitch during the financial crisis.
Dominique Carrel-Billiard, CEO of Axa Investment Managers, has mentioned an interest in capturing smart beta opportunities in Asia and emerging markets in the past, and now hopes to re-launch the Rosenberg product around the newly created Asian smart beta platform.
With 20 people now based in Singapore, down from around 30 before the crisis, Chen says last year the Asia team has focused on restructuring and strengthening its investment process to ensure that the firm’s $22.4 billion global AUM will continue to grow.
The reduction in headcount was due mainly to the firm outsourcing back-office functions, he adds. Part of that effort saw three people redeployed to Axa Rosenberg’s research team to focus specifically on maintaining its “model integrity”. Chen says the trio joined from other teams within the firm, but did not specify which ones.
“In the last two years we have seen the market stabilise and interest come back in equities,” he adds. “Now we are better positioned in both the alpha and beta parts of the business to capture growth opportunities from the region.”