AXA Investment Managers is positioning itself for the growth in demand for low-cost-product solutions as Australian super funds look to adapt their offerings for MySuper, launching a series of corporate-bond strategies.
The “SmartBeta” credit strategies enable funds to access low-cost global-credit exposures, while avoiding the drawbacks of market-capitalisation index-based strategies, says Craig Hurt, AXA IM’s director for Australia and New Zealand.
“As of July 2013, Australian super funds will be required to offer a low-cost, transparent default balanced-fund option via MySuper products,” he notes.
“Low-cost constraints could lead to an industry-wide over-reliance on standard index funds and hence the well known problems associated with market-capitalisation indexes. We believe that our SmartBeta solutions will enable local investors to achieve both the low costs they are seeking, while simultaneously resolving the market-capitalisation issues.”
Over the coming months, AXA IM is also launching global equities and aggregate strategies, which also aim to offer Australian super funds low-cost MySuper-compliant pooled-fund options.
The corporate-bond strategies narrow down a universe of investable bonds that is determined by preset rules and a range of fundamental, proprietary screens.
Diversity is key
The portfolio is constructed with diversity as a key aim, with the investment strategy ensuring that there is not undue exposure to either systemic or event risk at an issuer, sector or country level.
In outlining its strategy, AXA IM says it uses relative-value analysis to decide which bonds are considered best value, and then these are equally weighted in the portfolio.
The overriding belief is that the purchase price is critical to the overall return for buy-and-hold fixed-income investors. The process also aims to weed out the default-risk issuers, taking out the worst or most indebted issuers while diversifying across the remaining companies issuing debt.
In addition, the strategies also require diligent oversight of the underlying quality of the bonds to ensure that the manager can guard against quality erosion or respond to particular events.
This approach aims to maximise the beta – or common risk of credit markets – over the medium term.
A middle ground
Hurt says that other alternative index methods can be expensive, leaking the potential credit-market beta that can be harvested through either excessive management fees or expensive transaction costs.
“Alternative indices in our view are extremely high cost and our objective is to find something that works for investors on an after-fees basis,” he says.
Hurt notes that the SmartBeta strategies aim to provide what he describes as a middle ground for investors looking to harvest the return of the market, while still avoiding the inefficiencies of a purely passive approach.
“It is a strategy that is designed with the aim of protecting portfolios form both systemic and event risk and to deliver a less volatile return.”
Hurt says he expects interest to grow in the products as the MySuper deadline draws closer.
It is understood that the launch of the global-equities strategy will be within the next few months, and the global-aggregate strategy to be offered towards the end of the year.
Globally, AXA Fixed Income manages $374 billion as of June 30, 2012. The manager has two fixed-income teams comprising more than 100 investment staff. The first team is made up of credit specialists and the second comprises asset-allocation fund managers specialising in interest-rate positions, including aggregate-inflation and emerging-markets expertise.
