New AXA IM research highlights golden rules around how insurers invest
There’s a great deal asset owners and managers can learn from insurance companies’ long-term approach to investing, especially when it comes to investment strategy design, according to AXA Investment Managers (AXA IM).
Hosting a series of roundtables for Australian institutional clients and consultants across the country this week, AXA IM has identified the key behaviours that have served insurance companies well over the years which include taking a long term, sustainable approach and avoiding benchmarks. The leading investment manager has developed these behaviours into strategies that other large-scale investors can adopt and learn from across asset classes.
Craig Hurt, Head of Australia and New Zealand at AXA IM, said there was a global shift by long term pension fund investors who now use a number of target return strategies adopted for decades by global insurance companies.
“Insurance companies have unique needs that give rise to some very specific behaviours and we think that some of the strategies they employ could be very relevant for Australian investors as this market transitions towards a retirement income phase.
“Insurers focus on generating specific returns to ensure they meet their liability promises rather than the less relevant return from specific market driven benchmarks. This behaviour leads to some very interesting and innovative non-benchmark driven investment strategies and we will be sharing some of these ideas from across equities, bonds and real estate at our round table series this week.”
Equity investing: Non-benchmark aware, sustainability and low volatility hold the key
As part of AXA IM’s research, Gideon Smith, Europe Chief Investment Officer, AXA IM Rosenberg Equities, highlights four key behaviours that local investors can learn from insurers specifically relating to equity investing – avoiding benchmarks, focusing on factors, reducing volatility, and embracing sustainability.
“Insurance companies have been wise to reject cap-weighted benchmarks because they typically have long investment horizons. A relative-return perspective within the context of an overwhelmingly short horizon investment cycle risks sacrificing the long run for the sake of the short run.
“An efficient way of eschewing cap weighted benchmarks is to focus on factors, or risk premia investing, which represents a more direct, low cost and transparent way to improve returns by capturing attractive equity characteristics such as quality, low volatility, value, momentum or small cap. Insurers were also early to adopt strategies that blend these equity factors,” Mr Smith said.
Mr Smith added that large insurance companies also adopted low risk equity investing as a way of maximising the efficiency of their equity allocations.
“Any equity investor interested in reducing volatility and preserving capital would be wise to investigate low risk investing. These strategies potentially offer less variability of return on both a short and long term basis, and typically experience less drawdown during period of equity market stress.
“Large insurance companies also have every incentive to embrace sustainable investing as they are literally bearing the risk for giant societal challenges,” he said.
Locally, AXA IM is managing AUD75m in an Australian domiciled pooled fund, AXA IM ACWI SmartBeta Equity Fund – a fully integrated ESG equity fund offering local investors a more efficient way of capturing long term equity market returns while incurring lower volatility than a capitalised weighted benchmark.
Fixed income investing: better issuer and issuance selection is needed
Lionel Pernias, Head of Buy and Maintain London, AXA IM Fixed Income, said institutional investors would do well to pay attention to issuer and issuance selection when investing in fixed income, and avoiding certain credit bonds.
“The structural changes to the credit market, such as the increased transaction costs and the looming end of the current credit cycle, coupled with the end of quantitative easing, have made credit spread a significant part of the total yield available to investors. Therefore, the quality of credit analysis and risk assessment has become even more important for investors,” Mr Pernias said.
Mr Pernias added that the world’s largest insurance companies were adopting a global, long-term and unconstrained approach in the anticipated less-benign credit environment.
“Going global offers a larger pool of assets and better diversifies fixed income portfolios across sectors. It also has the potential to better manage the duration risk from rising sovereign yield in certain countries.
“An unconstrained approach avoids the pitfalls of a benchmarked approach where the largest allocations are made to the most indebted and potentially risky sectors and issuers.
“This investment approach, combined with a holistic, fundamentally driven research process, takes advantage of multiple themes whilst managing risk effectively and lowering transaction costs,” Mr Pernias said.
