Axa plans launches after integration

While its immediate focus is on the mergers that are a result of its Framlington purchase, Axa IM is also weighing up the launch of a Japan smaller companies fund. Will Jackson reports.

Axa Investment Managers has focused on the consolidation of the Framlington fund range since buying the asset manager last November. As reported in Fund Strategy on April 17 (see Axa to merge four funds into two), the review will result in the merging of four funds into two later this month, subject to investor approval.

This will mark the end of the rationalisation process for the time being, says Jim Clark, head of product development at Axa IM. “There are no further mergers to make,” he says. “We are not ruling it out but there is no necessity right now. Launching new funds is where the business is at.”

Clark adds that “one or two” products are being considered. “We are looking at possibilities and conducting research,” he says. “But we have not set the wheels in motion yet. It would be the next stage of what we do and we will have firmer plans in another month or so.”

Axa IM recently appointed Chisako Hardie, a Japan smaller companies specialist from Scottish Widows Investment Partnership, to its Edinburgh-based Japan desk. Hardie, due to arrive in June, will work alongside Anja Balfour, manager of the group’s Japan portfolio. Hardie’s recruitment may also provide scope for a new fund. “A small-cap fund is certainly possible,” says Clark. “We will let Chisako settle in first but we are not discounting the idea. We obviously want to play to her strengths.”

Gary Potter, fund of funds manager at Credit Suisse Asset Management, is positive on the new appointment. “Chisako Hardie is a good hire and adds a depth of coverage to the business,” he says. “Balfour is not as much of a small-cap specialist as David Mitchinson [Japan fund manager until July 2004] and Hardie will add spice to the large-cap edges of the Japan fund. It could bring in a lot of money.”

Potter is less enthusiastic on the prospect of a small-cap portfolio. “It would be an interesting move after such a strong run in the sector,” he says. “I would not be surprised to see it. But how successful it would be at raising funds on day one I do not know.”

Although fund launches are a priority, Clark’s immediate focus is on the two fund mergers due to take place this month. Blue Chip is set to merge into the larger UK Growth portfolio on May 12. “We are trying to avoid funds that overlap,” says Clark. “The idea is to rationalise where we can and we believe there are better opportunities if we put these two funds together.”

The funds, managed by Chris Murphy until his recent departure to Morley, are temporarily being run by Nigel Thomas, manager of UK Select Opportunities. Clark says the investment objective of UK Growth will stay the same, despite the inflow of money.

There will be a change of emphasis for Blue Chip investors, though. The £40m fund had 90% of its assets in the FTSE 100 on March 31, compared with just 57.7% for UK Growth. The fund also had no exposure to FTSE Small Cap or the Alternative Investment Market. As revealed in Fund Strategy on April 17, a permanent appointment to run the combined fund should be in place “by the summer”, according to Robert Kyprianou, chief executive officer of Axa Framlington.

The second merger, of NetNet and Nasdaq to create the Global Technology fund, will take place a week later. The new fund will be run by Nick Evans, current manager of both portfolios. “Although the two funds have slightly different objectives, there is a large crossover in US stocks,” says Clark. “Performance dipped during the technology crash and, although there has been a good recovery, there is still a long way to go before we get back to the levels of 2000. The new fund will be more global and there will be more opportunities to pick from a wider range of stocks.” Tim Cockerill, head of research at Rowan & Company Capital Management, agrees the merger is a logical step. “NetNet was of its time and the remit remains largely unchanged,” he says. “It is outdated. There has been a long bear market in technology and the whole story has changed. Investors are still looking back over the past six years. Taking a global approach makes a lot of sense, although it is still not an area we would put a lot of money into.”

While investors remain wary of technology funds, NetNet and Nasdaq have performed strongly, in terms of benchmark and absolute returns, according to data from Standard & Poor’s. Over one and three years to April 24, both funds are ranked first-quartile in the Investment Management Association’s Technology and Telecoms sector. NetNet is ranked first out of 17 funds over the shorter period, with returns almost 20% above the average of 32.66%. Nasdaq is ranked third over the same period, generating returns of 45.37%.

The returns are typical of strong performance across the range. According to S&P, 15 from a total of 21 funds are ranked in the top two quartiles over three years. This improves to 17 funds when measured over one year. The best absolute three-year returns have been generated by Balfour’s Japan portfolio. The fund has returned 243.35%, more than double the sector average and enough to achieve first place out of 51 funds. At March 31, 66.6% of the fund’s assets were in large-caps, with 23.8% in mid-caps and just6.7% in small-caps. The fund had £125m in assets under management on April 24.

CSAM’s Potter says he does not hold the Japan fund in any of the firm’s portfolios but has done so previously. He currently holds Biotech, managed by Gareth Powell, and Equity Income, run by George Luckraft. The income fund was soft closed in February 2005, using increased initial charges, but investors are still able to use the smaller Monthly Income portfolio. Clark says there are no plans to cap other funds in the range.

Potter also highlights Nigel Thomas, Roger Whiteoak, manager of UK Smaller Companies, and Richard Peirson – Gilt, Managed Balanced and Financial – as names to watch. “They are benefiting from the wider Axa resources around them,” says Potter. “They are developing a good team.”

Cockerill says UK Smaller Companies is used on an ongoing basis in Rowan & Company Capital Management’s portfolios. He is also a follower of Nigel Thomas, who joined Framlington in 2002. “Thomas is particularly good,” says Cockerill. “He looks for above-average risk opportunities but keeps the fund diversified. In my opinion, his clarity of thought is second to none. When you talk to him there is no ambiguity. It is not unique but the clarity with which he sees investments is unusual.”

Launched in 1969, UK Select Opportunities is the largest fund in the range, with more than £1bn in assets under management. The portfolio had 40.8% of its assets in the FTSE 100, 24.7% in the FTSE 250 and 14.4% in the FTSE SmallCap on March 31. There was also exposure to Aim and FTSE Fledgling.

The only fund to be ranked fourth-quartile over one year is Gilt, returning 3.18% against the sector average of 4.36%. Performance improves to third-quartile over three years but returns are still below the sector average.

In the third big change to the range this month, management of the Gilt and Pan European funds will be delegated to Axa IM’s fixed income team, led by Denis Gould. “Essentially the funds will not change,” says Clark. “They will stay as Axa Framlington products, otherwise there would be a complete upheaval. Axa IM has the franchise for fixed interest so it seems logical. Denis’s team deals in billions of the stuff.”

The move is also designed to reinforce Axa Framlington’s status as an equity specialist, he adds. Overall, Clark is happy with the way Framlington has been absorbed into Axa’s structure. “The Framlington business complements us completely,” says Clark. “It gives us huge opportunities and enables Framlington to use our large distribution channels.”

Clark admits there may be confusion for some investors, with some fund names common to both the Axa IM and Framlington ranges. “The Axa IM funds are run very differently and this is something we may need to look at,” he says. “For example, the Rosenberg portfolios use a highly refined quantitative system. We need to explain to the world the differences in the ways they are managed.”

Potter agrees that the acquisition has been successful but also sounds a note of caution. “I was surprised when Framlington went to Axa,” he says. “Axa is a big, insurance-based conglomerate and it was odd that the aspirations of the management team were compatible. It had always made a big play about its independence. But, looking at Legg Mason in the US [the recent integration of Citigroup’s Smith Barney funds], big groups can buy asset management businesses and leave them alone. Framlington appears to have been ring-fenced. It is important it is not overburdened with red tape.”

Cockerill says the retention of key managers was an important factor during Framlington’s acquisition. “Framlington has managed to retain its integrity,” he says. “The stars have been tied in. Without that, the brand would have been badly damaged.”

As reported in Fund Strategy on November 21, Axa was able to lock in the six fund managers running 70% of Framlington’s assets until 2010. The remaining managers signed up to a separate incentive plan.

According to Clark, investors have not been deterred by the takeover and Axa Framlington’s recent sales figures have been strong. This view is backed up by statistics from the IMA. Assets under management have grown by £1bn since the acquisition, from £3.7bn at the end of November to £4.7bn in March 2006.

AXA INVESTMENT MANAGERS Axa group has 50 million clients and more than 100,000 employees worldwide. It generated revenues of €72bn (£50bn) in 2005.The group’s fund management arm, renamed Axa Investment Managers in 1997, has more than €400bn in assets under management. Of this, £4.7bn is invested in the Axa Framlington range of mutual funds. Axa Framlington was formed in November 2005 and has 140 employees.