Axa’s German Arm loses faith in guided model

Four years ago, Axa, the French-headquartered pan-European insurance and funds group, split off its German operation as a separate profit centre. Of the E316bn currently managed by Axa Investment Managers, E29bn comes from clients secured by the German branch.

The core products marketed by the German sales team are managed by Axa Rosenberg, Axa’s London-based subsidiary, to which the company’s chief executive, Nicolas Moreau, handed over responsibility for equity management back in 2002.

“With Rosenberg, there is a unique approach to producing consistent alpha, year by year. It is an active process, but with quantitative research,” enthuses German CEO Christian Wrede, holding court in his headquarters, home to 121 employees, on the corner of Frankfurt’s Stiffstrasse. “It is replicable across the entire world universe, with the same alpha capacity for large cap, mid cap and small cap equities. Being able to rely on just one process gives us a unique selling proposition.”

It is one which German, Swiss and Austrian clients handled by Mr Wrede’s 23-person sales force have clearly embraced – and one which he clearly likes to talk about. While most of the assets he is responsible for are managed on behalf of the Axa insurance company, since 2000, E5bn has been secured from external clients.

Key distributors

The lion’s share of this is managed on behalf of key distributors, mainly insurance companies, banks, funds of funds, and major independent financial advisers (IFAs). Mr Wrede has pulled in E450m of net new money so far this year, and E1bn over the last 12 months. This year, E23m has been channelled into Axa Rosenberg’s pan-European small cap fund, and E26.6m into its Japan small cap fund.

Hot property

But there is another product which has proved even more successful. In fact, it takes some coaxing for him to talk about the Immoselect property fund, despite the fact that it has clocked up E323m of net inflows in the first seven months of 2004, making it his most popular line by far.

The problem is, money must now be turned away from the property fund, and if possible, diverted into the equity funds.

The depressed state of the German property market means that investors have been keen to buy into a pan-European exposure. “But many of our competitors effectively manage a cash fund. They have too much money to invest and so end up with 60 per cent cash and just 40 per cent in property,” reveals Mr Wrede.

“Sales forces can sell these funds, but they start to get greedy. The more money they take in, the bigger the cash position, as there is too much money chasing too few assets. They are also overpaying for assets, or buying risky assets with three-year leases and low opportunities for re-letting.

“We have therefore stopped net inflows, and do not promote our property funds actively. Our existing clients have the first right to re-invest. We can’t take in any new clients until we reduce the cash quota in our fund.”

The big advantage Mr Wrede claims here – momentarily forgetting that he is no longer promoting this fund – is that Axa has a pan-European team of property managers, but is competing against German funds who do not have any foreign expertise.

“Axa has good people in France and Italy,” he says. “In France, we have not acquired a single new building this year, as we have been outbid by other property funds. The risks and prices are outrageous there. But we are in there for the long-term. If we promise performance to our clients, we want to be sure we can deliver this.”

Clients of German insurance companies have suffered in particular because they have had excessive and poorly chosen allocations to property, private equity and hedge funds, believes Mr Wrede. “They had some garbage in their portfolios, and sometimes big chunks of garbage, such as E200m in a private equity fund invested in technology.”

Damaged reputation

Incorrect allocations, and an over-reliance on equities just before the last market crash, have damaged the long-term reputations of some German insurers, believes Mr Wrede. “Three or four years ago, every insurance company wanted to be a third party manager, building up a private equity and hedge fund capacity. This has now disappeared.”

This trend has allowed Axa to pitch for many new outsourcing mandates. But while the Frankfurt operation is buoyed by the Axa brand, is also has to fight against the new anti-insurer prejudice, with potential clients pointing to Axa’s own insurance tradition. “Because our parent company is Axa, German insurers have the fear that we are disclosing client information to one of their competitors. Allianz Dresdner is facing the same problem. This makes it difficult for us to break into that market.”

He is also careful to temper optimism of further distribution successes through the German bank and funds of funds market.

“The move from open to guided architecture was a big disappointment for us and most asset managers,” says Mr Wrede. “Even if you are preferred partners, it does not necessarily mean you will do any business.”

Deutsche Bank, which chose eight preferred providers last year, is a classic example of how fund promoters can be let down, says Mr Wrede. “Half of those partners are deeply disappointed. Only two or three are getting a good share of the funds. The idea was that you had to be a preferred provider for a bank, and then would win business automatically.” But only those partners such as Fidelity and DWS, who have both a strong brand name and top quartile performance track record, have benefited from the move, believes Mr Wrede.

“Axa was in negotiation with Deutsche Bank, but we were not chosen,” reveals Mr Wrede. “Alliance Capital, our sister company, won a place on the list. They paid a lot of money to get in, but have no new business. But despite not being on the list, we have E100m of net new money from Deutsche Bank. So in reality we are getting more money than some preferred providers. It really doesn’t help being called ‘preferred’.”

Selection process

Mr Wrede also reveals some of the dynamics of the selection process. “Deutsche Bank said at the time: ‘We can choose you as a provider, but we need to include you on our marketing material, and that’s costly for us. Why don’t you write us a little cheque to cover it?’ Judging by the size of inflows, I am not sure that the cheques written and assets received are anywhere near matching.”

Axa is also doing a lot of business with Commerzbank, which has been the lead placement agent for the Immoselect property fund. They are also gradually pitching for the new swathes of assets being outsourced by Comminvest, Commerzbank’s asset management arm.

Dresdner’s distribution network is currently seen by Mr Wrede as impenetrable, “as they have dit, mighty providers of Dresdner Allianz”, but he is hoping to make inroads into branches of the Sparkassen, owners of Deka, and the Volksbanks, which own Union.

Currently, 65 per cent of retail inflows come from banks, including funds of funds, and 35 per cent of new money comes from IFAs. “That’s a deliberate strategy,” claims Mr Wrede. “Banks have a big asset pool, but are more volatile, due to the demands of funds of funds. IFAs have a business which takes longer for us to build, but the assets are more sticky.”

Rather than achieving the “preferred provider” status, Mr Wrede believes in constant contact with bank customers, particularly the fund of funds allocators. “It’s an illusion that there is a global gatekeeper sitting in any bank saying: ‘Now that we have put you on our list, every single one of our bankers in Europe will automatically sell your fund, and the floodgates are open.’ Unfortunately, it does not happen this way.”

“In reality we are getting more money than some preferred providers. It really doesn’t help being called ‘preferred’”
Christian Wrede, Axa