AXA IM’s ‘secret sauce’ delivers 10 years of ESG success

An atypical approach to environmental, social and environmental (ESG) investing and a “willing” attitude to evolve alongside the latest technology innovations is the ‘secret sauce’ in AXA Investment Managers’ (AXA IM’s) recipe for success.

The quantitative equity manager’s Sustainable Equity Fund nabbed the top spot in Responsible Investments (ESG) at Financial Newswire/SQM Research’s Fund Manager of the Year Awards 2024, the cherry on top of celebrations as the strategy hit the 10-year milestone in Australia in August.

Chief Investment Officer of AXA IM’s Equity QI function, Ram Rasaratnam, credited the 14-strong “team effort” in delivering 18.04 per cent in annual returns since inception and recording over $705 million in assets under management (AUM) as of 30^th August.

Rasaratnam told Financial Newswire that the team is “proud” for the strategy to now have award recognition for providing clients with results that are expected, just “like it says on the box”.

“There are two primary aims of the strategy. One is to provide protection during down markets or in risky environments. The other key component is to provide outperformance and a better return than the benchmark over the long-term on a risk-adjusted basis,” he said.

“Investors know this is a good place to put their core equity allocation because it gives them a better risk-adjusted return over the long-term at a lower fee, more than just going into the benchmark.

“AXA IM is a well-established and mature team. We create these strategies for institutions for our parent company and we’re able to offer them on a low-fee basis for them, but it’s also important for us to offer them at a low fee for all our clients in all marketplaces.”

AXA IM’s Sustainable Equity strategy stands out from the crowd of short-term investors, and instead leverages two proprietary factors to deliver results for the longer-term horizon: ‘Low Volatility’ and ‘High Quality’.

According to Rasaratnam, the factors ride the ebbs and flows of a yin-and-yang-like connection, producing the perfect blend of “protection with outperformance”.

“The first factor that was attractive for this type of outcome was ‘Low Volatility’ – buying a basket of stocks with a lower volatility than the overall market offers protection during periods of high market volatility. When the market is falling quickly, low volatility stocks outperform on average,” he said.

“The other factor was ‘High Quality’. We allocate to this across all our strategies, and it means identifying companies with good earning sustainability and low volatility of earnings. That’s our way of recognising companies with strong profitability models, that are still able to deliver strong earnings during periods of market turbulence, which is good for their share price.

“We found that when you combine these factors, you get more than the sum of the parts. And in the way we’ve chosen to combine them, we’re able to deliver strong risk-adjusted return to our clients.”

While the Sustainable Equity strategy may have been first conceived as a guinea pig 10 years ago for systematically integrating ESG into the investment philosophy, Rasaratnam confirmed the principle has now been applied across all of AXA IM’s quant equity strategies.

And the proof is in the pudding. For AXA IM, ESG is not subject to fluctuations in investor appetite or market enthusiasm – it is effectively fused into the proprietary make-up of its investment strategies, which are unable to perform without it.

“When we integrate ESG, we’re also maintaining the fundamental characteristics of the strategy,” Rasaratnam said.

“It isn’t to integrate ESG at the expense of lowering our exposure to low volatility or high-quality names. We deliver the risk-adjusted returns that investors are looking for, but in an ESG-sensitive and ESG-compliant way.

“Part of the reason we made the decision to launch this type of strategy with ESG integration was because we believed this is the right way to invest. We’re here for the long-term and we believe that generating better risk-adjusted returns can only be done with ESG integration.”

But what will keep the strategy going in the years to come? It’s as simple as AXA IM’s “continuous willingness and ability to improve our models”, says Rasaratnam.

“Our edge comes from our ability to find new and interesting data sources, but also to get more value out of our existing ones. One of the building blocks of our investment platform is fundamental data: accounting data, income statements and balance sheets; and some of the newer data sets, from which we leverage artificial intelligence techniques to analyse.

“Around six years ago, we introduced our first machine learning model into this strategy. It uses a neural network to identify stocks that have a high probability of increasing in volatility over the next 12 months.

“We’re looking at using natural language processing techniques to identify sentiment from news data to help us improve our stock selection.”