Unpredictable markets and changing requirements of institutional investors, coupled with a migration of assets to passive-style investing at the bottom of the risk spectrum and hedge funds at the upper end, have squeezed out many clients from active equity portfolios.
However, European equities are still a must-have skill-set for leading fund-houses. The house that cannot provide a robust capability, investing in household name companies on its own door-step, is a shame-faced one.
FT Mandate’s research team examined the biggest 10 houses managing European equities, ranked them according to actively-managed assets and then solicited submissions for a fictitious Request for Proposal by a continental European country’s E15bn fund to meet future liabilities of pensioners.
The supposed fund is tendering several pan-European equity mandates worth E500m each, so we wanted to compare investment processes, portfolio breakdowns, investment teams and of course, performance.
Four submissions were received before the deadline: Axa Investment Managers (Axa IM), BNP Paribas Asset Management (BNP PAM), JPMorgan Fleming Asset Management (JPMF) and Morley Fund Management. All four are stockpickers, although there are some differences in fundamental beliefs.
Shifting drivers for Axa
Axa’s Pan-European equity process, which runs alongside the more quantitative approach of sister company Axa Rosenberg, is led by bottom-up stockpickers, backed by extensive research. However, there is no systematic overall style bias. Axa says that over the long-term, investment styles have similar track records, but that over shorter periods the ability to adapt portfolio profiles to integrate either a growth or value bias is a key advantage.
The drivers behind stock performance will shift over time, according to Axa, which says its fund management team must have an evolving management style in order to take advantage of opportunities. Axa is also an advocate of the “boutique approach”, with smaller, dedicated teams integrating portfolio managers and analysts to develop a common investment view.
BNP PAM promotes a growth-oriented core style, although clients requiring other styles are directed into strategies sub-advised by external managers. One of the key beliefs underpinning the BNP business is that a viable investment process remains largely unchanged over time, but that it becomes progressively more efficient through the introduction of automation in functions, such as order execution and post-trade analysis.
BNP managers define themselves as “pure stock pickers” and believe long-term, free cash flow generators and firms with a high return on capital investments will outperform those just providing a two-year restructuring story.
JPMorgan marries value and growth
JPMorgan Fleming lays down a clear “investment philosophy” which favours stocks marrying the best value and growth characteristics.
However, there is a strong adherence to behavioural theory , with an investment philosophy reliant on exploiting “cognitive biases referring to the innate behavioural predispositions in the way people think.”
Morley likes to combine proprietary quantitative expertise with “flair of individual mangers” and attaches great importance to the cyclical nature of markets.
While Morley and BNP PAM have a strong belief in socially responsible investment (SRI), BNP actually has its head of SRI embedded in its team of senior portfolio managers. Two members of this loyal team have been in-house since 1988 and one since 1993.
With the notable exception of Chrysoula Zervoudakis, the experience of Axa’s team is mainly with French institutions. There are plans here to increase coverage of the mid-cap sector and of UK equities as part of the European universe.
According to S&P, only the JPMF European equities fund has outperformed the S&P/Citi BMI Europe benchmark over one, three and five years. Axa and BNP have substantially underperformed over all three periods. Morley’s fund, which does not include UK equities, has underperformed the MSCI Europe benchmark over the last 12 months.
New business is hard to compare, due to secrecy among both clients and managers. But awards for pan-European equities have been thin on the ground in the last 12 months.
Axa claims to have recently won a E700m brief from a “high profile Middle Eastern client”. JPMF and BNP PAM have both won European equity briefs from Swedish scheme AP Fonden 3.
