Deborah Shire, global head of structured finance at AXA Investment Managers and deputy head of AXA IM Alts, answers SCI's questions

Q: What were the drivers behind restructuring the AXA IM business into two key divisions – the Alts unit and the Core unit?
A: The business was restructured in March last year (SCI 11 March 2020), with the objective of developing two strategic businesses and boosting the commercial momentum behind them. The aim was to create a dedicated salesforce to bring deeper industry coverage, deliver more value to clients and increase our visibility.

We are especially pleased about the increased proximity with our clients that the restructuring has facilitated. Our AUM increased by €5bn during the six months following the restructuring and we’re on target to deliver strong results in our first full year, despite a complex market environment.

Q: What are the Alts unit’s key areas of focus today?
A: AXA IM Alts brings together our real assets business, our structured finance platform and our Chorus hedge fund business. The division has €153bn AUM, 16 offices with 700 staff and 350 clients.

We provide investment solutions across the spectrum of underlying asset classes and in both the private and public markets, with teams on the ground in a number of jurisdictions. In principle, we’ll consider anything – whether it is up or down the capital stack, in corporate, consumer or commercial real estate assets – providing we understand it and have market conviction. We tend to avoid asset classes where we feel we don’t have an edge such as commodities or shipping.

Our real assets franchise comprises an open-ended fund range, including diversified as well as sector-focused funds dedicated to residential and logistic property. The private debt and alternative credit franchise includes commercial real estate and infrastructure debt, corporate debt and consumer exposure, and our second fund in infrastructure debt. We also reached key milestones in our CLO business and regulatory capital strategies, with the launch of the Allegro CLO XII transaction in December and our eighth partner capital solutions fund a year ago (SCI 21 February 2020) respectively.

Within senior CLOs, we prefer European paper due to the benefits of the Libor floor. Within investment grade consumer ABS, we prefer paper with short-dated profiles. We like diversifying asset classes, such as Australian RMBS, because it offers good fundamentals and diversification.

Generally, we were overweight on revolvers and reg cap investments last year.

Q: From your perspective, what makes capital relief trades so attractive?
A: Synthetic securitisation is receiving more recognition these days, but we’ve been active in the segment for 20 years. Regulatory capital is a high-return strategy, where we can provide an edge in sourcing and structuring investments while providing diversification among direct lending, whose attractiveness has not been hampered by Covid-19. Our eight partner capital solutions funds are on track to deliver or have already delivered 7%-10% IRR since launch, for example.

We favour capital relief trades because they allow access to stable cashflows while being exposed to among the best assets that it is possible to find – the core performing loan portfolios of banks. The market has momentum, particularly in the current environment, because it provides a capital management solution that makes sense to banks, thus they’re willing to pay, and providing advantageous spread pick-up.

The market has seen reduced competition post-Covid, which has provided us with an improved ability to negotiate higher quality portfolios, more defensive structures and higher pricing. We always request full transparency over assets and currently have a nice pipeline in large cap corporates.

Q: What is your strategy in other sectors going forward?
A: CLO equity is a strategy we have a long-term track record in and remain focused on, driven by the fact that the market is providing ideal conditions in which managers can outperform. CLOs are arbitrage vehicles, so playing in the equity space requires a certain configuration of returns and liabilities.

We believe the best timing for equity is when liabilities are tighter; CLO equity tranches from active CLO managers can be considered as well to benefit from extra value once being able to refinance or reset CLO debt.

Q: How do you differentiate yourself from your competitors?
A: One way we differentiate ourselves is by completely integrating ESG considerations into our investment platform and processes. We already rate over half of our loan portfolio across specific ESG criteria and plan to increase that proportion to 80% rapidly. We also undertake a due diligence questionnaire with prospective borrowers and are finding that more and more corporates are willing to participate.

Both client demand and regulatory pressure to do more in the ESG arena have become real – it’s no longer a ‘nice to have’, but a necessity. Now is the time for action. We can drive real, concrete change within the alternative market.

For instance, exclusion within CLOs really took off in 2020 in Europe. As a leading alternatives asset manager, we have been very active in embedding ESG in the way we do business, and we want to have an active role in driving the agenda for the whole industry.

We also have a long-established impact fund range, now in its fourth generation, with 10 years of experience and more than US$700m of assets under management and more than 40 transactions executed. Our two focused dimensions with dedicated strategies are climate change and biodiversity (where we deployed close to US$200m in commitments to various projects last year), as well as healthcare and basic needs.

Q: Which challenges/opportunities do you anticipate in the future?
A: The Covid crisis has demonstrated the resilience of the securitisation market, due to robust transaction structures and stable cashflow streams. We’re seeing a strong interest in senior bonds, which offer a significant pick-up compared to traditional fixed income.

In terms of technicals, because there is so much governmental and policymaker support for the market, we’re not too concerned. Even if we have a second or third wave of Covid-induced lockdowns and the widespread payment holidays come to an end, they should be counterbalanced by economic flows.

We don’t expect the macro situation to be the main challenge to credit markets in 2021.

At the same time, we don’t like the current ‘lower yields for longer’ scenario, which drives spread contraction and is challenging for performance. Against this backdrop, credit selection and smarter sourcing are key.

We anticipate further rating action activity, although it should be more balanced than during the height of the coronavirus crisis. Overall, we have a constructive outlook on the securitisation market.

Corinne Smith