A number of fund managers have recently favoured financials in their equity funds. Banks are precisely the sector in which French manager Axiom Alternative Investments (Axiom AI) is specialised in.
Launched in 2009, Axiom AI has offices in Paris and London. It currently manages €550m in assets under strategies targeting the subordinated debt market and financials equities.
The founders of the firm such as its managing partner David Benamou (pictured) have worked for a long period in the banking sector before moving to the asset management sector.
“We launched Axiom AI in 2009. The financial crisis has revealed the complexity of financial institutions. It was a shock for investors back then as they thought that investing in banks stocks and debt was not risky,” Benamou explains to InvestmentEurope.
“Following the crisis, the valuation of subordinated debt was very low and understanding this particular area was difficult.
“Asset managers were spreading the word that they were not investing in banks in order to respond to their clients’ concerns,” he adds.
At that time, only two funds were investing in this theme. Axiom AI’s founders decided to launch their first strategy on the debt side rather than on the equity segment.
“We have assessed the way regulation was going to evolve within the banking sector. It would have been suicidal to start on the equities side as there was a massive dilution risk for bank shareholders. It was not the right time.
“However, the regulator was on our side regarding the subordinated debt market. From a regulator point of view, this debt was meant to absorb shocks like the financial crisis of 2008,” Benamou says.
Basel’s regulation was not applied in the same way on local markets and regulatory authorities wanted stricter rules as well as banks to take regulatory capital off of their sheets.
“We bet on what we call the grandfathering period. By 2022, banks will have to replace their old debts by new ones,” Benamou tells InvestmentEurope.
“We launched our first fund in 2009, Axiom Obligataire, with €500,000 of assets under management and no seeder. We have built Axiom’s growth on our expertise to understand financial institutions and instruments, attracting first retail investors towards IFAs then high-net-worth individuals and institutional investors.”
For now, French investors account for 35 to 40%. Other clients come from the UK, Benelux, Switzerland, Spain and Italy.
The implementation of Basel III has been anticipated by the banking sector, Benamou says. He recalls that the Tier 1 market has been kicked off far before 2014. In May 2013, BBVA claimed to be the first issuer of a new generation of Tier 1.
Assessing the impact of Basel III, Axiom’s managing partner says the firm has spotted a normalisation of the market that has stepped up during the first half of 2014. But the normalisation has not been achieved yet, according to him.
“Banks are quite active and flexible on the type of subordinated debts they manage and want to keep,” he stresses.
“Prudence from investors remain in the market and that slows down the normalisation of credit spreads,” he adds.
Regarding the financials market, Benamou compares its current situation to what the high yield market faced in the nineties.
“In the eighties, only one asset manager was buying high yield corporate bonds. Then the market boomed and the high yield market was born. Managers started to gather teams and launched funds on this theme.
“The financial crisis of 2008 has had the same effect. There were only two funds dedicated to subordinated debt in 2007, now their number has grown dramatically and it will continue to do so,” he develops.