Investment Road Test: AXA North

PORTFOLIO POINT: AXA North’s heroic fee scale – of up to 9.15% plus upfronts – detracts from its good features.

It beggars belief that the funds management industry, and its hangers on are still trying to perpetuate the business model that enriches them all at the expense of the customer.

Masquerading as professional wealth managers, most financial planners are in fact tied to manufacturers through a chain of distributors (dealer groups) that pass kick-backs from fund managers to planners, staff and senior management. Even the administration platforms play the game, with “volume based rebates” (derived from the fees paid by customers for administration services) being paid back to dealer groups and planners to further reinforce the tied business model.

The industry sanitises these practices by engaging “research houses” to rate investment products, but none of these research houses adequately take into consideration the layers of fees and commissions that bite into investment returns. Moderate fees are acceptable but massive fees are not.

There is no better recent example of this than the recently launched AXA North product. Although it offers some beneficial aspects, such as capital protection and the possibility of locking in profit during the investment term, it can best be described as a fee gouge.

Investment research confirms that many customers are now looking for investments with capital protection. Thankfully, many clients have seen through the traditional funds management myth, recognising that despite the layers of management involved, many managed funds actively destroy wealth as a result of locking in investment losses during severe market downturns.

The better-managed funds focus on doing things that retail investors can’t do easily themselves – such as investing in international or emerging markets or in smaller cap stocks where independent research is hard to come by. So for investors using managed funds (hopefully for the right reasons) but who are still concerned to protect their capital, products like AXA North will be on their radar.

AXA North offers some attractive investment features. It does not use the “CPPI” protection method and so remains fully exposed to the underlying investments for its full term. This means that as markets rise after falling, the investment returns can recover also (in CPPI products this often isn’t possible, as they enter into “cashlock” after severe market downturns).

AXA North can be invested in without the capital guarantee (in which case it is just an expensive administration platform) or the “Protected Investment Guarantee” (with a five or seven-year term) or the “Protected Growth Guarantee” (with a 10, 15 or 20-year term) can be selected. The “Protected Growth Guarantee” facility offers annual profit lock in (ie, each year there is a gain above the invested amount), that gain will be locked in even if the asset falls in value subsequently. Click here for more details.

There is a choice of 40 different managed funds within the AXA North protected facilities. Many of these funds are “mainstream” and suffer from the travails of traditional active management. Investors need to keep a spread of funds across different asset classes and there is some flexibility to rebalance or change allocations.

The capital guarantee does not cover the upfront or ongoing fees paid to financial advisers. And it’s the potential for massive fees and charges across the entire AXA North product that will, in practice, make the facility unattractive for well-informed investors:

• Contribution fees of up to 4% can be charged and these are paid to the investor’s financial planner.
• Annual administration fees are 0.5–1.46% pa (including trail fees paid to financial planners).
• Managed fund management fees are 0.22–2.74% pa depending on which funds are selected.
• Depending on which managed funds are selected, the AXA North Guarantee Fee is 0.9–2.95% pa.
• Annual adviser fees of up to 2% pa can be charged.

Instead of succumbing to annual fees of up to 9.15% and hefty upfronts, investors could instead deposit the same amount into a cash account over the same time frame, with the balance invested in either the same managed funds or even better-performing direct equities, giving themselves the prospect of significant outperformance with capital preservation even in volatile markets. No wonder AXA North was placed on review by Standard & Poor’s earlier this year, which makes one wonder how it’s possible for some of the other industry research houses to have given AXA North high ratings and “product of the year” awards.

The score: 1.5 stars
0 Ease of understanding/transparency
0 Fees
0.5 Performance/durability/volatility/relevance of underlying asset
0.5 Regulatory profile/risks
0.5 Innovation

Tony Rumble is the founder of the ASX-listed products course LPAC Online, a provider of investment training to financial services professionals.