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Noblesse obliged
Henri de Castries wants to forge France's giant insurer into a world-beating asset manager. But he's not interested in the glamour of high finance. To him, it's all about moving product.
Henri de Castries wants to forge France's giant insurer into a world-beating asset manager. But he's not interested in the glamour of high finance. To him, it's all about moving product.
By Andrew Capon
January 2001
Institutional Investor Magazine
For an aristocrat -- and corporate titan -- Henri de Castries can sound awfully down to earth.
Chief executives of other financial behemoths vying for global supremacy in asset management like to toss around catchphrases about building corporate paradigms, nurturing entrepreneurship or pushing the e-envelope. Not de Castries, a descendant of Louis XVI's naval commander, who took the reins of power at Axa Group in May. He might as well be running a factory, so distinctly Old Economy is his speech, so riddled with la production and les distributeurs. With $70 billion in revenues, Axa is the world's biggest insurer by income, and with $790 billion in assets, it's the third-largest investment manager. Yet when de Castries wants to explain his main goal -- boosting sales to build the money management business -- he finds it useful to compare Axa to a modest corner boulangerie. "In France a baker knows that everyone buys bread every day," he says. "His cost of client acquisition is low. Financial services are not so simple."
That homespun approach -- coupled with a sharp focus on profits -- is characteristic of the 46-year-old who has inherited one of the most awe-inspiring mantels of corporate power in Europe, that of legendary financier Claude Bébéar. Within a generation, the iconoclastic Bébéar bootstrapped himself from humble origins to the pinnacle of the European business establishment. In the process, he hauled Axa from 17th place in French insurance to its current lofty heights. During his 25-year tenure, the company grew spectacularly as Bébéar, a consummate deal maker, scarfed up insurers from the U.S.'s Equitable Cos. to the massive but ailing Union des Assurances de Paris. He laid the foundations of Axa's asset management empire by absorbing New Yorkbased Alliance Capital Management, along with its parent, Equitable, in 1991 and launching, Europe's Axa Investment Managers in 1997. Perhaps most important, he began building the Axa name -- an intentionally bland one that he confected to work for any business line in any region of the world -- into a global brand.
Now it is up to de Castries to guide the next phase of Axa's evolution. He envisions Axa as a financial protection company, "manufacturing, servicing and distributing savings and risk products across the key markets of the world." But unlike Bébéar, he believes that the path to improved profitability is internal growth. Axa can cut costs, but that alone won't help profits much. Acquisitions, at least in Europe, are less attractive than they were in the past, since asset values have been bid up so high. So de Castries is bent on making the most of Axa's main strength -- its powerful sales army.
Opportunities -- and dangers -- abound. Ongoing pension reform in Europe continues to stoke consumer appetites for new financial products, but deregulation on the Continent and consolidation in the U.S. are squeezing insurance premiums. The dauphin-turned-king will need to do some housecleaning in insurance, perhaps selling off noncore property/casualty divisions and nonperforming businesses such as reinsurance. Meanwhile, in asset management -- the high-margin growth business that has become the Holy Grail for bankers and insurers everywhere -- he must figure out how to push more mutual funds through Axa's vast distribution network.
De Castries has already put his stamp on Axa. He has bought out the minority interests of U.K. insurance subsidiary Sun Life and Provincial Holdings and those of Axa Financial, the U.S.-based holding company that encompasses Alliance and the old Equitable brands. Alliance Capital, the growth fund powerhouse, announced in June that it would shell out $3.5 billion to buy value manager Sanford C. Bernstein & Co. (see box). And in November Axa Financial quit the investment banking business, and fattened its war chest, by selling its 70 percent stake in Donaldson, Lufkin & Jenrette to Credit Suisse First Boston for $8 billion.
But buying and selling businesses won't be enough to satisfy de Castries' ambition to become the world's preeminent asset manager. Axa must also improve its performance. Dragged down by the dominance of its insurance operations, its margins lag those of more-diversified financial services businesses. The company's future growth depends largely on selling more mutual fund products -- especially in Europe, where Axa is up against aggressive and practically ubiquitous bank branches trying to do exactly the same thing. So instead of trying to lure more customers at ever-increasing cost, de Castries, who previously headed Axa's money management business, is focusing on selling high-margin products to the millions of people who already buy insurance from the company.
That's where the baker analogy comes in. "Our business isn't as easy as the baker's," he says. "Not everyone can be persuaded that they need a pension or a mutual fund. If you understand that selling more products to your existing clients can enhance your profitability massively, you understand everything about this business."
True, but accomplishing that goal won't be easy. Competition is growing ever fiercer, and slumping global markets will diminish growth prospects, at least in the short term. Overseas buyers have descended on the lucrative U.S. market en masse, driving up acquisition costs and heightening competition: Germany's Allianz paid $4.7 billion to buy renowned bond manager Pacific Investment Management Co. in late 1999 and in October announced plans to acquire Nicholas-Applegate Capital Management, the small-cap growth specialist, for $1.1 billion. (Allianz also listed its shares in New York, to make future acquisitions easier.) UniCredito Italiano bought Boston-based Pioneer Group, while France's Caisse des Dépôts et Consignations' CDC Asset Management spent $1.9 billion for Boston-based Nvest Cos., the parent of Loomis, Sayles & Co.
In the U.S. profitability isn't a problem so far. Thanks to Axa Financial's return on equity of nearly 25 percent, its Big Boardlisted stock zoomed 71 percent last year, easily outperforming the average for the financial services sector. The European operations, on the other hand, need to boost their bottom line. With an overall ROE of 14.5 percent, Axa Group is slightly ahead of its German archrival, Munich-based Allianz, but trails the 18 percent posted by Dutch insurer Aegon. One reason: Asset management accounts for only about 3 percent of Axa's total revenues, 68 percent of which are generated in Europe.
So de Castries has made European asset management a priority. In 1997 he brought in Donald Brydon, 55, the tough-minded Scot who with the well-timed acquisition of Wells Fargo Nikko Investment Advisers and some stray organic growth had built Barclays Bank into a top money management house. De Castries has vested Brydon with a lot of power. Along with Axa Financial CEO Edward Miller, Brydon sits on Axa's executive committee, to which the officials of Alliance and other U.S. businesses report.
Indeed, part of what's driving Axa Financial's stock price is that Miller is actively implementing de Castries' strategy of pushing more product through the distribution pipeline. Besides rounding out Alliance's fund universe with acquisitions like Bernstein, Miller has put Equitable's 7,500 sales agents into a new entity called Axa Advisors and retrained them as financial planners who can sell the full menu of brands from Equitable, Alliance and Bernstein, as well as a wide variety of third-party products.
On the Continent the changing financial environment could help raise the contribution from asset management, lifting Axa's ROE. European investors have been pouring money into retail investment products, particularly mutual funds, at record rates over the past five years (Institutional Investor, October 2000). Worried about underfunded state pension schemes, governments are gradually shifting some of the burden of retirement funding onto individuals' shoulders. Axa has a ready-made means to reach these investors: its network of insurance agents. But like most Continental insurers, Axa sells mainly homegrown products -- and conservative ones, at that. Developing its sales force into a successful purveyor of third-party funds, like Axa Advisors in the U.S., is a high hurdle. Says Michael Huttner, European insurance analyst at J.P. Morgan: "Europe is an uphill struggle. Axa is investing a lot in organic growth, but they need to make the distribution work."
At the same time, de Castries wants to wring more synergies out of the Axa empire. Formerly run like a hodgepodge of country-based fiefdoms, the company is gradually globalizing. It now boasts a single worldwide information-technology purchasing strategy that is likely to cut costs. The company has launched a customer relationship management program with the goal of finding a template that works for clients everywhere. A Paris-based team is developing a pan-European e-commerce initiative. The board of directors increasingly reflects business lines as well as geography.
Analysts say that the ambitious young CEO is more likely to rock the boat and make needed changes -- especially pulling out of property/casualty insurance -- than Bébéar, who retained emotional ties to Axa's old businesses. De Castries may have more stomach for pruning dead wood. Certainly, when he talks about his company, he's pure practicality. "Once you create a manufacturer and distributor model, it is very powerful," he says. "You can see what part of the organization needs to be congratulated and who needs to be challenged. This way we have a much clearer understanding of the chain of value creation throughout the entire organization."
A WIRY, COMPACT MAN WHOSE BUILD AND stature suggest a jockey, de Castries is in fact a keen equestrian who keeps horses at his country estate in Anjou, two hours from Paris. His office seems almost obsessively tidy, his imposing antique desk free of clutter. The sole personal touch is a photograph of his three young children, to whom he is devoted. Except for the odd overnight flight on a Friday, his weekends are sacred and mostly spent in Anjou.
Yet he seems wonderfully at home at Axa. He moves with atavistic grace (his full name, Henri René Marie Augustin de la Croix de Castries, betrays his noble lineage) among the Louis XIV antiques and the courtiers' oil portraits that decorate the company's 18th-century headquarters near the Champs Elysées. The building, formerly home to the newspaper Le Figaro, a pillar of the establishment press, harks back to France's golden age. Supremely at ease, de Castries chats casually with employees, a monarch among his subjects.
But the crown he wears comes from Bébéar, who plucked him from the French Finance Ministry in 1989 to head Axa's corporate finance division. Many industry veterans see an almost poetic soundness in the succession. Now 65, Bébéar is widely considered the godfather of modern French finance, and his influence reaches across Europe; Axa's huge shareholdings ensure that few deals get done without his tacit approval. As chairman of Axa's supervisory board, he still talks to de Castries frequently and remains involved in decision making. The two men share a passion for hunting and have in common an easy charisma. Both speak faultless English.
Indeed, personal affinity may explain their mentor-and-protégé symbiosis better than anything else, since the insurance business was hardly a natural fit for the young de Castries. His early career reflected his origins in a family that has for centuries moved in the upper echelons of French politics, diplomacy and the military. (One ancestor, Charles Eugene de la Croix de Castries, headed the navy under Louis XVI; another was a World War II hero and the field commander who surrendered Diên Biên Phú.) De Castries served in an elite paratroop regiment, then graduated with top honors from the Ecole Nationale d'Administration, training ground for the French governing classes -- the so-called énarques. In 1980, at 26, he became a supervisor in the Ministry of Finance, a prestigious job that gives its holders free rein to audit the books of any piece of the French state.
De Castries worked on the first wave of French privatizations, including that of phone giant Alcatel, under former prime minister Edouard Balladur. He seemed destined to run one of France's quasi-state-controlled businesses or to hold a top government office. But in 1989 he met Bébéar. The go-between: Lazard Frères & Cie. senior partner Antoine Bernheim, who later was chairman of No. 1 Italian insurer Assicurazioni Generali until ousted by the late Mediobanca heavyweight Enrico Cuccia in 1999.
Although Axa was at the time a growing force in French insurance, most énarques would have regarded it as too small a stage for their talents. De Castries, however, was fascinated by the prospect of remaking the European financial landscape -- and of working side by side with Bébéar. He joined the firm's corporate finance department, where he played an integral role in the Equitable, UAP and Sun Life acquisitions, among others. It was a tremendous experience in male bonding.
De Castries rose quickly. Named managing director in 1993, he was appointed the following year as head of life insurance at Equitable and at Axa Equity & Law Life Assurance Society, the U.K. insurer that Axa had swallowed up in 1989. By 1997 he was one of only five executive vice presidents, responsible for life operations in the U.K. and U.S. And after serving on Alliance's board of directors for five years and observing the business up close, he became head of asset management worldwide in 1997. When Brydon met him for the first time that year, he was struck by de Castries' approach to the business. "There was a clarity of vision about the separation of insurance and investment management that set Henri apart from many people I have met," he says. "Other executives at large financial service companies in Europe knew there was an opportunity. Henri understood how to create a business to capture that opportunity."
Outsiders believe that the asset management appointment marked de Castries as Bébéar's dauphin. Axa insiders are less sure. "Claude had many potential successors," says a former senior employee, including among them Denis Kessler, former head of the French insurance association, and current insurance chief Claude Tendil. "He kept testing Henri with more and more challenges. It was only because Henri was equal to each of these challenges that he became the successor."
Probably the biggest of those challenges was the November 1996 takeover of UAP, which doubled Axa's size and transformed its European profile. Robert de Metz, a former Banque Paribas senior banker who was de Castries' contemporary at the Finance Ministry and worked with him on the UAP deal, thinks that transaction was de Castries' finest hour. It was de Castries to whom Bébéar turned to tie up loose ends after the acquisition was complete. Buying out the 52 percent of Royale Belge that Axa did not acquire with UAP pitted de Castries against Belgian investor Albert Frère, who controlled the majority interest through his flagship holding company, Groupe Bruxelles Lambert. De Castries finally persuaded Frère to sell in 1998, but not before Axa had built up a threatening position in GBL's stock.
Armed with his comprehensive knowledge of French finance and of the Axa empire, de Castries is fighting two battles. While strengthening asset management, he needs to shore up the company's insurance side. As Europe deregulates, formerly protected national markets have turned into hotbeds of competition. In the growth business of mutual fundlinked life insurance, the banks are emerging as strong contenders. And in property/casualty, too much capital is chasing too little business; locally dominant insurers that enjoy economies of scale dictate pricing. De Castries' game plan is to focus on life insurance and asset management, and he may also slowly wean Axa Group from the p/c business that nourished it in its infancy. (Axa's early-19th-century precursor was a fire insurer.)
The aggressive acquisition of assets at cut-rate prices, which propelled Axa's growth in the 1990s, is yesterday's strategy in Europe. Insurance companies are at the top of their price cycle, and there are few bargains left. The U.S. remains a more favorable hunting ground: The average price-earnings ratio of 17 for American insurers is lower than the average 23 multiple for their European peers. Among potential additions to Axa Financial, industry experts say Hartford Financial Services Group and Lincoln National Corp. are in de Castries' sights.
In Europe, analysts agree, he needs to perform radical surgery. Indeed, Mark Cathcart, who covers European insurance for Deutsche Bank, calls Axa "strategically challenged." Without a market-dominant position, it's almost impossible to be profitable in property/casualty. Axa has a 12 percent market share in France, where it's the biggest insurer, and its acquisition of Guardian Royal Exchange in 1998 made it No. 3 in the U.K. But elsewhere it doesn't have enough of a presence to make money. J.P. Morgan's Huttner thinks Axa could improve p/c earnings by sticking to distribution and leaving the underwriting to others. "Axa would keep the distribution margin and keep the relationship with the client," he notes. Axa watchers think de Castries will be less tolerant of that drag on the group's profitability than Bébéar, who liked presiding over a wide mix of businesses.
On the second battle front, European and Asian asset management, de Castries relies heavily on Brydon. When Brydon joined Axa from Barclays in 1997, de Castries, as head of global asset management, was considering merging Axa's European assets into Alliance Capital. Combining the European and U.S. businesses would have created a global asset management powerhouse overnight.
But he quickly rejected the idea. Alliance had more than enough on its plate coping with the boom in U.S. mutual fund investing. Distracting the company with a mandate to organize Axa's global asset management businesses might have knocked it off course and sent Alliance's independent-minded executives out the door. So far it seems that de Castries made the right decision. In the first half of 2000, Alliance was one of an exclusive band of five U.S. money managers that together attracted 85 percent of all flows into bond and equity mutual funds.
Rather than combine the operations, de Castries launched Axa Investment Managers in November 1997 as the vehicle to drive asset management growth in Europe and Asia. When Brydon took over, the European business was a cottage industry, with just $107 billion under management; 90 percent of revenues came from managing group assets. Today Axa IM is becoming a more credible force. In the 12 months ended in May 2000, assets under management rose by 70 percent, to E250 billion ($232.5 billion), and revenues from affiliated companies are down to 46 percent.
Still, history has proved how tough it can be for an insurer to build asset management credentials organically. Allianz launched Allianz Asset Management in 1998 with much fanfare, only to decide quickly that an acquisition strategy made more sense. Zurich Financial Services Group chose the acquisition route early, buying Scudder, Stevens & Clark in July 1997 for $1.2 billion and the insurance and asset management businesses of British American Tobacco the following year. Aegon manages a lot of money, but its third-party business is paltry.
Managing outside money is critical to Axa's future growth in Europe. Overall, non-Axa business accounts for 51 percent of revenues -- a ratio de Castries wants to raise to 70 percent by 2005. He knows his strategy is sound. He has a shining example in the U.S., where production and distribution have been successfully married. Last year the Equitable brand was subsumed into Axa Financial, and Equitable's 7,500-strong sales force became part of the newly formed Axa Advisors. In addition to in-house products, the agents offer more than 900 mutual funds from 20 different fund companies. In the first half of 2000, Axa Advisors gathered assets at a record pace of $50 billion, up 54 percent from the same period in 1999.
Now Axa Financial is paying for its salespeople to take the Series 7 examinations administered by the U.S. Securities and Exchange Commission, which will license them to give financial planning advice. Their compensation is changing, too. New hires are paid as fee-based planners; current agents have the option of collecting commissions or fees.
That should help burnish Axa Financial's image with the public. So, de Castries hopes, will a $30 million TV and print advertising campaign, launched in September, that talks up the firm's investment credentials as well as its insurance reputation. Axa sales agents are shown with large building blocks that spell out "protection," "savings" and "planning." The ads end with the words, "Axa Advisors -- Building Futures."
De Castries believes his investments in education and marketing will pay off in spades. "The average profitability of the financial planners we have in the group is far higher than the traditional sales force," he says. "Changing the name changes the perception in the community. One former Equitable salesman told me that his clients now invite him to their weddings. It's fine to invite your financial planner. He never got those invitations as an insurance salesman."
Just before Christmas de Castries indicated that he wants to put the U.S. subsidiary's know-how to work elsewhere in the world. He named Axa Financial CFO Stanley Tulin to Axa's executive committee; along with Miller, Tulin will have a loud voice in global strategy. He also elevated Axa Financial's investor relations chief, Gregory Wilcox, to Axa senior vice president. The promotions signal that de Castries is counting on the Americans to inject more juice into Axa's ratings and stock price.
IMITATING THE U.S. STRATEGY ON the Continent plays to Axa's main strength -- its 25,000-plus sales agents in Europe. Brydon is just beginning to leverage that distribution clout in the retail market. In the institutional market Axa IM has a long way to go, according to one London fund consultant. Brydon's reputation gets the firm through many doors, but winning large, high-profile British institutional accounts is a ways off.
For that reason, the firm's strategy is retail-led and country-specific. Axa IM offers global equity and fixed-income products; European investors can also buy small-cap equity funds and corporate credit products. Of its E250 billion under management, E170 billion comes from affiliated companies; its non-Axa business breaks down to E50 billion in retail accounts and E30 billion in institutional.
Because Axa Investment Managers was formed from many disparate companies and brands, long-term performance numbers are hard to assess meaningfully. Still, in its U.K. peer group of pension fund managers overseeing balanced accounts, Axa's performance has been in the top quartile over one, three and five years. European equities are a particular strength, with Axa's French mutual funds in the top quartile in the last one, three, five and ten years. Axa's European equity U.K. unit trust is also in the top quartile over one year.
Axa Investment Managers' biggest client, Axa, is happy with Brydon's efforts. "We recently completed a review of the investment performance of our main funds, and our own benchmarks have been exceeded," says de Castries. "Performance has never been better, and in some areas it is outstanding."
Getting to this point wasn't simple. Creating Axa Investment Managers presented an organizational challenge, literally. Brydon had to craft a strategy for Axa's patchwork of European insurance affiliates, then redefine their relationships with their money management operations. He toured his new offices, met the people running the businesses, set up a ten-person steering group and in the spring of 1998 decamped with them to Marrakech to develop a "statement of philosophy."
In so doing, Brydon was following a well-worn Axa path. Bébéar long ago instituted trips for Axa executives to such far-flung locations as the Sahara desert and the Great Wall of China. The idea: Sever people's ties with the familiar, and force them to think afresh about their business. Last spring Axa sent 250 upper-level staff members to a retreat in the Brazilian rain forest, where they stayed in a hotel built over the Amazon, fished for piranha and heard an inspirational talk on leadership from former French national soccer coach Aime Jacquet, who helped win the 1998 World Cup for his country.
Two central tenets emerged from Marrakech. One: That Axa's European asset management companies should share their resources, particularly research, so that their combined scale would give the individual companies an information edge. Two: That the local insurance offices should own their client relationships. That meant decentralizing money management, sales, marketing and customer relations -- a radical departure from the way most investment management firms are structured.
To make the model work, Brydon, with de Castries' backing, cut the link between Axa's European insurance companies and its asset managers. Axa IM would create investment products and manage the assets; the insurers would just sell. Essentially, Brydon built a network of institutional fund management relationships, each with its own contract and performance benchmark. The company won't disclose specifics except to say that some units have to match indexes, others are measured against a peer group, and still others are given absolute-return targets.
To effect the separation, Brydon sold stock in Axa IM to the insurance companies in return for control of the asset management businesses. German insurance subsidiary Axa Colonia, for example, traded 100 percent control of its local E800 million asset management business for stock in the new firm. That gave the insurers an incentive to make Axa IM work -- and gave the new company a bedrock of assets and revenues.
With six different deals to strike and contracts to negotiate, this was a time-consuming process. But by the end of 1998, Brydon had what he called a "multilocal" structure in place. Each of Axa IM's offices -- in Frankfurt, the Hague, Hong Kong, London, Paris and Tokyo -- is a full-service hub providing investment management, client service and sales and marketing. Other large global asset management companies centralize at least one of these functions. At Axa there is no head office. The chief of European equities is based in Frankfurt, for example, but the team is spread throughout Europe's investment centers. The head of equity research is based in London, but analysts are scattered throughout Europe. Brydon likes to characterize Axa Investment Managers as a "virtual company" whose "center is everywhere."
Conceptually, Axa's is a powerful model for asset gathering. Investors want the research resources that international firms can deliver, but they also want sensitivity to local fee structures and product preferences. Institutional investors need a money manager who knows the tax and regulatory regime and who is flexible enough to create unique portfolios with unique benchmarks. For asset managers, that kind of tailor-made service usually means extra complexity and expense.
Thus big international houses miss out on significant chunks of institutional business because local customers are too small to merit segregated account status or too difficult to service. With its extensive ground network, Axa has the chance to win business that had previously been the preserve of a handful of domestic players. Take France's employee savings plan market: Assets grew by 104 percent in the 12 months ended in September; new clients included TotalFina Elf and IBM France.
To run this complicated enterprise, Axa employs matrix management: Each local business head has a counterpart with global responsibilities. There's a German head of marketing and a global head of marketing, a CEO for France and a global CEO. Matrix management got a bad name among investment bankers in the early 1990s, when it was considered a surefire recipe for turf battles. (Business writer Jonar Nader wrote a book on the subject: How to Lose Friends and Infuriate People.) But so far Axa's senior executives all seem to be reading from the same page. It helps that Brydon has fostered an atmosphere of transparency, with job descriptions set out in writing and available to all staff.
Some of Brydon's team-building efforts have raised hackles. Early on he hired a psychologist to carry out in-depth profiles of fund managers and senior staff. Says a former executive: "It left a very bitter taste. I don't like navel-gazing, and I'm damned if I am going to do it at work. I felt Donald was asking too much."
In his defense, Brydon says the assessments helped him put like-minded people together and to separate the team players from the free spirits. "It was a pretty raw process, but a very valuable one," he says. Still, he never used the shrink again.
Less controversial has been his approach to compensation. Salaries are the biggest single bugbear for a CEO trying to create asset management businesses in an insurance company. Good fund managers expect salaries that few in the insurance industry command, and insurance executives blanch at paying them. But Axa IM managers earn paychecks that are competitive with those at, say, Fidelity Investments. "This is a separate business with a separate philosophy," says Brydon.
He has gone a step further. About 100 senior executives receive Axa IM stock options -- still a relatively rare form of compensation for fund managers employed by insurers. The options are valued annually by independent analysts. "It's what the best people in the industry expect," Brydon remarks.
Certainly, his compensation plan hasn't gotten in the way of hiring high-profile names. In the past year Robert Kyprianou came to head global fixed income from the same job at ABN Amro Asset Management; Jean-Louis Laurens, formerly France country head for Dresdner Bank, signed on as CEO of Axa Investment Managers in France; Adam Lessing left Goldman Sachs Asset Management, where he was chief of European retail, to head Axa IM's global retail effort; Stuart Fowler came from Dresdner RCM Global Investors to head U.K. equities; and Günther Skrzypek, who as CEO turned J.P. Morgan Investment Management into Germany's largest foreign-owned institutional manager, joined Axa IM as chief executive of the firm's German business.
Momentum is still building. Brydon points to a E450 million high-yield collateralized debt obligation fund that Axa IM's structured product unit sold to institutions in the summer as an early example of the manufacturing-and-distribution model at its best. "There is no way we could have done that 18 months ago," he says.
The firm's acquisition of California-based quant fund specialist Barr Rosenberg Investment Management Group in 1998 has also been a success. Assets under management at this separately run unit, which operates in both the U.S. and Europe, have grown by $2 billion, and the firm is on course to write $1 billion of new business this year, according to CEO Nicolas Moreau. Inscape, the wealth management business launched in November by Abbey National Group, selected Axa Rosenberg to manage a U.K. equity portfolio. "After a rocky patch in the early 1990s, Rosenberg's process seems to be back on track," notes one London investment consultant.
Brydon's drive to make Axa Investment Managers succeed may have something to do with the experience that propelled him into de Castries' arms. Many London bankers believe he was treated appallingly at Barclays, where he worked for 20 years. Born in Stirling, Scotland, Brydon earned a degree in mathematics from Edinburgh University. Unlike his younger and more polished boss, he spent most of his career at one firm, Barclays, and in one business, asset management.
In Brydon's ten years as chief executive of BZW Investment Management, he transformed it from a second-string business managing a couple of billion pounds into a $363 billion powerhouse. Appointed deputy chief executive of BZW, Barclays' investment banking division, in October 1994, he masterminded the successful acquisition of Wells Fargo Nikko Investment Advisors the following year. That deal swelled BZW's assets under management by some $200 billion and turned it into the world's biggest index fund company. Brydon seemed poised for what was then considered one of the City's top jobs. When BZW's CEO, his close friend and fellow Scot David Band, died suddenly in March 1996, many thought that Brydon's years of loyal service would be rewarded.
But the Barclays board, led by new CEO Martin Taylor, had different ideas. They appointed William Harrison, a deal-making star from Robert Fleming, to the top job at BZW. Within 24 hours of his arrival in mid-September, he had fired Brydon. "It was shoddy," says a senior investment banker formerly with the firm. "I thought at the time it marked an end of an era."
It did. Barely two years later Harrison and Taylor were gone, and Barclays sold the bulk of its investment banking business to Credit Suisse First Boston. Ironically, the one part of the bank that weathered these storms is Barclays Global Investors, the asset management company Brydon built. Given his history, Brydon may now be eager to get the recognition he deserves -- from de Castries. "When he hired me, Henri said that he wanted me to build the best asset management company in the world," says Brydon. "I don't intend to disappoint."
BRYDON IS UNDER PRESSURE TO PERFORM, because investors, analysts and de Castries have a ready-made measuring rod for his new European firm: Alliance Capital Management, the principal U.S. asset management subsidiary of Axa Financial. Alliance increased its assets under management by 21 percent, to $388 billion, from third-quarter 1999 to third-quarter 2000. And it further bolstered its presence by acquiring value shop Sanford C. Bernstein. The price was steep by industry standards: 4 percent of Bernstein's $87 billion in assets under management. But most analysts think it is a good deal. "Buying a style-diversifying value manager near the bottom of the cycle for value is clever," says J.P. Morgan's Huttner.
The deal also broadens Alliance's reach in the high-net-worth market, adding 15,000 private client accounts and a nationwide advisory and referral network. And Bernstein's highly regarded sell-side research product will continue to be run as an independent boutique, diversifying Alliance's revenues.
Outside the U.S. Alliance is building links with Axa. In October Axa Asia Pacific and Alliance created a 50-50 joint venture to establish new asset management companies in Australia and New Zealand. Says Kathleen Corbet, Alliance's global CEO of fixed income and chairman of the new venture: "We are very excited by Axa's distribution power. There are 1,300 financial advisers across the two countries."
According to Corbet, Axa Investment Managers and Alliance Capital are competing globally for both Axa and third-party business. But Axa IM is much more closely linked to the insurance company than is Alliance.
In some ways, Axa Investment Managers should have an easier time pushing noninsurance products in Europe than Axa Advisors has had in the U.S. For one thing, Europeans take a much more holistic approach to personal finance. They like one-stop shopping. And the Axa name carries considerable weight. "Axa has a brand-recognition rate of 70 percent in Europe," says Adam Lessing, head of global retail at Axa IM. His firm will push its products through non-Axa channels as well. In France it has distribution agreements with Merrill Lynch & Co., ABN Amro and CDC.
The testing ground for Axa Investment Managers, not surprisingly, will be France. Axa's home turf accounts for the biggest chunk of Axa IM's business, with E100 billion of the firm's total managed assets of E250 billion. The French branch is developing a good reputation; recently, its mutual fund line won the top award for five-year performance from personal-finance magazine Investir.
Pushing the products are 11,000 insurance agents across the country -- France's second-biggest distribution network after the postal service. Jean-Louis Laurens, CEO of Axa Investment Managers in France, has divided the country into 12 regions, each with four "wholesalers" dedicated to supporting the Axa agents. Axa IM has established a telemarketing operation to facilitate sales of fund products. A team of senior financial advisers will answer complex queries from clients. The new sales onslaught swung into life in October. "We are sure we can build significant market share," says Laurens. "We just haven't properly exploited the power of our distribution in the past."
The competition is much fiercer in other countries. In Germany, for example, Axa has 4,000 Colonia insurance agents with 4 million customers. Günther Skrzypek, CEO of Axa Investment Managers in Germany, estimates that fewer than 2 percent of these customers own an Axa mutual fund or other savings product, so there's plenty of growth potential. Deutsche Bank's mighty branch network has garnered its fund subsidiary, DWS, a 24 percent market share. Still, Axa Investment Managers will try to replicate its French sales strategy in Germany.
Getting the distribution right is key. In Europe Axa's salespeople still work on a commission basis, but the trend from the U.S. is coming. The education process has already begun and de Castries says he is committed to changing the model "from product push to advice giving."
In the U.S. selling products created by third parties through proprietary distribution channels (so-called open architecture) is common. But European banks and insurers remain wedded to the idea that they should peddle their own brands. De Castries knows better. When clients buy funds from Fidelity or Merrill Lynch, Axa still earns its distribution fee. "It's a wonderful way to make the client happy, to keep him longer, to sell him more products and to increase our profitability," he says. "The interests of all parties are aligned."
Compared with Bébéar's swashbuckling takeover exploits, all the talk of product and distribution at Axa these days sounds far less sexy. Yet in some ways, what de Castries is trying to do is more difficult -- and rarer -- than building critical mass. "In the food business I don't think it is possible to be Danone and Carrefour," he says. "But I do think it's possible in financial services." Axa's factories are in place, and its retail juggernaut is beginning to roll. If de Castries can effect the transformation he envisions, his analogies won't sound like pain ordinaire any longer.
Opposites attract
It was a triumph of pushy matchmaking. Salomon Smith Barney investment banker Robert Smith, chatting informally with Alliance Capital Management executives early last year, learned that they wanted to add high-net-worth clients to the growth fund giant's roster. Smith also knew that Sanford C. Bernstein & Co. had put its plan to go public on the back burner, spooked by a lousy market for its trademark value products. So Smith arranged a March 9 dinner at Manhattan's high-toned, high-ceilinged Metropolitan Club, where Alliance chairman David Williams was asked whether his firm would be interested in acquiring Bernstein. "I responded, with a fair amount of alacrity, that yes, we would," Williams recalls.
By June two of U.S. money management's biggest names had agreed to become one. Under the terms of the deal, New Yorkbased Axa Financial, which has a 57 percent interest in Alliance, ponied up $1.5 billion in cash, which Alliance supplemented with $2 billion worth of stock. The newly combined entity will have $470 billion under management, about $85 billion of which comes from Bernstein. Roughly one third of that $85 billion belongs to Bernstein's 15,000 private clients.
"This was a superb transaction," says Bruce Brewington, an analyst with Putnam Lovell Securities. "The cross-selling opportunities are incredible, and there's almost zero overlap." Adds Bernstein president Roger Hertog: "I really think we've come as close as you can get to achieving 'one plus one equals three.' This is a better opportunity for shareholders and staff than was going it alone, and because we merged with a publicly traded firm, in essence, we did go public."
Institutional investors appear to be giving the deal their blessing. Since the announcement, Alliance has picked up 50 accounts and Bernstein 40, garnering a combined $5 billion in new assets. Meanwhile, the jewel in the crown of Axa Financial's U.S. empire has been greatly embellished. "We were trying to build a value product organically, but it was becoming clear it would be a long slog," says Alliance's Williams. Thanks for pushy matchmakers. -- Rich Blake
By Andrew Capon
January 2001
Institutional Investor Magazine
For an aristocrat -- and corporate titan -- Henri de Castries can sound awfully down to earth.
Chief executives of other financial behemoths vying for global supremacy in asset management like to toss around catchphrases about building corporate paradigms, nurturing entrepreneurship or pushing the e-envelope. Not de Castries, a descendant of Louis XVI's naval commander, who took the reins of power at Axa Group in May. He might as well be running a factory, so distinctly Old Economy is his speech, so riddled with la production and les distributeurs. With $70 billion in revenues, Axa is the world's biggest insurer by income, and with $790 billion in assets, it's the third-largest investment manager. Yet when de Castries wants to explain his main goal -- boosting sales to build the money management business -- he finds it useful to compare Axa to a modest corner boulangerie. "In France a baker knows that everyone buys bread every day," he says. "His cost of client acquisition is low. Financial services are not so simple."
That homespun approach -- coupled with a sharp focus on profits -- is characteristic of the 46-year-old who has inherited one of the most awe-inspiring mantels of corporate power in Europe, that of legendary financier Claude Bébéar. Within a generation, the iconoclastic Bébéar bootstrapped himself from humble origins to the pinnacle of the European business establishment. In the process, he hauled Axa from 17th place in French insurance to its current lofty heights. During his 25-year tenure, the company grew spectacularly as Bébéar, a consummate deal maker, scarfed up insurers from the U.S.'s Equitable Cos. to the massive but ailing Union des Assurances de Paris. He laid the foundations of Axa's asset management empire by absorbing New Yorkbased Alliance Capital Management, along with its parent, Equitable, in 1991 and launching, Europe's Axa Investment Managers in 1997. Perhaps most important, he began building the Axa name -- an intentionally bland one that he confected to work for any business line in any region of the world -- into a global brand.
Now it is up to de Castries to guide the next phase of Axa's evolution. He envisions Axa as a financial protection company, "manufacturing, servicing and distributing savings and risk products across the key markets of the world." But unlike Bébéar, he believes that the path to improved profitability is internal growth. Axa can cut costs, but that alone won't help profits much. Acquisitions, at least in Europe, are less attractive than they were in the past, since asset values have been bid up so high. So de Castries is bent on making the most of Axa's main strength -- its powerful sales army.
Opportunities -- and dangers -- abound. Ongoing pension reform in Europe continues to stoke consumer appetites for new financial products, but deregulation on the Continent and consolidation in the U.S. are squeezing insurance premiums. The dauphin-turned-king will need to do some housecleaning in insurance, perhaps selling off noncore property/casualty divisions and nonperforming businesses such as reinsurance. Meanwhile, in asset management -- the high-margin growth business that has become the Holy Grail for bankers and insurers everywhere -- he must figure out how to push more mutual funds through Axa's vast distribution network.
De Castries has already put his stamp on Axa. He has bought out the minority interests of U.K. insurance subsidiary Sun Life and Provincial Holdings and those of Axa Financial, the U.S.-based holding company that encompasses Alliance and the old Equitable brands. Alliance Capital, the growth fund powerhouse, announced in June that it would shell out $3.5 billion to buy value manager Sanford C. Bernstein & Co. (see box). And in November Axa Financial quit the investment banking business, and fattened its war chest, by selling its 70 percent stake in Donaldson, Lufkin & Jenrette to Credit Suisse First Boston for $8 billion.
But buying and selling businesses won't be enough to satisfy de Castries' ambition to become the world's preeminent asset manager. Axa must also improve its performance. Dragged down by the dominance of its insurance operations, its margins lag those of more-diversified financial services businesses. The company's future growth depends largely on selling more mutual fund products -- especially in Europe, where Axa is up against aggressive and practically ubiquitous bank branches trying to do exactly the same thing. So instead of trying to lure more customers at ever-increasing cost, de Castries, who previously headed Axa's money management business, is focusing on selling high-margin products to the millions of people who already buy insurance from the company.
That's where the baker analogy comes in. "Our business isn't as easy as the baker's," he says. "Not everyone can be persuaded that they need a pension or a mutual fund. If you understand that selling more products to your existing clients can enhance your profitability massively, you understand everything about this business."
True, but accomplishing that goal won't be easy. Competition is growing ever fiercer, and slumping global markets will diminish growth prospects, at least in the short term. Overseas buyers have descended on the lucrative U.S. market en masse, driving up acquisition costs and heightening competition: Germany's Allianz paid $4.7 billion to buy renowned bond manager Pacific Investment Management Co. in late 1999 and in October announced plans to acquire Nicholas-Applegate Capital Management, the small-cap growth specialist, for $1.1 billion. (Allianz also listed its shares in New York, to make future acquisitions easier.) UniCredito Italiano bought Boston-based Pioneer Group, while France's Caisse des Dépôts et Consignations' CDC Asset Management spent $1.9 billion for Boston-based Nvest Cos., the parent of Loomis, Sayles & Co.
In the U.S. profitability isn't a problem so far. Thanks to Axa Financial's return on equity of nearly 25 percent, its Big Boardlisted stock zoomed 71 percent last year, easily outperforming the average for the financial services sector. The European operations, on the other hand, need to boost their bottom line. With an overall ROE of 14.5 percent, Axa Group is slightly ahead of its German archrival, Munich-based Allianz, but trails the 18 percent posted by Dutch insurer Aegon. One reason: Asset management accounts for only about 3 percent of Axa's total revenues, 68 percent of which are generated in Europe.
So de Castries has made European asset management a priority. In 1997 he brought in Donald Brydon, 55, the tough-minded Scot who with the well-timed acquisition of Wells Fargo Nikko Investment Advisers and some stray organic growth had built Barclays Bank into a top money management house. De Castries has vested Brydon with a lot of power. Along with Axa Financial CEO Edward Miller, Brydon sits on Axa's executive committee, to which the officials of Alliance and other U.S. businesses report.
Indeed, part of what's driving Axa Financial's stock price is that Miller is actively implementing de Castries' strategy of pushing more product through the distribution pipeline. Besides rounding out Alliance's fund universe with acquisitions like Bernstein, Miller has put Equitable's 7,500 sales agents into a new entity called Axa Advisors and retrained them as financial planners who can sell the full menu of brands from Equitable, Alliance and Bernstein, as well as a wide variety of third-party products.
On the Continent the changing financial environment could help raise the contribution from asset management, lifting Axa's ROE. European investors have been pouring money into retail investment products, particularly mutual funds, at record rates over the past five years (Institutional Investor, October 2000). Worried about underfunded state pension schemes, governments are gradually shifting some of the burden of retirement funding onto individuals' shoulders. Axa has a ready-made means to reach these investors: its network of insurance agents. But like most Continental insurers, Axa sells mainly homegrown products -- and conservative ones, at that. Developing its sales force into a successful purveyor of third-party funds, like Axa Advisors in the U.S., is a high hurdle. Says Michael Huttner, European insurance analyst at J.P. Morgan: "Europe is an uphill struggle. Axa is investing a lot in organic growth, but they need to make the distribution work."
At the same time, de Castries wants to wring more synergies out of the Axa empire. Formerly run like a hodgepodge of country-based fiefdoms, the company is gradually globalizing. It now boasts a single worldwide information-technology purchasing strategy that is likely to cut costs. The company has launched a customer relationship management program with the goal of finding a template that works for clients everywhere. A Paris-based team is developing a pan-European e-commerce initiative. The board of directors increasingly reflects business lines as well as geography.
Analysts say that the ambitious young CEO is more likely to rock the boat and make needed changes -- especially pulling out of property/casualty insurance -- than Bébéar, who retained emotional ties to Axa's old businesses. De Castries may have more stomach for pruning dead wood. Certainly, when he talks about his company, he's pure practicality. "Once you create a manufacturer and distributor model, it is very powerful," he says. "You can see what part of the organization needs to be congratulated and who needs to be challenged. This way we have a much clearer understanding of the chain of value creation throughout the entire organization."
A WIRY, COMPACT MAN WHOSE BUILD AND stature suggest a jockey, de Castries is in fact a keen equestrian who keeps horses at his country estate in Anjou, two hours from Paris. His office seems almost obsessively tidy, his imposing antique desk free of clutter. The sole personal touch is a photograph of his three young children, to whom he is devoted. Except for the odd overnight flight on a Friday, his weekends are sacred and mostly spent in Anjou.
Yet he seems wonderfully at home at Axa. He moves with atavistic grace (his full name, Henri René Marie Augustin de la Croix de Castries, betrays his noble lineage) among the Louis XIV antiques and the courtiers' oil portraits that decorate the company's 18th-century headquarters near the Champs Elysées. The building, formerly home to the newspaper Le Figaro, a pillar of the establishment press, harks back to France's golden age. Supremely at ease, de Castries chats casually with employees, a monarch among his subjects.
But the crown he wears comes from Bébéar, who plucked him from the French Finance Ministry in 1989 to head Axa's corporate finance division. Many industry veterans see an almost poetic soundness in the succession. Now 65, Bébéar is widely considered the godfather of modern French finance, and his influence reaches across Europe; Axa's huge shareholdings ensure that few deals get done without his tacit approval. As chairman of Axa's supervisory board, he still talks to de Castries frequently and remains involved in decision making. The two men share a passion for hunting and have in common an easy charisma. Both speak faultless English.
Indeed, personal affinity may explain their mentor-and-protégé symbiosis better than anything else, since the insurance business was hardly a natural fit for the young de Castries. His early career reflected his origins in a family that has for centuries moved in the upper echelons of French politics, diplomacy and the military. (One ancestor, Charles Eugene de la Croix de Castries, headed the navy under Louis XVI; another was a World War II hero and the field commander who surrendered Diên Biên Phú.) De Castries served in an elite paratroop regiment, then graduated with top honors from the Ecole Nationale d'Administration, training ground for the French governing classes -- the so-called énarques. In 1980, at 26, he became a supervisor in the Ministry of Finance, a prestigious job that gives its holders free rein to audit the books of any piece of the French state.
De Castries worked on the first wave of French privatizations, including that of phone giant Alcatel, under former prime minister Edouard Balladur. He seemed destined to run one of France's quasi-state-controlled businesses or to hold a top government office. But in 1989 he met Bébéar. The go-between: Lazard Frères & Cie. senior partner Antoine Bernheim, who later was chairman of No. 1 Italian insurer Assicurazioni Generali until ousted by the late Mediobanca heavyweight Enrico Cuccia in 1999.
Although Axa was at the time a growing force in French insurance, most énarques would have regarded it as too small a stage for their talents. De Castries, however, was fascinated by the prospect of remaking the European financial landscape -- and of working side by side with Bébéar. He joined the firm's corporate finance department, where he played an integral role in the Equitable, UAP and Sun Life acquisitions, among others. It was a tremendous experience in male bonding.
De Castries rose quickly. Named managing director in 1993, he was appointed the following year as head of life insurance at Equitable and at Axa Equity & Law Life Assurance Society, the U.K. insurer that Axa had swallowed up in 1989. By 1997 he was one of only five executive vice presidents, responsible for life operations in the U.K. and U.S. And after serving on Alliance's board of directors for five years and observing the business up close, he became head of asset management worldwide in 1997. When Brydon met him for the first time that year, he was struck by de Castries' approach to the business. "There was a clarity of vision about the separation of insurance and investment management that set Henri apart from many people I have met," he says. "Other executives at large financial service companies in Europe knew there was an opportunity. Henri understood how to create a business to capture that opportunity."
Outsiders believe that the asset management appointment marked de Castries as Bébéar's dauphin. Axa insiders are less sure. "Claude had many potential successors," says a former senior employee, including among them Denis Kessler, former head of the French insurance association, and current insurance chief Claude Tendil. "He kept testing Henri with more and more challenges. It was only because Henri was equal to each of these challenges that he became the successor."
Probably the biggest of those challenges was the November 1996 takeover of UAP, which doubled Axa's size and transformed its European profile. Robert de Metz, a former Banque Paribas senior banker who was de Castries' contemporary at the Finance Ministry and worked with him on the UAP deal, thinks that transaction was de Castries' finest hour. It was de Castries to whom Bébéar turned to tie up loose ends after the acquisition was complete. Buying out the 52 percent of Royale Belge that Axa did not acquire with UAP pitted de Castries against Belgian investor Albert Frère, who controlled the majority interest through his flagship holding company, Groupe Bruxelles Lambert. De Castries finally persuaded Frère to sell in 1998, but not before Axa had built up a threatening position in GBL's stock.
Armed with his comprehensive knowledge of French finance and of the Axa empire, de Castries is fighting two battles. While strengthening asset management, he needs to shore up the company's insurance side. As Europe deregulates, formerly protected national markets have turned into hotbeds of competition. In the growth business of mutual fundlinked life insurance, the banks are emerging as strong contenders. And in property/casualty, too much capital is chasing too little business; locally dominant insurers that enjoy economies of scale dictate pricing. De Castries' game plan is to focus on life insurance and asset management, and he may also slowly wean Axa Group from the p/c business that nourished it in its infancy. (Axa's early-19th-century precursor was a fire insurer.)
The aggressive acquisition of assets at cut-rate prices, which propelled Axa's growth in the 1990s, is yesterday's strategy in Europe. Insurance companies are at the top of their price cycle, and there are few bargains left. The U.S. remains a more favorable hunting ground: The average price-earnings ratio of 17 for American insurers is lower than the average 23 multiple for their European peers. Among potential additions to Axa Financial, industry experts say Hartford Financial Services Group and Lincoln National Corp. are in de Castries' sights.
In Europe, analysts agree, he needs to perform radical surgery. Indeed, Mark Cathcart, who covers European insurance for Deutsche Bank, calls Axa "strategically challenged." Without a market-dominant position, it's almost impossible to be profitable in property/casualty. Axa has a 12 percent market share in France, where it's the biggest insurer, and its acquisition of Guardian Royal Exchange in 1998 made it No. 3 in the U.K. But elsewhere it doesn't have enough of a presence to make money. J.P. Morgan's Huttner thinks Axa could improve p/c earnings by sticking to distribution and leaving the underwriting to others. "Axa would keep the distribution margin and keep the relationship with the client," he notes. Axa watchers think de Castries will be less tolerant of that drag on the group's profitability than Bébéar, who liked presiding over a wide mix of businesses.
On the second battle front, European and Asian asset management, de Castries relies heavily on Brydon. When Brydon joined Axa from Barclays in 1997, de Castries, as head of global asset management, was considering merging Axa's European assets into Alliance Capital. Combining the European and U.S. businesses would have created a global asset management powerhouse overnight.
But he quickly rejected the idea. Alliance had more than enough on its plate coping with the boom in U.S. mutual fund investing. Distracting the company with a mandate to organize Axa's global asset management businesses might have knocked it off course and sent Alliance's independent-minded executives out the door. So far it seems that de Castries made the right decision. In the first half of 2000, Alliance was one of an exclusive band of five U.S. money managers that together attracted 85 percent of all flows into bond and equity mutual funds.
Rather than combine the operations, de Castries launched Axa Investment Managers in November 1997 as the vehicle to drive asset management growth in Europe and Asia. When Brydon took over, the European business was a cottage industry, with just $107 billion under management; 90 percent of revenues came from managing group assets. Today Axa IM is becoming a more credible force. In the 12 months ended in May 2000, assets under management rose by 70 percent, to E250 billion ($232.5 billion), and revenues from affiliated companies are down to 46 percent.
Still, history has proved how tough it can be for an insurer to build asset management credentials organically. Allianz launched Allianz Asset Management in 1998 with much fanfare, only to decide quickly that an acquisition strategy made more sense. Zurich Financial Services Group chose the acquisition route early, buying Scudder, Stevens & Clark in July 1997 for $1.2 billion and the insurance and asset management businesses of British American Tobacco the following year. Aegon manages a lot of money, but its third-party business is paltry.
Managing outside money is critical to Axa's future growth in Europe. Overall, non-Axa business accounts for 51 percent of revenues -- a ratio de Castries wants to raise to 70 percent by 2005. He knows his strategy is sound. He has a shining example in the U.S., where production and distribution have been successfully married. Last year the Equitable brand was subsumed into Axa Financial, and Equitable's 7,500-strong sales force became part of the newly formed Axa Advisors. In addition to in-house products, the agents offer more than 900 mutual funds from 20 different fund companies. In the first half of 2000, Axa Advisors gathered assets at a record pace of $50 billion, up 54 percent from the same period in 1999.
Now Axa Financial is paying for its salespeople to take the Series 7 examinations administered by the U.S. Securities and Exchange Commission, which will license them to give financial planning advice. Their compensation is changing, too. New hires are paid as fee-based planners; current agents have the option of collecting commissions or fees.
That should help burnish Axa Financial's image with the public. So, de Castries hopes, will a $30 million TV and print advertising campaign, launched in September, that talks up the firm's investment credentials as well as its insurance reputation. Axa sales agents are shown with large building blocks that spell out "protection," "savings" and "planning." The ads end with the words, "Axa Advisors -- Building Futures."
De Castries believes his investments in education and marketing will pay off in spades. "The average profitability of the financial planners we have in the group is far higher than the traditional sales force," he says. "Changing the name changes the perception in the community. One former Equitable salesman told me that his clients now invite him to their weddings. It's fine to invite your financial planner. He never got those invitations as an insurance salesman."
Just before Christmas de Castries indicated that he wants to put the U.S. subsidiary's know-how to work elsewhere in the world. He named Axa Financial CFO Stanley Tulin to Axa's executive committee; along with Miller, Tulin will have a loud voice in global strategy. He also elevated Axa Financial's investor relations chief, Gregory Wilcox, to Axa senior vice president. The promotions signal that de Castries is counting on the Americans to inject more juice into Axa's ratings and stock price.
IMITATING THE U.S. STRATEGY ON the Continent plays to Axa's main strength -- its 25,000-plus sales agents in Europe. Brydon is just beginning to leverage that distribution clout in the retail market. In the institutional market Axa IM has a long way to go, according to one London fund consultant. Brydon's reputation gets the firm through many doors, but winning large, high-profile British institutional accounts is a ways off.
For that reason, the firm's strategy is retail-led and country-specific. Axa IM offers global equity and fixed-income products; European investors can also buy small-cap equity funds and corporate credit products. Of its E250 billion under management, E170 billion comes from affiliated companies; its non-Axa business breaks down to E50 billion in retail accounts and E30 billion in institutional.
Because Axa Investment Managers was formed from many disparate companies and brands, long-term performance numbers are hard to assess meaningfully. Still, in its U.K. peer group of pension fund managers overseeing balanced accounts, Axa's performance has been in the top quartile over one, three and five years. European equities are a particular strength, with Axa's French mutual funds in the top quartile in the last one, three, five and ten years. Axa's European equity U.K. unit trust is also in the top quartile over one year.
Axa Investment Managers' biggest client, Axa, is happy with Brydon's efforts. "We recently completed a review of the investment performance of our main funds, and our own benchmarks have been exceeded," says de Castries. "Performance has never been better, and in some areas it is outstanding."
Getting to this point wasn't simple. Creating Axa Investment Managers presented an organizational challenge, literally. Brydon had to craft a strategy for Axa's patchwork of European insurance affiliates, then redefine their relationships with their money management operations. He toured his new offices, met the people running the businesses, set up a ten-person steering group and in the spring of 1998 decamped with them to Marrakech to develop a "statement of philosophy."
In so doing, Brydon was following a well-worn Axa path. Bébéar long ago instituted trips for Axa executives to such far-flung locations as the Sahara desert and the Great Wall of China. The idea: Sever people's ties with the familiar, and force them to think afresh about their business. Last spring Axa sent 250 upper-level staff members to a retreat in the Brazilian rain forest, where they stayed in a hotel built over the Amazon, fished for piranha and heard an inspirational talk on leadership from former French national soccer coach Aime Jacquet, who helped win the 1998 World Cup for his country.
Two central tenets emerged from Marrakech. One: That Axa's European asset management companies should share their resources, particularly research, so that their combined scale would give the individual companies an information edge. Two: That the local insurance offices should own their client relationships. That meant decentralizing money management, sales, marketing and customer relations -- a radical departure from the way most investment management firms are structured.
To make the model work, Brydon, with de Castries' backing, cut the link between Axa's European insurance companies and its asset managers. Axa IM would create investment products and manage the assets; the insurers would just sell. Essentially, Brydon built a network of institutional fund management relationships, each with its own contract and performance benchmark. The company won't disclose specifics except to say that some units have to match indexes, others are measured against a peer group, and still others are given absolute-return targets.
To effect the separation, Brydon sold stock in Axa IM to the insurance companies in return for control of the asset management businesses. German insurance subsidiary Axa Colonia, for example, traded 100 percent control of its local E800 million asset management business for stock in the new firm. That gave the insurers an incentive to make Axa IM work -- and gave the new company a bedrock of assets and revenues.
With six different deals to strike and contracts to negotiate, this was a time-consuming process. But by the end of 1998, Brydon had what he called a "multilocal" structure in place. Each of Axa IM's offices -- in Frankfurt, the Hague, Hong Kong, London, Paris and Tokyo -- is a full-service hub providing investment management, client service and sales and marketing. Other large global asset management companies centralize at least one of these functions. At Axa there is no head office. The chief of European equities is based in Frankfurt, for example, but the team is spread throughout Europe's investment centers. The head of equity research is based in London, but analysts are scattered throughout Europe. Brydon likes to characterize Axa Investment Managers as a "virtual company" whose "center is everywhere."
Conceptually, Axa's is a powerful model for asset gathering. Investors want the research resources that international firms can deliver, but they also want sensitivity to local fee structures and product preferences. Institutional investors need a money manager who knows the tax and regulatory regime and who is flexible enough to create unique portfolios with unique benchmarks. For asset managers, that kind of tailor-made service usually means extra complexity and expense.
Thus big international houses miss out on significant chunks of institutional business because local customers are too small to merit segregated account status or too difficult to service. With its extensive ground network, Axa has the chance to win business that had previously been the preserve of a handful of domestic players. Take France's employee savings plan market: Assets grew by 104 percent in the 12 months ended in September; new clients included TotalFina Elf and IBM France.
To run this complicated enterprise, Axa employs matrix management: Each local business head has a counterpart with global responsibilities. There's a German head of marketing and a global head of marketing, a CEO for France and a global CEO. Matrix management got a bad name among investment bankers in the early 1990s, when it was considered a surefire recipe for turf battles. (Business writer Jonar Nader wrote a book on the subject: How to Lose Friends and Infuriate People.) But so far Axa's senior executives all seem to be reading from the same page. It helps that Brydon has fostered an atmosphere of transparency, with job descriptions set out in writing and available to all staff.
Some of Brydon's team-building efforts have raised hackles. Early on he hired a psychologist to carry out in-depth profiles of fund managers and senior staff. Says a former executive: "It left a very bitter taste. I don't like navel-gazing, and I'm damned if I am going to do it at work. I felt Donald was asking too much."
In his defense, Brydon says the assessments helped him put like-minded people together and to separate the team players from the free spirits. "It was a pretty raw process, but a very valuable one," he says. Still, he never used the shrink again.
Less controversial has been his approach to compensation. Salaries are the biggest single bugbear for a CEO trying to create asset management businesses in an insurance company. Good fund managers expect salaries that few in the insurance industry command, and insurance executives blanch at paying them. But Axa IM managers earn paychecks that are competitive with those at, say, Fidelity Investments. "This is a separate business with a separate philosophy," says Brydon.
He has gone a step further. About 100 senior executives receive Axa IM stock options -- still a relatively rare form of compensation for fund managers employed by insurers. The options are valued annually by independent analysts. "It's what the best people in the industry expect," Brydon remarks.
Certainly, his compensation plan hasn't gotten in the way of hiring high-profile names. In the past year Robert Kyprianou came to head global fixed income from the same job at ABN Amro Asset Management; Jean-Louis Laurens, formerly France country head for Dresdner Bank, signed on as CEO of Axa Investment Managers in France; Adam Lessing left Goldman Sachs Asset Management, where he was chief of European retail, to head Axa IM's global retail effort; Stuart Fowler came from Dresdner RCM Global Investors to head U.K. equities; and Günther Skrzypek, who as CEO turned J.P. Morgan Investment Management into Germany's largest foreign-owned institutional manager, joined Axa IM as chief executive of the firm's German business.
Momentum is still building. Brydon points to a E450 million high-yield collateralized debt obligation fund that Axa IM's structured product unit sold to institutions in the summer as an early example of the manufacturing-and-distribution model at its best. "There is no way we could have done that 18 months ago," he says.
The firm's acquisition of California-based quant fund specialist Barr Rosenberg Investment Management Group in 1998 has also been a success. Assets under management at this separately run unit, which operates in both the U.S. and Europe, have grown by $2 billion, and the firm is on course to write $1 billion of new business this year, according to CEO Nicolas Moreau. Inscape, the wealth management business launched in November by Abbey National Group, selected Axa Rosenberg to manage a U.K. equity portfolio. "After a rocky patch in the early 1990s, Rosenberg's process seems to be back on track," notes one London investment consultant.
Brydon's drive to make Axa Investment Managers succeed may have something to do with the experience that propelled him into de Castries' arms. Many London bankers believe he was treated appallingly at Barclays, where he worked for 20 years. Born in Stirling, Scotland, Brydon earned a degree in mathematics from Edinburgh University. Unlike his younger and more polished boss, he spent most of his career at one firm, Barclays, and in one business, asset management.
In Brydon's ten years as chief executive of BZW Investment Management, he transformed it from a second-string business managing a couple of billion pounds into a $363 billion powerhouse. Appointed deputy chief executive of BZW, Barclays' investment banking division, in October 1994, he masterminded the successful acquisition of Wells Fargo Nikko Investment Advisors the following year. That deal swelled BZW's assets under management by some $200 billion and turned it into the world's biggest index fund company. Brydon seemed poised for what was then considered one of the City's top jobs. When BZW's CEO, his close friend and fellow Scot David Band, died suddenly in March 1996, many thought that Brydon's years of loyal service would be rewarded.
But the Barclays board, led by new CEO Martin Taylor, had different ideas. They appointed William Harrison, a deal-making star from Robert Fleming, to the top job at BZW. Within 24 hours of his arrival in mid-September, he had fired Brydon. "It was shoddy," says a senior investment banker formerly with the firm. "I thought at the time it marked an end of an era."
It did. Barely two years later Harrison and Taylor were gone, and Barclays sold the bulk of its investment banking business to Credit Suisse First Boston. Ironically, the one part of the bank that weathered these storms is Barclays Global Investors, the asset management company Brydon built. Given his history, Brydon may now be eager to get the recognition he deserves -- from de Castries. "When he hired me, Henri said that he wanted me to build the best asset management company in the world," says Brydon. "I don't intend to disappoint."
BRYDON IS UNDER PRESSURE TO PERFORM, because investors, analysts and de Castries have a ready-made measuring rod for his new European firm: Alliance Capital Management, the principal U.S. asset management subsidiary of Axa Financial. Alliance increased its assets under management by 21 percent, to $388 billion, from third-quarter 1999 to third-quarter 2000. And it further bolstered its presence by acquiring value shop Sanford C. Bernstein. The price was steep by industry standards: 4 percent of Bernstein's $87 billion in assets under management. But most analysts think it is a good deal. "Buying a style-diversifying value manager near the bottom of the cycle for value is clever," says J.P. Morgan's Huttner.
The deal also broadens Alliance's reach in the high-net-worth market, adding 15,000 private client accounts and a nationwide advisory and referral network. And Bernstein's highly regarded sell-side research product will continue to be run as an independent boutique, diversifying Alliance's revenues.
Outside the U.S. Alliance is building links with Axa. In October Axa Asia Pacific and Alliance created a 50-50 joint venture to establish new asset management companies in Australia and New Zealand. Says Kathleen Corbet, Alliance's global CEO of fixed income and chairman of the new venture: "We are very excited by Axa's distribution power. There are 1,300 financial advisers across the two countries."
According to Corbet, Axa Investment Managers and Alliance Capital are competing globally for both Axa and third-party business. But Axa IM is much more closely linked to the insurance company than is Alliance.
In some ways, Axa Investment Managers should have an easier time pushing noninsurance products in Europe than Axa Advisors has had in the U.S. For one thing, Europeans take a much more holistic approach to personal finance. They like one-stop shopping. And the Axa name carries considerable weight. "Axa has a brand-recognition rate of 70 percent in Europe," says Adam Lessing, head of global retail at Axa IM. His firm will push its products through non-Axa channels as well. In France it has distribution agreements with Merrill Lynch & Co., ABN Amro and CDC.
The testing ground for Axa Investment Managers, not surprisingly, will be France. Axa's home turf accounts for the biggest chunk of Axa IM's business, with E100 billion of the firm's total managed assets of E250 billion. The French branch is developing a good reputation; recently, its mutual fund line won the top award for five-year performance from personal-finance magazine Investir.
Pushing the products are 11,000 insurance agents across the country -- France's second-biggest distribution network after the postal service. Jean-Louis Laurens, CEO of Axa Investment Managers in France, has divided the country into 12 regions, each with four "wholesalers" dedicated to supporting the Axa agents. Axa IM has established a telemarketing operation to facilitate sales of fund products. A team of senior financial advisers will answer complex queries from clients. The new sales onslaught swung into life in October. "We are sure we can build significant market share," says Laurens. "We just haven't properly exploited the power of our distribution in the past."
The competition is much fiercer in other countries. In Germany, for example, Axa has 4,000 Colonia insurance agents with 4 million customers. Günther Skrzypek, CEO of Axa Investment Managers in Germany, estimates that fewer than 2 percent of these customers own an Axa mutual fund or other savings product, so there's plenty of growth potential. Deutsche Bank's mighty branch network has garnered its fund subsidiary, DWS, a 24 percent market share. Still, Axa Investment Managers will try to replicate its French sales strategy in Germany.
Getting the distribution right is key. In Europe Axa's salespeople still work on a commission basis, but the trend from the U.S. is coming. The education process has already begun and de Castries says he is committed to changing the model "from product push to advice giving."
In the U.S. selling products created by third parties through proprietary distribution channels (so-called open architecture) is common. But European banks and insurers remain wedded to the idea that they should peddle their own brands. De Castries knows better. When clients buy funds from Fidelity or Merrill Lynch, Axa still earns its distribution fee. "It's a wonderful way to make the client happy, to keep him longer, to sell him more products and to increase our profitability," he says. "The interests of all parties are aligned."
Compared with Bébéar's swashbuckling takeover exploits, all the talk of product and distribution at Axa these days sounds far less sexy. Yet in some ways, what de Castries is trying to do is more difficult -- and rarer -- than building critical mass. "In the food business I don't think it is possible to be Danone and Carrefour," he says. "But I do think it's possible in financial services." Axa's factories are in place, and its retail juggernaut is beginning to roll. If de Castries can effect the transformation he envisions, his analogies won't sound like pain ordinaire any longer.
Opposites attract
It was a triumph of pushy matchmaking. Salomon Smith Barney investment banker Robert Smith, chatting informally with Alliance Capital Management executives early last year, learned that they wanted to add high-net-worth clients to the growth fund giant's roster. Smith also knew that Sanford C. Bernstein & Co. had put its plan to go public on the back burner, spooked by a lousy market for its trademark value products. So Smith arranged a March 9 dinner at Manhattan's high-toned, high-ceilinged Metropolitan Club, where Alliance chairman David Williams was asked whether his firm would be interested in acquiring Bernstein. "I responded, with a fair amount of alacrity, that yes, we would," Williams recalls.
By June two of U.S. money management's biggest names had agreed to become one. Under the terms of the deal, New Yorkbased Axa Financial, which has a 57 percent interest in Alliance, ponied up $1.5 billion in cash, which Alliance supplemented with $2 billion worth of stock. The newly combined entity will have $470 billion under management, about $85 billion of which comes from Bernstein. Roughly one third of that $85 billion belongs to Bernstein's 15,000 private clients.
"This was a superb transaction," says Bruce Brewington, an analyst with Putnam Lovell Securities. "The cross-selling opportunities are incredible, and there's almost zero overlap." Adds Bernstein president Roger Hertog: "I really think we've come as close as you can get to achieving 'one plus one equals three.' This is a better opportunity for shareholders and staff than was going it alone, and because we merged with a publicly traded firm, in essence, we did go public."
Institutional investors appear to be giving the deal their blessing. Since the announcement, Alliance has picked up 50 accounts and Bernstein 40, garnering a combined $5 billion in new assets. Meanwhile, the jewel in the crown of Axa Financial's U.S. empire has been greatly embellished. "We were trying to build a value product organically, but it was becoming clear it would be a long slog," says Alliance's Williams. Thanks for pushy matchmakers. -- Rich Blake