In matters of French pensions the adage plus ça change, plus c’est la même chose could often be employed in the past with an accompanying gallic shrug. Today the case is different. While France is not about to give up its beloved répartition (pay-as-you-go) pensions system for all the demographic timebomb scares in the world (see page 25), the French institutional pensions market is changing. Gradually perhaps, but in marked ways that are modifying its pensions and asset management industry.
To examine why, it’s helpful to remember where the bulk of French institutional money emanates from. Firstly there are the Caisse de Retraites (CDRs), France’s répartition collection organisations, which invest their annual surpluses after they have paid out pensions. Additionally, there are the life insurance companies, the mutual health and welfare groups and a small number of multinational pension funds.
One of the most significant drivers of change has been consolidation amongst the CDRs – speeded up by last year’s fusion of Arrco and Agirc, the white and blue-collar répartition administration agencies. Bigger CDRs has led to larger tranches of money being placed in the market. This in turn has heralded an increase in professionalism as the boards of the CDRs consider carefully how to invest these burgeoning pots of cash.
At the same time, a gradual loosening of allocation restrictions on French institutions has given them a broader investment map to consider.
Nathalie Boullefort-Fulconis, global head of institutional sales at AXA Investment Managers (AXA IM) argues that the knock-on effect of this CDR concentration has been a shift to specialisation, away from the traditional balanced approach.
“There has certainly been an increased demand for specialist mandates, even if the balanced mandate remains the most important, due to the liability profile of the CDRs.
“What this means is an increased use of consultants by CDRs for services like manager selection and performance measurement. All the services that the teams at the CDRs might need.”
As a result, the advisory market has seen the recent arrival of more overseas players. Hewitt, Bacon & Woodrow last year bought local adviser Finance Arbitrage citing potential in the market going forward.
However, Michel Piermay, managing director at French consultancy Fixage, claims the market is more fractured than it might appear.
“We are definitely seeing more business in terms of audits for mandates so that clients can better understand where their risks are. “Nevertheless, I think this is an atomised market for consultants and firms are doing many different types of business in the HR area. For the foreign firms it’s more a question of being present in the market to see what’s happening and to live off some annex services.
“We are probably the biggest investment consultant in the market even though we are still quite small!”
In terms of investment, the 2002 survey by French institutional monitor (OFGRI – Observatoire Français de la Gestion des Réserves des Investisseurs Institutionels), showed that institutions still tended to use discretionary mandates (32%) more than dedicated funds (29%) or open-ended funds (15%).
However, France’s CDRs have also traditionally carried out their own in-house bond or cash management – the former bedrock of their investment strategies. That approach continues, but, for the more specialist briefs, they are now shopping around for managers.
The OFGRI report also identified an increasing trend in delegation to third party managers - up from 63% in 2001 to 69% in 2002. “This increase in the weight of delegated AUMs can be somewhat explained by the search for expertise or diversification of expertise,” noted OFGRI.
These underlying strategic trends though are being overshadowed by the parlous state of today’s markets.
French investors could be forgiven a moment of Schadenfreude towards their equity biased Anglo-Saxon cousins at the moment, were it not for the fact that equity portions have also been steadily rising in recent years in their own portfolios, albeit at much lower levels. These have scaled back a little due to the slide in markets. However, the x-factor is whether the current prolonged crisis will force the traditionally equity-averse French to rethink their attitude to shares.
Philippe Lecomte, director of development at Invesco, managing some e5bn in the French market – half of which is institutional money, thinks not: “French investors bought a lot of equity in 2000 and they are sticking with it, apart, of course, from drops due to market impact. “They are fully aware that when the market turns they will go back to the equity market – they understand it quite well now.”
The market storms have, however, been driving French institutions into their traditional bunker – money market funds.
Odile Rivier, head of French institutional sales at CDC IXIS Asset Management voices what is on many managers’ minds: “French institutions have been shifting huge amounts into cash in recent years. The question for 2003 is where this will go if and when the markets pick up!”
Rivier’s assertion is backed up by the OFGRI survey: “When analysing the breakdown between the different options (asset allocation), an increase of 110% (2001-2002) in money market investment arises. This is due to uncertainty regarding the equity market and its current strong volatility.”
One outcome is that French institutions are starting to take a deeper look at fixed income as an asset class, espousing risk on the duration side in favour of investment grade credits and mortgage-backed or inflation-linked securities. The latter approach appears to be taking off this year as funds seek to dampen risk in the low interest rate environment by guarding against inflation and any rise in liabilities. The other area that is attracting significant interest is that of absolute return strategies.
Rivier at CDC IXIS says that recent fund launches to meet institutional market demand have included new cash products, inflation linked bonds, but also alternative investment funds.
And Jean Pitois, director of institutional clients for France and Benelux at Dexia Asset Management, comments: “Alternative asset classes, particularly hedge funds and fund of funds have taken a significant amount of money in the last few years, although they tend to be long/short only strategies as French investors are not permitted to use leveraged approaches.”
According to the OFGRI survey, hedge funds were used by around 30% of French institutions in 2002, with the same number saying they would do so again in 2003. Reasons given were the optimisation of performance and risk by investing in products uncorrelated from market movements.
Piermay at Fixage believes this shift away from the plain vanilla is also synonymous with a wider client dissatisfaction with asset managers. “This is a problem everywhere, not just in France.
“The asset manager says to the client: ‘We were prudent with a low tracking error and we closely followed the index’. The client doesn’t understand because they have lost 30% and what seems prudent from the manager’s point of view has not been prudent for the investor. “The issue is that clients are asking themselves what they are paying for!”
As a result, he says asset managers are moving away from traditional management towards passive or non-benchmarked absolute returns to address this client dissatisfaction.
Pitois at Dexia agrees: “I think we could start to see the market go more passive and specialist and the large investment houses will come with passive products as investors ask themselves whether they are actually buying active products.”
Philippe Lecomte at Invesco disagrees, however, that French investors will pursue indexation: “French investors want active managers. They could have ETFs if they wanted an index exposure. The other thing is that I don’t think asset managers will offer these products in the French market for the kinds of fees they could generate. No-one is going to work for nothing!”
Xavier de Bayser, CEO at quant manager ABF Capital Management, says he sees French institutions increasingly questioning approaches to strategic asset allocation (SAA) and alternative investment.
Consequently, de Bayser is seeing greater numbers of highly professional RFPs with clearer emphasis on tracking error and transaction costs.
“There is a lot of discussion, for example about whether to benchmark or not and there is still confusion about issues such as passive, and active management as well as absolute returns, etc.
“I believe that the quantitative approach that we take towards risk control is appealing in this environment. Institutional investors appreciate being able to take decisions that are based on transparent and straightforward investment proposals from asset managers.”
The firm picked up two emblematic quant mandates in 2002 from two retirement institutions in France, one of which was an e150m brief from Arrco.
In response to this market shift, AXA IM has developed an asset allocation approach that encompasses non-traditional asset classes such as CDOs, real estate, private equity and alternative investment.
Nathalie Boullefort-Fulconis notes: “Ten years ago, CDRs used to have a significant investment in real estate. Now, due to the state of the equity markets, there is renewed interest in this asset class.”
Banque Populaire Asset Management (BPAM), the 6th largest player in the French institutional market is another house developing new approaches to compliment its core balanced business. In 2001, the firm launched a multi-manager vehicle ‘Asset Square’ in conjunction with Goldman Sachs. Alain Lançon, head of investor relations at BPAM, believes it is now more important than ever for the large players to differentiate themselves: “When you look at the French market you see that the 10 largest managers have 60% of the assets, while the rest have 40%. The French market has already become very professional in terms of GIPS coverage and the number of managers that are rated by Fitch-AMR, so you have to find ways of standing out.”
Rivier at CDC IXIS agrees, but believes that the battleground is as traditional as it has ever been: “The differentiators in the French market between competitors are still about quality in client reporting, performance demands, performance attribution and analysis, and the proximity of the commercial team. It’s a client driven market.”
Yet despite the fierce competition, resulting in the consolidation that has characterised the French market in recent years – the disappearance of Credit Lyonnais Asset Management being just the latest case – there is a feeling in France that there is business out there to be won.
With vast cash pools of institutional money set to be reinvested when the markets head north, there is potential ahead for money managers – both French and foreign – to dangle a variety of new strategies in front of clients.
Furthermore, the salivating prospect of the massive e13bn RFP for the French government pensions reserve fund, which will go out to tender later this year, will not have gone unnoticed either by foreign houses (see page 24). Neither will the continued growth in the employee share savings market (PPESV) introduced a couple of years ago.
Add in the French government’s allusion to additional third pillar private pension fund vehicles in its recent pronouncements on pensions (see above), and you have all the ingredients for a tempting investment gateau, of which overseas managers will want a slice.
Christine Moser, responsible for French institutional clients at Credit Agricole Asset Management, says she is seeing increased competition from overseas managers, but argues that the large international managers are not yet focusing closely on the institutional segment: “The foreign players are not really getting in with the institutions, but they are moving into multi-distribution retail, IFA and insurance businesses.”
Many perhaps are wary of mistakes made before by houses tempted by institutional prospects in France, as Michel Piermay at Fixage points out: “Some managers who brought in teams a few years ago have retrenched. I see this more as a market where firms will come in and take a look with an eye on the future and try and keep their heads above water. There could certainly be some prestige in picking up a mandate from the reserve fund, and if a foreign manager could pick up a few other mandates then it would be worth being here.”
Nonetheless, Patrick Saint Sever, major accounts director – institutional, at BNP Paribas Asset Management believes there are still strong factors in favour of the local players.
“It’s still the case that the fee margins in France are significantly lower than the Anglo-Saxon houses are used to. Also there remain a number of specific local constraints that are particular to each client in France. This is our best protection against our foreign competitors who have a lot of trouble in getting the ‘savoir-faire’ for the job.”
Saint-Sever also believes that the large French houses themselves have “matured” to become global players, with many completing their global coverage in recent years by buying US asset managers.
Jérôme de Dax, central director of marketing and development at Société Générale Asset Management (SGAM), explains that the firm has recently been widening the institutional product range it can sell outside of France – particularly in the Belgian and Swiss markets. “We are now in the process of contacting consultants and pension funds in these markets.
“For us it is an important development because in all honesty three or four years ago we didn’t have an offer that could attract Swiss investors, for example.
“We now have a strong investment proposition that we can take to non-French clientele, which includes a solid base in Asia and the credibility in US equity and fixed income that came with acquisition in 2001 of TCW in the US.”
The French institutional market then is probably in as great a state of change as it has been in many years, with as many opportunities opening up within her borders as out of them.
It is symbolic perhaps that this year the French government will go to the capital markets with a huge fund to invest with international investment banks that will serve to support a retirement system those same asset managers have criticised and coveted for years.
France – as idiosyncratic as ever. Plus ça change, plus c’est la même chose.