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Impact Investing

IPE special report May 2018

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Coming together, coming alive

Predictions that last year’s three-way tussle between Société Générale , BNP and Paribas would be the precursor of a flurry of consolidation in the French market have been proved right – the French asset management scene is on the move.
In a highly competitive market with a heavy retail bias and relatively few clients in the fragmented institutional sector, perhaps the most astonishing aspect is that it has taken so long.
Recent alliances announced between Société Générale and Spain’s Banco Santander Central Hispano (BSCH) over investment management and distribution, CCF and US group SEI for manager of manager products, and rife speculation that CDC Asset Management is on the cusp of announcing a partnership with a major US player, expose a number of reasons why French houses are seeking to branch out.
The atomisation of the French market, with French managers generally looking after more of their own assets or retail money than institutional assets, certainly accentuates the need for strong network capabilities.
And the combination of French institutional preference for investment fund vehicles – be they closed or open-ended – coupled with the onset of portfolio diversification has created a need to offer the right sort of investment structures to meet demand.
Michel Piermay, president at consultant Fixage, explains: “There has never really been much place in France for segregated mandates. French investors want to have regular valuations and liquidity within a flexible, low-cost, reliable vehicle.”
The consolidation effect in the French market appears less the result of wholesale change in the investment approach of French institutions post-euro. Indeed the lack of homogenity in the sector means the institutional market still runs on multiple tracks.
France’s caisse de retraites (CDRs), for example, a significant portion of the market, remain constrained by legislation requiring a 50% holding in French securities.
For the rest of the country’s long-term savings and institutional money, invested by corporates, insurance companies and banks, the overriding transformation is that investors are now taking a systematic euro approach.
While the euro equity passage has not happened overnight – 1999 returns from the CAC40 for one kept Paris very attractive – it is now the norm.
According to managers ex-euro equity allocations are for the time being serving limited diversification purposes, with the exchange issue too prevalent. The market is gradually moving forward though.
Bernard Fauché, director of equities at CDC Asset Management (CDC AM), comments: “The move to euro portfolios is now well engaged and this issue is behind us. For many institutions the euro was just an intensification of international diversification.” Consequently, the accepted equity weighting for a neutral portfolio in France is around 40% in shares.
The fine-tuning on portfolios occurring today concerns benchmark selection, with many institutions replacing the Euro Stoxx 50 for the newer Euro Stoxx large and its greater country and sector replication. Fauché says CDC’s tendency is to propose an MSCI Emu strategy, also citing correspondence to euro sectors, which he notes is the equity reference for investors today.
Jean Echiffre, head of marketing and communication at State Street Global Advisors (SSGA) in Paris, says investment teams are modifying to cover ‘European’ equities due to demand for large cap exposure and more recently increasing mid and small caps interest.
Further afield the equity approach is a case of toes being dipped in the ocean. Strategic risk for French institutions is in large part still uncharted water. Consequently, investment is staying close to the domestic shoreline.
Notably, high US prices coupled with institutional bearishness on market prospects are holding back any overt North American asset shifts, according to managers.
Patrick Peignon, director of French institutional investment at SG Asset Management (SGAM), says diversification into the US and Japan picked up slightly last year, but adds: “French institutions are very domestically orientated, mostly because of regulations which will change over the coming year, so risks such as timing need to be carefully looked at.”
However, Pascal Duval, managing director at consultant Frank Russell, says there may be more than just a hint of protectionism in the approach of domestic players: “French portfolio managers are very ‘euroequity’ centric, so they are not very keen to sell US equities and clients are certainly not being pushed down this road.”
Fauché at CDC says emerging markets are being revisited, though: “Investors are ready to go a little more risky to get the catch-up effect of Latin America and we are seeing interest here.”
The clear-cut euro transition of institutional bond portfolios, has, however, set off a scramble for corporate bond exposure in France. French managers concur that diversification into non-government bond signatures is set to explode.
As Peignon at SGAM points out: “The credit argument is easy. With interest rates giving around 30 basis points (bps), credits giving 50–80 bps are undoubtedly interesting."
Suggestions are that some managers won’t easily make the structural switch. Didier Jug, responsible for the institutional investment department at AXA Investment Managers, says the market is opening up for bond managers to increase their field of performance. “I’m convinced credit investment will increase considerably. The combination of low interest rates and the 70% portion of French institutional portfolios in bonds will oblige institutions to go there. However, for corporate bond selection you have to have equity research type teams and we are already beginning to see big differences in the returns coming through to the market from different managers.”
Jean Luc Bianchi, responsible for French corporate and institutional investors at Indocam Asset Management, notes: “We have put in place a specialist team looking at good risks on the investment grid and are developing more products in this direction to meet a certain client demand.”
Echiffre at SSGA says there is a lot of talk on the riskier corporate end, but less action: “Everyone is speaking about high yield bonds but doing a lot less. Our strategy is to recommend staying in the investment grid – going down to BB at most.”
Smatterings of interest are popping up in other bond strategies as investors move away from the pursuit of spreads in European government bonds. Peignon at SG says clients are looking to global bond strategies alongside high yield. He adds that emerging market debt portions of between 2% and 3% and some interest in US corporate treasuries are also noticeable.
Thierry Charon, head of global balanced funds at CDC AM, says even the CDRs are seeking bond diversification on a world ex-euro basis, despite regulatory limits of 5% on holdings. Managers agree that the advent of more advanced bond indices will raise the stakes here even higher in the near future.
The dearth of supplementary returns in traditional asset classes is also encouraging greater alternative investment (AI) allocations within French institutional portfolios. Gérard Kanengieser, president at Credit Suisse Asset Management (CSAM), comments: “Clients are looking to AI due to interest rate trends and money market fund returns. These are down from 12% levels to 2% today and being replaced by the low risk and returns of 10–12% available in AI. Hedge fund strategies are the most popular among our clients.”
Nevertheless, the euro hasn’t engendered a collapse of French money market funds, as Echiffre at SSGA points out: “There is no alternative to daily returns of 2.5% involving limited risk while inflation is at 1%. There’s no value added but market returns can be achieved.”
He also believes the likelihood that increasing numbers of enhanced or indexed money market funds will keep AI securities at portfolio margins.
Peignon at SGAM says the group is putting together a private equity team as well as launching enhanced money market funds and hedge fund products in the near future to meet demand.
Such latent potential has attracted foreign players to the French market in their droves with all the major names present, working to a variety of formats.
Piermay at Fixage believes the eurozone houses are making the running though. “The perception is that the Dutch, Italian and German managers have a legitimacy in the euro investment area of reference and have put a lot of work into client relationships. I’m not sure if the others are approaching the market in the right fashion.”
Conversely, French managers are exporting themselves with noticeable success into markets where the institutional pickings are undoubtedly greater than in France. “We are conscious of being attacked in our own market, but we are doing the same thing in other markets. Investment managers with a serious European servicing element have good reason to think they can pick up business anywhere now,” says Peignon at SGAM.
Nonetheless, France’s 10 largest investment managers still dominate over 60% of the institutional market and foreign players acknowledge the difficulty in breaking the status quo.
CSAM (France), established in Paris in1997 and now managing Ffr18bn for French institutional clients from Paris, London and New York, operates a two-pronged strategy with direct institutional management and distribution of mandates and OPCVMs, a third of which run via existing Luxembourg funds.
Kanengieser notes: “First of all you need to have a French operational outfit with the availability of a large international AM capacity behind it to capture the euro diversification effect. Also, clients want French products covered by the COB with French custody to reassure them. Arrco and Agirc CDRs certainly don’t want to hear about non-French depository banks.”
But Kanengieser says the restructuring of the French banking system is serving up prospects for the foreigners. “We have clients formerly investing in mandates with BNP and Paribas as well as Indosuez and Credit Agricole, who switched managers at the time of the mergers to spread their risk.”
Market concentration is also pushing institutional investors to diversify investment through an increasing number of fund of funds structures on offer.
Duval at Frank Russell, where assets managed through its European multi-manager structures have risen to around $7bn, says French clients are recommended to go for the big world investment game, noting that they are missing 70% of the market cap at the moment. He believes the message is starting to get through, pointing out that benchmarks for profit-sharing funds are changing from the former 60% French/20% MSCI to a 50% euro equity/50% MSCI world approach.
The problem, he says, is implementation: “We might look to recommend Alliance Capital or Equinox in the US for example, but no way is a French institution going to accept this – so the only possibility is to implement the strategy for the client and be judged accordingly.”
Duval says the Russell/Société Générale network leveraging on retail bank distribution behind the multi-manager structure is catching on, pointing out that many unit-linked life contracts are run in a similar fashion. “A lot of large investment houses are looking to do the same, although the French market has to get used to the effect market cycles will have on active bets and on the adopted styles of different asset managers. We now cover nine asset classes from global high yield to European small caps and I think we are starting to convince the market that a multi-asset/style/manager approach gives the best result over the long term.”
The CCF-SEI joint-venture appears to underscore the point. “BNP/Paribas will almost certainly do something in this domain because Paribas already has a large capability within its private banking division. They are likely to grow an internal team to start doing this for their clients. AXA will probably do the same, one way or another.”
The diversification effect though is also exposing business opportunities in the domestic market for local firms, as Piermay at Fixage points out: “New domestic asset managers are starting up in the market, which hasn’t been seen for a long time – although success rates are variable. Insurance companies are also attempting to set up their own asset management divisions.”
Duval at Frank Russell, concurs: “There is still room for firms in France with a different investment approach, strong personality and a sound client base.”
Boutique outfit ABF Capital Management, inaugurated in 1988, with assets under management of e1.6bn, is marketing itself successfully on the back of a cross fertilisation of quant investment and actuarial approach. Marketing director and member of the executive committee Antoine Dehen says ABF defines institutional client benchmarks following asset liability and strategic allocation studies. Portfolios are then rebalanced according to the firm’s long-term quant models.
Dehen says products identifying stocks on issues of corporate governance and sustainable company development to identify potential future value are also attracting institutional attention.
If anything, the future looks tougher for the larger institutions to stay in touch with the game. Duval at Russell explains: “For those managers with a captive distribution network, the future will be difficult if there isn’t a clear strategy on how to manage the network and implement new ideas and products, because the network will demand this. The challenge is greater here than for the niche players because it is an expensive business if you want good teams, quality investment research and compliance.”
Previously French managers were adept at squeezing fees, but with security and sector selection now demanded by investors in order to interpret returns, margins are becoming constrictive. “It’s going to be tough to maintain and grow quality across all the asset classes,” Duval adds.
SGAM’s Peignon says the concentration phase is certainly not over. “We will see more alliances to enable product rationalisation and international diversification between large investment managers. I believe there is space for everyone in the French market, but the competition is very intense on products, short term performance and fees. Those with the competence and specialisation will remain.”
Société Générale and BSCH’s strengthened alliance clearly focuses on a combination of business lines in asset management and banking distribution, with a view to launching ‘new activities’ and acquiring fund management companies outside France and Spain.
Nathalie Boullefort-Fulconis, director of institutional investment at Paribas, set to outline the structure of its merger with BNP in April/May, indicates that the battlefield is now undeniably global for the big houses. “As a result of the fusion phenomenon, the minimum now for the large players is the European market.”
Fauché at CDC agrees: “We want to be one of the biggest European players and need a global approach. Therefore we are looking outside Europe for partnerships with groups close to our own structure to construct a global offer to our clients. A large US manager could link with us and enhance our global product by pushing on the US expertise with our own. We have already been searching in that direction.”
Rumours also persist over the fate of Credit Lyonnais, in which Credit Agricole has a 10% stake and of which Société Générale bought 3.8% at the end of last year.
The French investment management shake-up has truly started, according to Duval at Frank Russell. “Two years from now we will see large networks of banks in partnership with large outside providers of products or a mutual team which is specialised in building products, particularly on the multi-manager side. We are now at the moment where the market really starts to come alive.”

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