Domestic institutional investors will be driven to reallocate strongly their portfolios and choose new benchmarks. Though, the switch from French benchmarks to new European indexes is being impeded by the fact that the representative benchmarks of the European market are of less quality than the one used for the sole French market.
One of the explanations lies in the fact that in France companies pay most of their dividends from May to July. Therefore, managers require daily indices that take into account the effective dividend and not only indices calculated once a month on an estimated 1/12th-year-dividend-yield.
Moreover, French managers often use the opening trade price to evaluate their portfolios and very naturally they would favour the indices calculated the same way. This is related to performance attribution systems, widespread in France.
This applies to shares as well as to bonds, except for the well-accepted CNO-EMU Government bonds index. For the time being, other proper European indices are not yet to be found. A change will occur as new benchmarks will appear that will be more adapted to the demands of French institutional investors.
As the Euro is commencing, the financial markets experience the strongest fall of rates ever occurred in living memory of investors. At the same time, new fiscal regulations are set up that very badly affects life insurance, but have also a very positive influence on share markets. So, French institutional investors will very naturally be driven to favour shares over bonds in their asset allocation.
French institutional investors will most probably increase their investments in French shares as well in Euroland shares. At the same time, the importance of French bonds in portfolios is expected to decrease in favour of bonds issued from the Euroland.
Asset reallocation needs a strong development of ALM and strategic asset allocation models, but these models have not to forget specific prudential liability regulations.
The next step of European integration of asset management will follow the harmonisation of accounting rules for life insurance and pension funds.
Michel Piernay is with Fixage