Patterns of investment in France have changed markedly over the past two years, largely as a result of the political decisions being taken in readiness for EMU membership.

Before 1995, the policy of maintaining a strong currency kept interest rates at high levels. This encouraged investors to look no further than money market and bond funds, where returns were high and relatively risk-free. With the French mutual fund industry dominated by the banks, there was no shortage of vehicles.

French industry tended to suffer as a result, being required to pay a high price for any borrowing and in a bad position to compete for funds. As a consequence, equity investment provided relatively poor returns.

All this has changed as interest rates have trended downwards. Over the past 12 months, faced with a steep yield curve, private sector savings have been unlocked and flows from Livret A savings accounts and money market SICAVS have supported the stock market and are expected to do so throughout 1997. In 1996 the CAC 40 Index rose by 443.76 points or more than 20%.

The performance figures shown for French equity and fixed interest funds (both domestic and offshore) illustrate these changes clearly. On the equity side, the average domestic French equity fund managed a healthy gain of 17.81% in dollar terms in the year to the beginning of February. This compares with an average over the three-year period to that date only marginally higher at 19.16%, indicating that almost all of the gain has come in the past 12 months.

An even greater contrast can be seen on the fixed interest side. The average fund made a small loss over the 12-month period, but is still up a healthy 26.54% over three years.

A similar picture emerges whether you are looking at domestic French funds investing in their own market, or at funds based in offshore locations investing in either French equities or bonds. The temptation is to look at the returns achieved by the leading funds in each category and conclude that the domestic funds are much better managed. This would be wrong.

Take the one-year French equity performances as an example. The table is headed by Cogefi (Conseil en Gestion Financiere) France with an impressive 43.32% return, compared to the leading offshore fund, Caisse Centrale des Banques Populaires’ Luxembourg-based Fructilux Actions Francaises, which returned 26.28%. On the face of it, no contest!

But this is misleading, and somewhat dangerous. Investors should not assume that they can pick the top performing fund. Average performance is a much better guide. Here the average offshore fund actually outperformed the average domestic fund, returning 17.83% compared to 17.81%.

The universe of domestic French equity funds consists of 325 vehicles compared to just 42 offshore funds investing in the same market. The larger the universe, the more likely it is that the variation around the average will be greater. So, just as Cogefi out-performed the average by some considerable margin, other funds will have under-performed to a similar, or even greater, degree.

The same considerations apply to the fixed interest funds, where the performance figures reflect the activities of 567 domestic vehicles against just 44 offshore.

That said, the argument that a French investment house is likely to know more about French equities than its offshore competitors is still persuasive. And this probably explains why Luxembourg-based funds run by French management groups feature prominently in the offshore tables.

Fructilux Actions Francaises, topping the one-year table, has already been mentioned. A small (less than $10m) fund launched just after the 1987 crash, it received a four-star rating from Micropal in its recent Offshore Investment Fund directory.

The MOSAIS funds, in second place over one year in the equity table and in the top five for fixed interest, and Parvest, second for equity investment over three years, also have a definite French connection. The former are part of the Luxembourg operations of Credit Agricole while Parvest is one of the brand names adopted by Banque Paribas in Luxembourg.

Among offshore funds, Micropal reserves its five-star rating for just two equity funds - Independance and Expansion (part of the Luxembourg SIPAREX group) and Wright EF French National Equity (from the US Wright Investors Service group). For fixed interest, five stars go to three funds - the Swiss bank funds Credis Bond FRF A, and SBC Bond Portfolio FF/B, and Fixe Franc Francais, part of the Bearbull Asset Management range based in Nassau, Bahamas.