France is getting ready for general elections, and the outcome will be crucial for the future of its retirement system. During the past year, the French retirement system has been under review. Even though the current level of pensions is good, social partners, government and employers are concerned about the future of the system, and any major changes will be linked to political issues and the next presidential elections in April.
In a country where pension funds do not officially exist as yet, most of the retirement system is based on a pay-as-you-go approach. On top of the basic social security scheme, there are two main compulsory schemes, ARRCO (for salaried workers in the private sector), and ARGIC (for executives), whose present and future functioning is now under discussion. ARRCO has around 15m contributors, and its reserves will continue growing until 2010. On the other hand, ARGIC, with around 2.3m contributors, is seeing its reserves diminishing, due to problems with the social security system that is limiting contributions. In the recent past there has been a lot of discussion regarding a possible merger of the two schemes, although so far nothing has been decided.
On top of this, some companies are offering additional voluntary pension schemes based on a defined benefit (DB) or defined contribution (DC) model. This market is still small, although slowly developing.
Early last year a new law was passed allowing the establishment of company saving plans – épargne salariale. This initiative has been welcomed by the asset management industry, since the reform will force employers to offer their staff extended voluntary savings periods of 10 years. Although participation is not compulsory for those companies with less than 50 employees, almost a third of companies surveyed in June last year, were thinking about offering the new 10-year retirement savings scheme, the Plan Partenarial d’Epargne Salariale Volontaire (PPESV).
“The introduction of these company savings plans has been a big development in France,” says Arnauld d’Yvoire, secretary general at the Observatoire des Retraites, a pensions research body, in Paris. “It is difficult to forecast the future of these plans but it is helping companies to rethink their approach to retirement provision.”
Fund managers expect large volumes of cash to be invested in medium and long-term funds as a result of the introduction of the épargne salariale savings plans. “We believe the new PPESVs will grow very fast,” says Jean Pitois, head of institutional sales at Dexia Asset Management in Paris. “We are seeing a lot of interest among fund managers in this market.” Dexia manages e8bn for French institutional clients.
Apart from new assets coming from these savings plans, fund managers forecast further business growth for this year in other areas. “The majority of new assets will keep on coming from insurers, although in smaller amounts than those we used to see a few years ago,” says Patrick Saint-Sever, director of institutional clients at BNP Paribas Asset Management in Paris. “The second quite strong inflow will come from the supplementary schemes of the pay-as-you-go system, from both ARGIC and especially ARRCO.”
Both ARRCO and ARGIC are undergoing major reforms, and the pension schemes that constitute both systems are merging: “Today both ARRCO and ARGIC had more than 40 different schemes each, and the idea is to have not more than 25,” says d’Yvoire at the Observatoire des Retraites. “So there will be changes in managers and reduction of potential of clients even though the mandates could be larger in size.”
In terms of investment strategies, although balanced mandates are still the first choice for French institutional investors during the past few years the interest in specialist portfolios has grown. “Although investors are still very much focused on balanced mandates, specialist portfolios investing, for instance, in US or Asian equities or corporate bonds are becoming more and more popular,” says Saint-Sever. “This is also one of the reasons why the French market is becoming more attractive for foreign players, who in the past have had some problems understanding French investors and managing portfolios in the ‘traditional French way’.”
The size of the mandates being awarded is also growing. “Now the average size of a mandate is around e100m, and this is also attracting more international providers into the French market,” Saint-Sever says. BNP Paribas Asset Management has a strong position in the market, with assets under management for French institutional clients amounting to e15bn, and believes that even though foreigners are entering the market, French houses will maintain a significant market share. “We are fighting on their own grounds offering very specialised products such as, for instance, technology funds, overlay asset management and hedge funds. But we also have the best position when it comes to balanced mandates. In general, I would say that even though there is room for international asset management in this market, foreigners are finding it difficult to obtain a larger market share. However, we are not protected against competition and things will get tougher and tougher over the next few years.”
At CDC IXIS Asset Management, head of institutional marketing for Europe, Thierry Charon says: “At present our market share represents more than 40% of some segments and of course we are very sensitive to new entries. It is true that competition is growing and institutional investors are giving more mandates to foreign asset managers, but the market is growing as well and we will see more assets coming in again in the next few months.” Charon explains that CDC, with around e180bn assets under management, answered around 600 tenders and questionnaires from investors during last year. “This means around 30% more than in the previous year, which makes it clear that outsourcing is growing and consequently turnover among asset managers is going up. It is true that mandates are still relatively small, but some investors that in the past were working with only one manager are now hiring two or three.”
And, indeed, one of the reasons why foreign providers are slowly finding their way in the market is that investors in France seem to be quite happy to give assets to foreigners as long as they demonstrate they can meet their specific requirements.
“French investors have no problems about hiring foreigners,” says Michel Piermay, president at Paris-based consultants Fixage. “The problem is on the fund manager side, because they try to enter the France with a product-oriented strategy when this is a client-oriented market.”
Differences in performance among managers have also made investors consider investment styles more carefully. At ABF Capital Management, founder and president Xavier de Bayser says: “I see institutional investors being more concerned about style because they have seen huge differences in returns among value and growth managers in the recent past.” He adds: “With the development of multi-management that has become very popular among institutional investors, people are learning more about different styles and the way they need to be combined. In this sense, a more Anglo-American approach to investment is coming to France.”
Bad performance during the past couple of years have also made investors more aware about issues related to risk control in their portfolios. Regarding this, Thierry Rigoulet director at Dexia Asset Management in Paris, comments: “During the past 12 months or so we have seen clients looking very seriously at the idea of risk control and there has been a lot of improvement in this area. They want to know how managers are addressing this in their portfolios, what are the investment guidelines they follow, and compare this to the work of other managers or against benchmarks.”
Despite recent disappointments in the equity market, French investors are not moving away from equities. “Even after 11 September, French institutional investors have shown interest in increasing their exposure to equities. This means they are not biased by short-term market considerations and know that including a significant exposure to stocks in their portfolios is the way forward,” says Fixage’s Piermay. The average proportion of total assets in the French pay-as-you-go system is around 30%, most of it invested in the Euro-zone and with a very small exposure to investments outside Europe.
CDC’s Charon says: “We haven’t seen panic among investors, although some insurers had to sell equities last year. It all depends on whether investors have annual constraints or not. Those who don’t have these constraints and didn’t have a very high exposure to equities were in a quite comfortable position. For the rest, things have been more difficult but in general there has been no panic.”
Diversification has become the major focus for investors and alternative asset classes are on the increase, both through single funds or funds of funds issued by domestic or foreign managers. Although it is difficult to estimate what proportion of total assets is being invested in alternatives, those not already investing are talking about it.
“We get a lot of questions regarding these products,” says BNP Paribas’ Saint-Sever. “They want to know if other investors are already investing in alternative classes and how well this is working for them. Although the numbers are still small and mainly done through funds of funds, the exposure to these asset classes will increase.”
Pitois at Dexia comments: “The French market is among the most sophisticated markets as far as hedge funds are concerned, but when it comes to other assets classes we are still quite conservative. Investors here do not invest much in high yield classes or private equity, for instance.”
What is clear is that investors are reviewing their portfolios and introducing alternative asset classes, seeing this as a way to achieve low correlation and portfolio diversification. This review will also mean that in the months to come some changes in managers will occur, and competition will get tougher.
This is seen as a great opportunity for smaller players. “During the past couple of years we have seen large players losing clients,” says Dexia’s Pitois. “The market share is changing and this is giving us a good chance to compete with the big names and increase are presence in our home market.”
“The competition will grow in the next few months because we’ll not only have new assets in the market but also manager changes in some of the mandates that were awarded a few years ago,” says BNP Paribas’ Saint-Sever. “Consultants are helping investors to rethink their investment strategies and we have to take care not to lose clients and gain new ones.”
And consultants are indeed playing a more important role as the market matures. Although asset managers’ opinions differ on whether consultancy professionals are making their lives easier or more difficult, almost everyone agrees that their role as mediators and sometimes translators between manager and client is becoming crucial.
“More and more our clients are using consultants and the large majority of biddings are now coming though them,” Saint-Sever adds. “I think they are helping us to really focus on the technical issues of asset management, improving clients’ understanding about investment issues.”
Consultants are not only helping investors in manager searches but also tracking investment performance, defining investment strategies and contributing to a greater transparency in the market.
“Investors want an independent adviser to avoid conflicts of interest,” says Fixage’s Piermay. “They want to know what is behind the fee structures and the managers’ investment style to avoid things that have happened in the past such as the very high cost hidden behind some multi-manager arrangements.”
Although the strong players in the French consultancy industry are local firms, international houses, mainly Anglo-American names, are gaining market share and some domestic managers find that this is not benefiting them. “More Anglo-American houses are coming into the market and they tend to have Anglo-American providers in their list of preferred asset managers and obviously this is not benefiting French players much,” ABF’s de Bayser says.
“More and more clients are calling on the assistance of a consultant to draw up request for proposals,” says Alain Lançon, in charge of investor relations at Banque Populaire Asset Management (BPAM) in Paris. BPAM is number five in France in terms of assets under management through investment funds,amounting to around e53bn assets. “Their requirements are also increasingly technical,” he adds. “They ask more and more for detailed information about our organisation, our risk control procedures, our reporting resources and, in general, about everything that has to do with a comprehensive asset management service.”
The presence of consultants is definitely forcing managers to answer more questions, but also to tell clients more about their investment process and, as a consequence, to contribute to the professionalism in the market.
Investors are increasingly more concerned about the long-term effects of what managers do than with short-term performance. Because of this, different approaches to asset management, such us socially responsible investment (SRI), are gaining ground.
“SRI is not just a trend but a very serious way of doing things,” says de Bayser. “At the moment there is a lot of confusion regarding SRI, and it is our role and the job of the consultants as well as the press to clarify this question. In our view and ethical approach reflects an indivual standpoint in the sense that what seems ethical for one person is not automatically seen as such by others.” ABF prefers the sustainable development approach - people, planet, profit – because they see it as an efficient solution to both performance and social responsibility. “Therefore, our approach to SRI is holistics and focuses on listening to clients, stakeholders, community lifeand the environment. Understanding these audiences helps you to implement sustainable development,” he says.
The holistic approach to investment requires tools to measure the environmental and social behaviour of companies and how this impacts on financal performance. ABF has been working with specialised research firms who provide information on issues such as sustainability, corporate governance and eco-efficiency.
“Together we have developed tools that allow us to measure the impact of SRI on financial performance. This is the only way to identify the source of performance and confirm that it originates in the SRI criteria and not in sector or regional developments,” he adds.
“We have to establish a price for SRI, implement in the management process and then verify if what the client has paid for is working or not.”
CDC also refers to SRI as something that can no longer be ignored. “It is something you have to deal with and for that we have a specific dedicated equity management team looking at everything related to the SRI area. We do have funds of funds investing following SRI criteria, and we have seen interest among our clients in these products,” says Charon.
With investors willing to review their investment strategies, more assets in the market and possible reforms in the pensions industry depending on the new government, the next few months will be interesting to watch. The future of the reserves in the pay-as-you-go system and the development of funded schemes is still uncertain, but fund managers know that the business potential in France is huge. Those already established in the market are not prepared to lose clients and those trying to enter will fight harder than ever.
“For the months to come we will be focused on considering asset management as a service where we not only deliver performance but also high quality solutions for our clients,” says BNP Paribas’ Saint-Sever. “With increasing competition managers have to prove day after day our transparency and that we are managing assets in the interest on clients. We are not only fighting against a benchmark and we need to be powerful and resourceful as the other large players and active and innovative as the smaller ones.”