On fait des progrès
New energy, new sophistication and, not least, new money. France is gradually shedding its image as a land of relatively limited opportunity for institutional asset managers.
This gathered pace last year with the issue of mandates worth E16bn by the Fonds de Réserve pour les Retraites (FRR), the first of several tranches that will total E150bn by 2020. The FRR mandates, along with the employee savings schemes that were enhanced last year, are significantly boosting the volume of assets under management as well as giving added impetus to the changes that are taking place in the way institutional assets are managed.
The recent developments have, among other things, brightened the prospects for foreign managers and, though less directly, those of the independents.
Among current trends the growth in specialised management is a central theme. Figures from Société Générale Asset Management (SGAM) show that balanced management still dominates institutional demand making up 80% of total institutional business, with an average of 70% invested in bonds and 30% in equities.
But specialised management is growing strongly. Karine Szenberg, head of institutional and wholesale business at JPMorgan Fleming Asset Management France notes: “French pension providers traditionally awarded balanced mandates with complex composite benchmarks, but the unsatisfactory level of alpha delivered by this approach has led them to rethink their allocation. Now they tend to favour the core satellite approach… In addition, the style approach is now gaining ground.”
There is consensus that the FRR awards of exclusively specialised mandates, not to mention their unprecedented scale has contributed to this shift. Szenberg stresses that this is part of a more general change of approach: “French institutional investors as a whole have been dissatisfied with the performances of their fund managers. Traditional fund managers use a benchmarked approach and are minimising the tracking error. French institutional investors are now willing to allow their fund managers to use a wider tracking error, in order to
implement a more active management and deliver more alpha.
In addition, changes in the regulatory environment now allow institutional investors to adopt a more flexible asset allocation.”
The factors driving the move away from balanced management may not all be as wholesome as one might wish for. Paul-Henri de La Porte du Theil is deputy chief executive of Crédit Agricole Asset Management (CAAM): “Consultants push for specialised management because there is more work for them in asset allocation,” he says.
A more positive driver is that concentration among the Caisses de Retraite (CDR) has given them the size and resources to move to specialised management. “The number of caisses de retraite is falling by about 10% per year,” notes Serge Kebabtchieff, president of Paris-based directory publisher FICOM.
This trend has also influenced pricing. Kebabtchieff says: “As well as wanting to reduce costs they also want have more bargaining power in the negotiations over fees.”
But Christophe Gloser, director of institutional sales at Fidelity's Paris office counsels caution: “One reason for the underperformance of balanced managers might have been that pricing has traditionally been a key element of selection. IN the past few years, with the change of approach and more specialist mandates being awarded, institutional French clients now appreciate tthat if they want to hire an active manager there is a different pricing structure.”
He has a point, and the FRR sent a strong message to the market when it placed price as the third most important criteria in its selection process and took the unusual step of forbidding any negotiation on price in its RFP process. Not surprisingly, therefore, many managers were selected in spite of not being the cheapest. Frédéric Cruzel, head of institutional business for France, Belgium and Switzerland at SGAM notes: “The FRR's fixed fees are low but a part of the fees are performance-related and those are not too low in our opinion.”
The background to the focus on fees lies in a fear of the unknown, as Szenberg explains. “Lower management fees than the other continental European countries have always characterised the French market. Large French banks have been willing to lower their fees in other to protect themselves from their foreign competitors.”
The increasing use of specialised management – not to mention the greater sophistication of the pricing process – can only be good news for foreign managers. De La Porte du Theil notes: “Through the increasing move to specialised mandates foreign managers will increase their market share in the coming years.” He adds: “The big French managers will respond by growing their presence abroad.”
Simon Desrochers, director of Watson Wyatt’s Paris office, provides the background: “The trend towards greater use of foreign managers started some time ago because of the move away from bundled management where asset management custody and the administration are sold together; we are now moving to a much more open structure. This is also the result of pressure from clients demanding more choice.”
French investors might be eager for more choice but, paradoxically, they are also said to be allergic to risk which, as one Paris-based consultant notes, “might make it difficult for asset managers to make money given the current interest rate environment”.
De La Porte du Theil counters the claim: “Risk allergy is more at an individual level, just as it is in Germany and Italy.”
He adds: “While the active management of equities has changed little, fixed income is the most improved in technique. There is more management of corporate credit, inflation-linked, high yield bonds and absolute return.”
Worldwide fixed income assets account for 30% of Fidelity’s funds under management. Fixed income accounts for between 60% and 70% of the assets of the institutional French business; this compares with 90% five years ago, so change is afoot. As well as the fall in yields, Gloser notes that “recent turmoil in the UK where funds suffered through being over-exposed to equities made funds in France less willing to take risk in their allocations. However, the FRR’s decision to allocate the majority of its assets to equity mandates is a good illustration of the current trend in the French market.”
The FRR’s overall allocation of 55% equity and 45% bonds may encourage a further shift away from fixed income. Pierre Bollon, director general of the French Association of Asset Managers (AFG) welcomes this move: “The decision of the FRR to allocate more than half of the fund to equities is very good news. They are able to do this because the mandates are long-term with no disbursements for 20 years.”
Short-term goals have provided the basis for France’s system of funded retirement provision, until recently. Cruzel notes: “The FRR is the first pension fund in France to have a long-term diversified strategy. This is very important for asset management in France.”
The importance of long-term mandates in the system of employee savings schemes (Plan d’épargne salariale), is also on the increase. The system was set up in 2001 and offered a five-year savings scheme known as the PEE (plan épargne d'entreprise). Last year the Loi Fillon brought in two new funded vehicles which have extended savings to retirement: a personal savings plan known as PERP (plan d’épargne pour la retraite populaire) and a company retirement scheme PERCO (plan d’épargne pour la retraite collectif).
Bollon is enthusiastic about this development: “Long-term savings money is very important for the asset management industry,” he says. “With more long-term savings products the equity content will grow naturally. The content of stocks is higher in the employee savings schemes than in the market as a whole, with around 60% in equities.”
Desrochers takes a similar line: “The impact on asset management derives from the different elements – the lump sum, annuity or cover for risk – and the many different approaches as to what to do with these elements. The savings plans are very promising for asset management because of the objective to get good returns without being constrained by a liability.”
He adds: “We will see increasing popularity of life-cycle products where the asset allocation depends on the time horizon and where all those retiring at a given date will be in the same fund. The ability to change the mix as the member gets older will be key.”
According to figures supplied by Watson Wyatt, assets under management in employee savings schemes were 19.5% higher in 2004 compared with 2003.
“Growth will also depend on competition from other financial products,” says Bollon. “The danger is that the asset management products and among them retirement products become overregulated, which would stifle innovation while other savings products that are less regulated may have more scope for innovation and will therefore become more competitive.”
The cost of running the employee savings schemes will also be an issue, at least in the early days. “In this system the administration costs will be huge,” says Jean Echiffre, director of asset management at State Street in Paris. “A million accounts have been opened this year with an average balance of E500. A management fee of 1%, so currently E5, is inadequate to cover administration costs. We could ask for 2% or 3% but that would kill the return. So we will participate only when it is possible for another to distribute our and other funds through their scheme.”
He adds: “Furthermore the PERCO and PERP are too complex for people to understand.”
Not only are running costs an issue – funding the scheme also presents challenges, as Kebabtchieff explains: “The Epargne Salariale is not working well because deductions on salary – 60% for most and 70% for higher earners – are so great that ordinary people have nothing to spare to put into one of these schemes.”
The temporary measure introduced last year by French finance minister Sarkozy to boost domestic consumption by allowing scheme members to draw down amounts they had saved in their employee schemes attracted some criticism. “Because of these measures the schemes lost 12-13% of their assets,” explains De La Porte du Theil. “We think that, against the backdrop of the Loi Fillon and Loi Fabius, the measure gave an unclear message regarding the importance of saving for the long term.”
In spite of the government’s efforts to boost retirement provision, there are still those that hanker after a more conventional system. One manager of a major fund noted: “There are no pension funds and the government is not willing to set them up; the legislation has been hanging around since the early 1980s. No pension funds means that there is no push for good asset managers.”
Thierry Charon, managing director at independent Paris-based asset manager Montpensier Finance takes a similar line: “Things can only get better,” he says, and adds: “Long-term management is still very rare so there is huge potential. We can see that the CDRs have made great progress in the use of ALMs and understanding the liabilities side of the equation, so little by little we should see more assets managed on a long-term basis.”
As well as giving a boost to funded retirement provision, the system of employee savings also offered the potential of a substantial vehicle for socially responsible investing (SRI). “In 2001 the unions in the Inter-Union Employee Savings Committee (CIES) were keen to have an SRI input into the employee savings scheme and devised a certification system – so the asset managers reacted,” says Pierre Trevet, managing director at Innovest in Paris. “But the uptake has been disappointing; the economists from the CIES who devised the SRI certification guidelines were not necessarily followed by union delegates as far as directing their savings towards SRI funds was concerned.”
He adds: “Where restructuring may be a necessary pain to ensure long-term competitiveness the unions see only one thing – jobs - whereas we rate how responsibly the social plan is being implemented. Many union members view an SRI fund as a deception if it holds a company that has laid off employees while a company could still have an AA rating from Innovest. The day-to-day preoccupations of the unions are at odds with the equities culture.”
Desrochers believes that the impact of the FRR in this area has been notable. “The FRR is a model of investment governance: process, selection and risk budget allocation. It has had a significant impact on the way large French institutional investors manage their investment process.”
He adds: “Governance principles are being adopted anyway but the FRR was a stimulus. They are becoming more important after Enron, Worldcom and others.”
From the beginning of this year a new law in France makes it compulsory for asset managers to exercise their voting rights.
The issue of expertise and performance has raised the issue of the dominance by the big banks and insurance companies of the institutional market at the expense of the independents.
A senior Paris-based pensions consultant notes that the way in which retirement funding makes its way through the system means that “it is very rare to have an independent asset management company in the management of pensions in France”.
But Szenberg at JPMF disagrees: “This has been true, but the trend in the asset allocation of retirement providers and the high performances delivered by independent fund managers has changed the market. Independent fund managers are specialised in niche markets and generate high performances, and they have a bright future in France. The only negative issue may be the amount of assets under management.”
Another reason for the relatively small share that independents have of the institutional market may be the ratings system which rates asset managers on process, risk control and other factors to provide a guide to potential clients. Cruzel at SGAM notes: “The rating of the asset manager is important; if the rating is bad or there is no rating there is no chance of a mandate. But very few small asset managers are rated today; the independents are not strong enough to get a good rating.”
Charon at Montpensier sees the ratings issue as passé: “Ratings were important five years ago because it pushed managers to improve processes and risk control. Today regulations have brought asset management firms into line over this so ratings have less importance than they did five years ago. Ratings are not an impediment to our development.”
Awareness and, beyond that, trust, are critical to independents as they seek to gain market share from their much larger rivals. Stéphane Toullieux is development director at independent asset manager Financière de L’Echiquer. “We are in a country where the state is very important,” he says. “People trust the state, after that they trust the post office, then the big banks, then the independents like us. This is very real in everyone’s mind including those on the board of pension schemes. If one of the big banks loses 20% people think: ‘they are a big bank, they are professional so it doesn’t matter’. On the other hand if we lose 20% people will say ‘who are they? Why did you place assets with them?’”
But he feels that the independent sector is gradually winning the public relations battle. “Institutions are now starting to increase the amounts they place with us because they see that we are not as exotic as they thought,” he says. “Typical mandates today range from E10m to E50m.” Peu à peu.
Toullieux explains that size of mandate is a critical issue: “The FRR mandates were too big for us; they would have destabilised the business.”
Financière de L’Echiquer, set up in 1991, today has E2.26bn under management of which E1.4bn is third-party management, E300m institutional and E500m private clients.
Toullieux adds: “We specialise in non-benchmarked management – stock picking, with absolute returns. FRR was all benchmarked, so we couldn’t add value in the way we would want to.”
But the issue of mandates by the FRR last year may also have provided an unexpected boost to the independents. “The big asset management houses devoted phenomenal time and energy to the FRR, well before the mandates were issued,” says Charon at Montpensier. “It took their attention away from other clients, and this gave more room to small players like us.”
He explains that there may be a quality issue generally: “Certain big managers, while they have very bright and competent people, are not very professional when it comes to active management. They give responsibility too early – someone comes in from the Grande école and gets immediate responsibility without being allowed to learn the ropes first.”
Toullieux explains the captive market theory: “The inflows of money through the branches of the big banks are like a big cheese. Because they sell through their branch network they don’t care that much about performance. So far their organisation has not been flexible enough to attract that many talented individuals.”
However, Szenberg does not believe in the theory that educational background takes precedence. “This is less and less true,” she says. “French fund managers are now chasing staff with a high level of practical expertise, and the recruitment policy has deeply changed. An issue remaining is the availability of internal training.”
But the independents realise that they need to make themselves known, mainly on an individual level where awareness is still low. It is in this sector that the potential may well be greatest.
While the feeling among some bigger banks is that the main opportunity lies in exploiting foreign markets, there are still some domestic opportunities, especially the reserve fund for civil servants which is yet to externalise its asset management. But De la Porte du Theil is confident: “Now that FRR has decided to issue RFPs, other funds will follow as part of a general trend.”
The general feeling is that legislation concerning funded retirement provision will not change for some time. “We now have the legislative framework to act,” says de la Porte du Theil.